abunchofrandom. joshua conner's weblog. - December 7th, 2004

It's getting close to the end of the semester, which means - I know, don't remind you - that it's getting close to the beginning of next semester. Which means we all get to go out and exercise our duty as Americans and be conusmers.

Consumers, specifically, of college textbooks.

Ridiculously expensive college textbooks. They're so expensive, in fact, that there's a petition circulating calling for their lowering.

So while I know you've all heard the horror stories (or experienced them!) of people spending $700 (or more!) on one semester worth of textbooks, and probably at some point you've wanted to scream out, "Why? Why do the textbook makers fleece us so?" please read this handy primer first.

The Economics of Textbook Pricing

Why are your books so expensive? It seems to boil down to four factors:

1. High costs, small market. The book for my Intro to Cinema class is beautiful. Elegantly laid out, well written, full of stills from pretty much every major movie made, and it includes free access to an equally excellent companion website. This book must have cost a fortune to develop and print. But how many will buy this book? There aren't many cinema classes offered (compared to, say, Biology classes) and I'm sure this isn't the only cinema book available. Facing a limited market, and high up-front costs, publishers need to recoup their costs, somehow. That's why it's $63 on Amazon.com.
   
   Yes, books like this one probably sell lots and lots of copies. But do publishers, as some suggest, need to keep the price up on their top sellers to subsidize the production of books like my cinema book? Probably. (hat tip: commenters on coffee grounds blog)
   
   
2. Inelasticity of demand. Uh-oh. Time to put on your thinking caps. According to Wikipedia, price elasticity "measures the responsiveness of the quantity demanded of a good to its price." In other words, "supply and demand" refers to the fact that as the price of a good or service goes up, fewer people will buy it, as you can see from this graph drawing I made with SPSS Microsoft Paint:
   
   But because you're sellling an item for a higher price, your profit increases up to a point even though you're not selling as many, as you can see here:
   
   The degree to which the number of people buying an item changes in relation to the price is called elasticity. But because we can't really be good consumers in the textbook market - we just buy what our professors tell us to buy, but I'll get there in a second - there's almost no elasticity in the market. If a text is the preeminent text in a field, publishers can (and do) charge whatever the hell they want for it, though possibly rightfully so, as it is the preeminent text. (hat tip to Crooked Timber)
   
   
3. Third-party decision making. I touched on this a second ago, but here's the fleshed-out version. We don't get to pick our textbooks. Our professors do. When you think about it, it's really our professors who are buying the books, albeit with our money. Since they're not paying, they can buy whatever book they want with no regard to price. And often times, they do. Sucks to be a student. (hat tip: Marginal Revolution)
   
   
4. Publishers recapturing the resale value. This argument is really interesting. Mark Steckbeck explains that though these other reasons probably account for some of the high cost of textbooks, said factors have remained the same while textbook prices have increased 40% over the last 6 years. What gives?
   

   My guess is that a large part of the relatively high price of textbooks (and especially the price increase) is attributable to the publisher capturing the resale value of the text. Because of the Internet the average textbook is now resold more times given the increasing liquidity of the market...
   
   As an example, let's say that a student receives $30 in value from the use of a text book. They would of course be willing to pay up to $30. But what if the student could resell the book for $25 after they're done using it? Then they would obviously be willing to pay more.
   
   So let's say that the first student who purchases the book new values it at $30; the next student who buys it used for the first time values it at, say, $25; and every student buying the book thereafter values it at $20. Assuming a five percent discount rate, the book would sell new for roughy $72 if it could be resold two times, as was the case five years ago. [$30 + ($25/1.05) + ($20/1.05^2) = $71.95]. Add two more resales and the textbook now sells new for $106.
   
   The increasing liquidity of the used textook market is largely responsible for the increase in textbook prices. And students are better off because their actual use value (their cost after resale) has likely declined given this increasing liquidity. Before I paid $30; now I pay $105 and I resell it for $80, for a net cost of $25.

   Not much comfort for me, as I generally avoid reselling my textbooks (they're fun - and useful - to check back on from time to time) but Steckbeck's theory does make sense!

In conclusion, I'd briefly like to point out one factor that I didn't mention: price gouging. I did this for a reason. Though I'm sure there are some evil publishers out there who try and screw us poor college students out of our hard-earned (or hard-loaned, as the case may be) money, there are some very real economic forces at work here, and price gouging is not one of them. So when you get the bill for your textbooks, don't blame the publishers, and don't blame the authors. Do what I do when I'm upset about anything: blame the internet! (Or your professors.)

Well, that about wraps it up.

I hope you've enjoyed this second edition of "Ask abunchofrandom," and stay on the look out for more soon! (Suggestions for new topics, of course, are always welcome.)

P.S. If you still want to sign the petition to lower textbook prices (as if asking will actually do anything) you can do so here.

P.P.S. Huge hat tip to this week's edition of Carnival of the Capitalists, an excellent weekly collection of economics-related blog posts. One of their links (the one about textbook pricing!) is what got me thinking about this in the first place.