Electronic Journal Electronic Journal Site Licenses:Site Licenses:A Boon for Whom?A Boon for Whom?

Ted Bergstrom, Ted Bergstrom, UCSB Economics UCSB Economics

DepartmentDepartment

The speaker conferring with a leadingThe speaker conferring with a leadingcommercial journal publishercommercial journal publisher

Pricing of Paper EditionsPricing of Paper Editions

• The 6 most-cited journals in economics The 6 most-cited journals in economics are owned by non-profit groups.are owned by non-profit groups.• Average price to libraries is $180 per year.Average price to libraries is $180 per year.

• Only 5 of the 20 most-cited journals are Only 5 of the 20 most-cited journals are owned by commercial publishers.owned by commercial publishers.• Average price to libraries is $1660 per year. Average price to libraries is $1660 per year.

Costs of Economics Costs of Economics Journals Journals

Publisher Publisher TypeType

Number of Number of JournalsJournals

Price Price per per PagePage

Price Price per Citeper Cite

Non-ProfitNon-Profit 9191 $0.18$0.18 $0.15$0.15

For-ProfitFor-Profit 206206 $0.82$0.82 $2.40$2.40

Costs of a Complete Costs of a Complete Economics CollectionEconomics Collection

Publisher Publisher

TypeTypePercent of Percent of CostCost

Percent of Percent of CitesCites

Non-ProfitNon-Profit 9% 62%

For-ProfitFor-Profit 91% 38%

JournalJournal Prices by DisciplinePrices by Discipline

Ecology 1.01 0.19 0.73 0.05Economics 0.83 0.17 2.33 0.15Atmosph. Sci 0.95 0.15 0.88 0.07Mathematics 0.70 0.27 1.32 0.28Neuroscience 0.89 0.10 0.23 0.04Physics 0.63 0.19 0.38 0.05

CostCost per pageper pageFor-profitFor-profit NonNon-profitprofit For-profitFor-profit Non-profitNon-profit

Cost per citeCost per cite(In US $)(In US $)

Monopoly Profits in Academic Monopoly Profits in Academic Publishing?Publishing?

• Hint: University press and Hint: University press and professional society journals are professional society journals are usually usually notnot subsidized subsidized

• They charge 1/5 as much per They charge 1/5 as much per page as for-profit journals.page as for-profit journals.

Costs and ProfitsCosts and Profits

• Estimates based on information Estimates based on information from non-profit publishersfrom non-profit publishers

– For-profits won’t tell, but it’s the For-profits won’t tell, but it’s the same technology. same technology.

• First-copy costs are about $100 First-copy costs are about $100 per page. per page.

• Marginal costs per subscriber: Marginal costs per subscriber: about 2 cents per pageabout 2 cents per page..

Example: One Leading Example: One Leading Commercial JournalCommercial Journal

• Has about 1000 library subscribers and Has about 1000 library subscribers and 2000 pages. 2000 pages.

• Price for 2003: about $1800. Price for 2003: about $1800. • Avg cost per subscriber: about $240.Avg cost per subscriber: about $240.• Profit is about $1,560 per subscriber Profit is about $1,560 per subscriber

– Total profits: $1,560,000 per year.Total profits: $1,560,000 per year.

• Authors and referees are not paid!Authors and referees are not paid!

The Cost of Going OnlineThe Cost of Going Online

• In 1998 almost no journals were online.In 1998 almost no journals were online.• In 2002, almost all were. In 2002, almost all were. • Price of top non-profits was $0.10 per Price of top non-profits was $0.10 per

page in 1998 and $0.12 in 2002 for page in 1998 and $0.12 in 2002 for paper plus online.paper plus online.

• For-profits charged $0.79 in 1998 and For-profits charged $0.79 in 1998 and $0.89 in 2002 for paper plus online.$0.89 in 2002 for paper plus online.

• ConclusionConclusion: Going online cost about : Going online cost about $.02 per page. Prices of for-profits are $.02 per page. Prices of for-profits are not determined by costs.not determined by costs.

Pricing of Electronic Pricing of Electronic Journals Journals

• Electronic distribution allows new Electronic distribution allows new pricing methods not available with pricing methods not available with paper.paper.– Price discrimination by size of libraryPrice discrimination by size of library– Bundling of Journals with all-or-Bundling of Journals with all-or-

nothing pricingnothing pricing– Consortium pricingConsortium pricing

What is left for libraries to What is left for libraries to do? do?

• With paper journals, libraries had With paper journals, libraries had an obvious role.an obvious role.– Location for shared accessLocation for shared access

• With electronic journals, library With electronic journals, library serves no “physical” purpose.serves no “physical” purpose.

• Only a “fiscal” role: toll collector Only a “fiscal” role: toll collector and gatekeeper for site licenses.and gatekeeper for site licenses.

• Who benefits from this?Who benefits from this?

Who gains? An Example Who gains? An Example

• There are 3 types of scientists. There are 3 types of scientists. • There are 100 universities. Each There are 100 universities. Each

has 1 scientist of each type.has 1 scientist of each type.• Willingness to pay for an Willingness to pay for an

electronic subscription:electronic subscription:– Type A: $300Type A: $300– Type B: $200Type B: $200– Type C: $100Type C: $100

Costs and Publisher Types Costs and Publisher Types

• Electronic Journal has production Electronic Journal has production cost of $32000 per year.cost of $32000 per year.

• Marginal costs for an extra Marginal costs for an extra subscriber are 0.subscriber are 0.

• Consider two types of publisher:Consider two types of publisher:– Profit-maximizerProfit-maximizer– Non-profit subscription maximizerNon-profit subscription maximizer

Consumer’s Surplus:Consumer’s Surplus:Economists’ Definition Economists’ Definition

• People buy things that are worth People buy things that are worth more to them than their price.more to them than their price.

• Your consumer’s surplus from Your consumer’s surplus from buying a good is the difference buying a good is the difference between the amount you would be between the amount you would be willing to pay and the amount you willing to pay and the amount you have to pay.have to pay.

Profit-maximizing Profit-maximizing publisher: No site licenses publisher: No site licenses • Since m.c. is zero, publisher wants Since m.c. is zero, publisher wants

to maximize revenue.to maximize revenue.• Revenue maximized at price of $200 Revenue maximized at price of $200

with 200 subscriptions.with 200 subscriptions.• Profits are $40,000-32,000=$8,000.Profits are $40,000-32,000=$8,000.• Type A’s get consumers’ surplus of Type A’s get consumers’ surplus of

$(300-200)=$100 each.$(300-200)=$100 each.• Type B’s and C’s get zero surplus.Type B’s and C’s get zero surplus.

Calculations for profit-Calculations for profit-maximizer maximizer

• The number who will buy isThe number who will buy is– 100 at price $300 (Type A’s only)100 at price $300 (Type A’s only)– 200 at price $200 (Type A’s and Type B’s)200 at price $200 (Type A’s and Type B’s)– 300 at price $100 (All 3 types)300 at price $100 (All 3 types)

• Total revenue at price:Total revenue at price:– $300 is $300x100=$30,000$300 is $300x100=$30,000– $200 is $200x200=$40,000$200 is $200x200=$40,000– $100 is $100x300=$30,000$100 is $100x300=$30,000

• Profit is maximized at $200 with A’s and Profit is maximized at $200 with A’s and B’s buying and C’s not buying. B’s buying and C’s not buying.

What happened? What happened?

• University site licenses allow publisher University site licenses allow publisher to make greater profits than it would to make greater profits than it would with individual subscriptions. with individual subscriptions.

• Although site licenses allow everybody Although site licenses allow everybody access to the journal, nobody is better access to the journal, nobody is better off and Type A’s are worse off than with off and Type A’s are worse off than with individual subscriptions.individual subscriptions.

First Moral of the Story First Moral of the Story

• We are protected from worst effects of We are protected from worst effects of monopoly by fact that monopolist monopoly by fact that monopolist doesn’t know who has high and who has doesn’t know who has high and who has low willingness to pay.low willingness to pay.

• Site licenses aggregate consumers and Site licenses aggregate consumers and reduce the variance of demand.reduce the variance of demand.

• This increases monopoly profit and This increases monopoly profit and reduces consumers’ surplus.reduces consumers’ surplus.

• Similar effects come from bundling Similar effects come from bundling across commodities.across commodities.

Non-profit publisher: Non-profit publisher: No Site Licenses No Site Licenses

• Publisher must recover costs and Publisher must recover costs and sell as many units as possible. sell as many units as possible. – Costs are $32,000. Costs are $32,000.

• Best publisher can do is price at Best publisher can do is price at $160 and sell to 200 A’s and B’s.$160 and sell to 200 A’s and B’s.– For C’s to buy, price needs to be For C’s to buy, price needs to be

$100. Then revenue would be only $100. Then revenue would be only $100x300=$30,000$100x300=$30,000. .

Non-profit publisher: Non-profit publisher: No Site Licenses (cont’d)No Site Licenses (cont’d)

• At price $160, consumers’ surplus: At price $160, consumers’ surplus: – Type A’s $300-160=$140.Type A’s $300-160=$140.– Type B’s $200-160=$40.Type B’s $200-160=$40.– Type C’s do not buy and get $0.Type C’s do not buy and get $0.

• Total consumers’ surplus is Total consumers’ surplus is $140x100+$40x100=$18,000.$140x100+$40x100=$18,000.

Non-profit publisher: Non-profit publisher: with Site Licenseswith Site Licenses

• Publisher can cover costs at price $320.Publisher can cover costs at price $320.• All 100 universities subscribe. Worth All 100 universities subscribe. Worth

$600 to each university.$600 to each university.• All 300 scientists have access. All 300 scientists have access. • Consumers’ surplus at each university is Consumers’ surplus at each university is

$600-320=$280.$600-320=$280.• Total consumers’ surplus is $28,000.Total consumers’ surplus is $28,000.• This exceeds c.s. with no site licenses.This exceeds c.s. with no site licenses.

A Second MoralA Second Moral• With non-profit publishers, site licenses With non-profit publishers, site licenses

improve efficiency: allow access to all.improve efficiency: allow access to all.• Libraries have a useful role to play as Libraries have a useful role to play as

revenue collectors that cover costs without revenue collectors that cover costs without shutting out users.shutting out users.

• Remember that when the cost of allowing Remember that when the cost of allowing access to another user is zero, it is access to another user is zero, it is wasteful wasteful notnot to allow access to all. to allow access to all.

Ranking the Alternatives Ranking the Alternatives by consumers’ Surplusby consumers’ Surplus

1)1) Non-profit journal with site licensesNon-profit journal with site licenses

2)2) Non-profit journal with individual Non-profit journal with individual subscriptions only subscriptions only

3)3) For-profit journal with individual For-profit journal with individual subscriptions only subscriptions only

4)4) For-profit journal with site licensesFor-profit journal with site licenses

Price Discrimination and Price Discrimination and BundlingBundling

• With paper journals, all libraries paid the With paper journals, all libraries paid the same subscription price. same subscription price.

• Journals were sold separately.Journals were sold separately.• With electronic journals, publishers With electronic journals, publishers

charge prices that depend on size of charge prices that depend on size of university or on previous purchases.university or on previous purchases.

• They offer deals that bundle all of their They offer deals that bundle all of their journals in a single package.journals in a single package.

A Publisher’s View A Publisher’s View

““So, we should have models where we make a deal with So, we should have models where we make a deal with

the university, the consortia or the whole country, where the university, the consortia or the whole country, where for for

this amount we will allow all your people to use our this amount we will allow all your people to use our

material, unlimited… And, basically the price then depends material, unlimited… And, basically the price then depends

on a rough estimate of how useful is that product for you; on a rough estimate of how useful is that product for you;

and we can adjust it over time. It is a principle, which, and we can adjust it over time. It is a principle, which,

in my view, is not immoral.” in my view, is not immoral.”

From a speech by Derk Haank, CEO, Elsevier ScienceFrom a speech by Derk Haank, CEO, Elsevier Science

A Librarian’s ViewA Librarian’s View““In the Big Deal, libraries agree to buy electronic access to In the Big Deal, libraries agree to buy electronic access to all of a commercial publisher's journals for a price basedall of a commercial publisher's journals for a price basedon current payments to that publisher, plus some on current payments to that publisher, plus some

increment.increment.Academic library directors should not sign on to the Academic library directors should not sign on to the Big Deal or any comprehensive licensing agreementsBig Deal or any comprehensive licensing agreementswith commercial publishers…with commercial publishers…You read that right. You read that right. Don't buy the Big DealDon't buy the Big Deal……the Bigthe Big Deal serves only the Big Publishers.Deal serves only the Big Publishers. “ “

Ken Frazier, head librarian, University of Wisconsin.Ken Frazier, head librarian, University of Wisconsin.

An Economists ViewAn Economists View

• ““Morality” of price discrimination and Morality” of price discrimination and bundling is not the issue. bundling is not the issue.

• Benefits and costs to the academic Benefits and costs to the academic community is what concerns us.community is what concerns us.

• Profitability is what concerns Profitability is what concerns

commercial publishers.commercial publishers.

Benefits of Price Benefits of Price Discrimination and Discrimination and

BundlingBundling• Price discrimination allows more access for Price discrimination allows more access for

small colleges and poor countries.small colleges and poor countries.• Bundling allows big universities to get Bundling allows big universities to get

everythingeverything a publisher produces. a publisher produces.• Since cost of access for an extra subscriber Since cost of access for an extra subscriber

is nearly zero, this raises efficiency.is nearly zero, this raises efficiency.

Benefits for Whom?Benefits for Whom?

• Price discrimination allows publishers to Price discrimination allows publishers to raise price to big universities—releases the raise price to big universities—releases the restraint previously imposed by threat of restraint previously imposed by threat of losing subscriptions at midsize universities.losing subscriptions at midsize universities.

Bundling and Entry Bundling and Entry DeterranceDeterrance

• Bundling plus annual price increases of Bundling plus annual price increases of about 7% means no room in library about 7% means no room in library budgets for new cheap journals.budgets for new cheap journals.

• Library budgets grow less rapidly than Library budgets grow less rapidly than price of Elsevier bundle. price of Elsevier bundle.

• This means no room in budget for new This means no room in budget for new cheaper journals unless library drops cheaper journals unless library drops entireentire Elsevier collection.Elsevier collection.

What should scholars do?What should scholars do?

• Refuse to referee for overpriced journals.Refuse to referee for overpriced journals.• Encourage cheap journals. Encourage cheap journals.

– Referee for them.Referee for them.– Cite them. Cite them. – Publish in them.Publish in them.

• Encourage professional societies to expand their Encourage professional societies to expand their journals and start new ones.journals and start new ones.

• Keep copyright on your own work and keep your Keep copyright on your own work and keep your papers on the web.papers on the web.

What should libraries do?What should libraries do?

• Pay attention to prices per page and per cite Pay attention to prices per page and per cite when deciding what to subscribe to.when deciding what to subscribe to.

• Encourage departments to trade overpriced Encourage departments to trade overpriced journals for cheaper new ones.journals for cheaper new ones.

• Encourage or start new electronic journals. Encourage or start new electronic journals. • Resist the Big Deal for overpriced journals. If you Resist the Big Deal for overpriced journals. If you

can’t resist, bargain hard and becan’t resist, bargain hard and be

“ “ready to walk”.ready to walk”.

Further ReadingFurther Reading• Free Labor for Costly Journals, by Ted Bergstrom—Journal of Economic

Perspectives, Fall 2001. See http://www.econ.ucsb.edu/~tedb/Journals/jeprevised.pdf

• Comments on above article in JEP, Fall 2002. Seehttp://www.econ.ucsb.edu/~tedb/Journals/jepcommentjstor.pdf

• You can find:– Do university site licenses benefit the academic Community? by Carl Bergstrom and

me– “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.at http://www.econ.ucsb.edu/~tedb/Journals/sitelicense.html