The Profit Motive and
Academic Journals
Ted
Bergstrom
UCSB
The curious market structure of
academic publishing
• Private profit-maximizing firms and nonprofit societies and academic presses
both are significant players.
• Most of the workforce--authors and
referees--work for free.
Market Performance
• The 6 most-cited journals in economics are
owned by non-profit groups.
• Average price to libraries is $180 per year.
• Only 5 of the 20 most-cited journals are
owned by commercial publishers.
• Average price to libraries is $1660 per year.
Journal Prices by Discipline
(In US $)
Cost per page
For-profit
Ecology
Economics
Atmosph. Sci
Mathematics
Neuroscience
Physics
1.01
0.83
0.95
0.70
0.89
0.63
Non-profit
0.19
0.17
0.15
0.27
0.10
0.19
Cost per cite
For-profit
Non-profit
0.73
2.33
0.88
1.32
0.23
0.38
0.05
0.15
0.07
0.28
0.04
0.05
Costs of a Complete
Economics Collection
Publisher
Type
Percent of
Cost
Percent of
Cites
Non-Profit
9%
62%
For-Profit
91%
38%
Costs of Barshall’s
Physics Collection
Publisher
Type
Percent of
Cost
Percent of
Cites
Non-Profit
39%
79%
For-Profit
61%
21 %
Each type plays an important
role
• Non-profits supply most of the citations.
• For-profits collect most of the money.
Elsevier’s Market
Share in Physics
Publisher
Type
Percent of
Cost
Percent of
Cites
Non-Profit
39%
79%
Elsevier
46%
15%
Others
15%
6%
Elsevier’s Market
Share in Economics
Publisher
Type
Percent of
Cost
Percent of
Cites
Non-Profit
9%
62%
Elsevier
34%
23%
Others
57%
15%
A bit of history
• In 1960 there were ~30 econ journals, all nonprofit, all cheap.
• In 1980,~120 econ journals, half for-profit, half
non-profit.
• In 2000,~300 econ journals, 2/3 for-profit.
• Between 1985 and 2000, top ten for-profits
almost doubled their pages, top ten nonprofits increased ~20%.
Entrepreneurship
• In the 1970’s the economics profession was
growing rapidly and society journals were not
growing as fast.
• Specialized field journals were not common.
• North-Holland (and other companies now
merged into Elsevier) started about 30 new
journals.
• About 12 of these could now be called leading
field journals.
Rewards to innovation
• In 1985, the new commercial journals cost
about 3 times as much per page as their nonprofit counterparts.
• Now about 6 times as much and increasing by
6.5% per year.
• Elsevier reports 33% profits on sales in
science and health division.
Why didn’t economics societies
start more journals and add more
pages?
• Confidence that private sector would do
as well as non-profit.
• Elitist views of old-guard leadership.
Pages published by U.S. Societies
Discipline
Society
members
Microbiology 42,000
Physics-APS 40,000
Math-AMS
30,000
Optics-OSA 13,000
Econ-AEA
18,800
Entomology 6,500
Polit. Science 14,000
Pages
published
53,000
96,600
12,000
19,000
4,300
4,100
2,000
Pricing of Electronic Journals
• Electronic distribution allows new
pricing methods not available with
paper.
– University-wide site licenses
– Price discrimination by size of university
– Bundling of Journals with all-or-nothing
pricing
– Consortium pricing
What is left for libraries to do?
• With paper journals, libraries had an
obvious role.
– Location for shared access
• With electronic journals, library serves
no “physical” purpose.
• Only a “fiscal” role: toll collector and
gatekeeper for site licenses.
• Who benefits from this?
Who gains? An Example
• There are 3 types of scientists.
• There are 100 universities. Each has 1
scientist of each type.
• Willingness to pay for an electronic
subscription:
– Type A: $300
– Type B: $200
– Type C: $100
Costs and Publisher Types
• Electronic Journal has production cost
of $32000 per year.
• Marginal costs for an extra subscriber
are 0.
• Consider two types of publisher:
– Profit-maximizer
– Non-profit subscription maximizer
Profit-maximizing publisher:
No site licenses
• Since m.c. is zero, publisher wants to
maximize revenue.
• Revenue maximized at price of $200
with 200 subscriptions.
• Profits are $40,000-32,000=$8,000.
• Type A’s get consumers’ surplus of
$(300-200)=$100 each.
• Type B’s and C’s get zero surplus.
Profit-maximizing publisher
and site licenses
• Total willingness to pay at each university is
$300+200+100=$600.
• Publisher can charge about $600 and sell to
all universities.
• Profits are $60,000-32,000=$28,000.
• All scientists have access.
• There is no zero surplus for any scientist.
What happened?
• University site licenses allow publisher to
make greater profits than it would with
individual subscriptions.
• Although site licenses allow everybody
access to the journal, nobody is better off and
Type A’s are worse off than with individual
subscriptions.
First Moral of the Story
• We are protected from worst effects of
monopoly by fact that monopolist doesn’t
know who has high and who has low
willingness to pay.
• Site licenses aggregate consumers and
reduce the variance of demand.
• This increases monopoly profit and reduces
consumers’ surplus.
• Similar effects come from bundling across
commodities.
Non-profit publisher:
No Site Licenses
• Publisher must recover costs and sell
as many units as possible.
– Costs are $32,000.
• Best publisher can do is price at $160
and sell to 200 A’s and B’s.
– For C’s to buy, price needs to be $100.
Then revenue would be only
$100x300=$30,000.
Non-profit publisher:
No Site Licenses (cont’d)
• At price $160, consumers’ surplus:
– Type A’s $300-160=$140.
– Type B’s $200-160=$40.
– Type C’s do not buy and get $0.
• Total consumers’ surplus is
$140x100+$40x100=$18,000.
Non-profit publisher:
with Site Licenses
• Publisher can cover costs at price $320.
• All 100 universities subscribe. Worth $600 to
each university.
• All 300 scientists have access.
• Consumers’ surplus at each university is
$600-320=$280.
• Total consumers’ surplus is $28,000.
• This exceeds c.s. with no site licenses.
A Second Moral
• With non-profit publishers, site licenses improve
efficiency: allow access to all.
• Libraries have a useful role to play as revenue
collectors that cover costs without shutting out
users.
• Remember that when the cost of allowing acces
to another user is zero, it is wasteful not to allow
access to all.
Price Discrimination
• Paper journals cost same to all institutions.
• With electronic access, commercial publishers and
many societies price discriminate by “size”.
• Elsevier negotiates separate contracts with each big
university---Offer price is a multiple of previous
expenditures on paper.
• Contract is “secret”.
A Publisher’s View
“So, we should have models where we make a deal with
the university, the consortia or the whole country, where
this amount we will allow all your people to use our
material, unlimited… And, basically the price then depen
on a rough estimate of how useful is that product for you
and we can adjust it over time. It is a principle, which,
in my view, is not immoral.”
From a speech by Derk Haank, CEO, Elsevier Science
The Big Deal
• Elsevier offers an all-or-nothing
contract.
• Electronic site licenses to every journal
published by Elsevier for a lump sum
price.
• About $10 million for UC system.
A Librarian’s View
“In the Big Deal, libraries agree to buy electronic acces
to
all of a commercial publisher's journals for a price bas
on current payments to that publisher, plus some
increment.
Academic library directors should not sign on to the
Big Deal or any comprehensive licensing agreements
with commercial publishers…
You read that right. Don't buy the Big Deal…the Big
Deal serves only the Big Publishers. “
Bundling and Entry
Deterrence
• Elsevier’s bundling policy deters potential entrants.
• Elsevier prices rise about 7% per year. Library budgets
grow less rapidly.
• This leaves no room in budget for new cheap journals
unless library drops entire Elsevier collection.
Takers and Leavers
• Harvard, Cornell, and the Research Triangle
universities have rejected the Big Deal.
• So have Wisconsin, Minnesota, Maryland, MIT.
• What about secrecy of contract terms?
• If terms are secret, universities should be able to
bargain for a share of the surplus.
• The UC negotiated hard and was prepared to walk.
They got a lower price than they were paying in their
previous 5 year contract—Terms are not secret.
Benefits of Price
Discrimination and Bundling
• Price discrimination allows more access for sma
colleges and poor countries.
• Bundling allows big universities to get everythin
a publisher produces.
• Since cost of access for an extra subscriber is
nearly zero, this raises efficiency.
Benefits for Whom?
• Price discrimination allows publishers to raise price to
big universities—releases the restraint previously
imposed by threat of losing subscriptions at midsize
universities.
• Publishers can charge close to total willingness to pay
users at universities, leaving no net benefit to
subscribers.
• This is worse for the academic community than the
outcome if libraries refused to deal buy site licenses at
monopoly prices.
Social cost of overpriced
journals?
• Wealth transfer from universities to executives
and stockholders.
– UC $20 million journals budget. Half goes to
Elsevier, who provide ¼ of the usage.
– Elsevier Science & Medical $2 billion in sales
(overpriced by factor of 5?).
• Excess burden from reduced access.
– Typical journal costs 5 times as much, has half as many
subscriptions.
• Rent dissipation
– Huge lobbying staffs, executive bonuses
Case Study in Rent-Seeking?
• Elsevier claims profits of 33% of revenue.
• Optical Society of America admits to profits of
50% of revenue.
• OSA price per page is 1/3 to 1/2 that of Elsevier
journals in same field.
• If Elsevier’s cost per page were same as OSA’s,
they would be making profits of between 3/4 and
5/6 of revenue.
• Where did these profits go?
Enough for now.
References
• Free Labor for Costly Journals, by Ted Bergstrom— JEP, Fall
2001.
• Comments on above article JEP Fall 2002.
• Benefits and Costs of Site Licenses to Academic Journals, by
Carl Bergstrom and Ted Bergstrom Proceedings of National
Academy of Science, Jan 20, 2004.
– The Librarian’s Dilemma, by Kenneth Frazier, from D-Lib
Magazine
– Is Electronic Publishing Being Used in the Best Interest of Science: The
Publisher's view Speech by Derk Haank.
What should scholars do?
• Refuse to referee for overpriced journals.
• Encourage cheap journals.
– Referee for them.
– Cite them.
– Publish in them.
• Encourage professional societies to expand their
journals and start new ones.
• Keep copyright on your own work and keep your pape
on the web.
What should libraries do?
• Pay attention to prices per page and per cite when
deciding what to subscribe to.
• Encourage departments to trade overpriced journals f
cheaper new ones.
• Encourage or start new electronic journals.
• Resist the Big Deal for overpriced journals. If you can’t
resist, bargain hard and be “ready to walk”.
Favorable signs
•
•
•
•
•
•
Journal of European Econ Assoc
Economic Bulletin
Journal of Public Economic Theory
ELSSS Review of Economic Theory
BE Press
Review Economic Studies plans to increase
pages by 50%.
• AER increased by ~25% in 2002