Sunday, April 15, 2012

Textbooks and Drugs

Greg Mankiw gives his favorite example of competition in his latest column:

Granted, competition is not always good for producers. I produce economics textbooks. I curse the fact that my competitors are constantly putting out new, improved editions that threaten my market share. But knowing that I have to keep up with the Paul Krugmans and the Glenn Hubbards of the world keeps me on my toes. It makes me work harder, benefiting the customers — in this case, students. The upshot is that competition among economics textbooks makes learning the dismal science a bit less dismal.

From my perspective, this is the wrong example for how competition benefits consumers.  To be sure, there are competitive forces in the textbook market, but the textbook market is far from a model of perfect competition.  The textbook market is more like the market for pharmaceuticals, and the analogies run deep.  In case you are unfamiliar, here are the salient features of the textbook market (along with how big pharma marketing is similar): 

  1. Professors -- not students -- make decisions about which textbook to adopt for a class.  From the standpoint of quality of content, this is likely optimal.  After all, the professor knows more about the subject, and should be better positioned to know what constitutes a comprehensive and useful treatment of the material.
    • Professors are like doctors, while students are like patients in the parallel universe that is the market for pharmaceuticals.
  2. Because professors decide on textbook adoption, textbooks are marketed directly to professors.  All else equal, professors care more about the quality of the book than the price (profs don't pay for the book).  The result is that the marketing and competition emphasizes quality, and price just isn't salient -- even though students justifiably care about the price. Students may complain about the expense of the textbook, but students will always complain about something, so profs imperfectly account for student price sensitivity.
    • The market for pharmaceuticals is slightly different, but ends up with the same tension / emphasis on quality rather than price.  Doctors don't care directly about price, but nor do patients (really) because a third party usually heavily subsidizes the cost of the drugs.
  3. There is extensive (maybe excessive) detail advertising of professors.  It does not look like advertising, but rather appears to be "peer review."  If you teach a class that could use a textbook at some university, textbook companies solicit you to review some small part of the textbook (one or two chapters, the table of contents, the book "mission statement").  They even pay profs some small amount to provide feedback, but to solicit feedback, they need to send a trial copy of the book.  There is likely some value to the peer review aspect of this, but a significant component of this is direct-to-professor advertising.
    • This is not unlike how the pharma industry treats doctors -- although doctors probably get better treatment.  To my knowledge, professors are not solicited by gifts like watches or golf clubs (see Table 2 of link).
All of this is to say that there are frictions in the textbook market -- the market is imperfectly competitive.  It is true that imperfect competition is still competition of sorts, but when you're trying to argue for the force of competition to generate outcomes that are greatly beneficial to consumers, it is harder to get on board when your example is a book with a list price of $268 (on sale today for $255 at Amazon!).  For my money, the three-pound can of Kirkland Signature coffee for $14 is a much better illustration of the forces of competition.

6 comments:

  1. I can't believe Mankiw used the textbook market as an example, either. It's almost worse than pharma. At least with drugs, after a few years an EXACT generic copy can come onto the market and compete more directly.

    There is a difference: textbooks are durable, drugs are not; however, even then, since Profs usually require the most recent edition, publishers can release frequent new additions with only minor changes in order to reduce the effects of the used market (competition from last year's printing of the same textbook).

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    1. Often Professors of a certain stature(or pretenses to a certain stature) actively flog their own works.

      My sister studies international law and she is right now doing her graduate work in Geneva, where she has to buy material by a relatively unknown professor who uses his own work for his classes. The students have no choice but to accept. And so he gets between 100-200 book sales per semester.

      And what should she tell him, that he's a nobody who is only pushing his own books out of crass economic self-interest? Profs are sensitive people.

      But the textbook market is flawed in many ways. Way too overpriced and although profs are better equipped with knowledge of which textbooks to use, there should be independent boards to decide that, who have no economic or ideological agenda to push.

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  2. This is a good point that I thought about incorporating into the original post, but I wanted to go with a textbooks-as-pharma theme. For the reason you give, it is disappointing to see issuing new editions of textbooks touted as a great example of sources of competition.

    It is too bad because I felt that the main point about Tiebout competition (i.e., voting with your feet) and Federalism is a great point. On the other side, it should have been met with a better example of how market competition benefits consumers (On competition, I like I, Pencil)

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  3. What's his explanation of the fact that the price of the used book is 5% the price of the new one?

    Given that the content is exactly the same, one must conclude that the extra $150 are not due the quality of Mankiw's work (as his example would lead you anyways to suspect) but if anything, to the quality of his publisher. Or more likely, to market distortions.

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  4. Josh Bivens points out that the intellectual property law for copyright is also a "government distortion" of "free markets" (my scare quotes.) Just as patent protection for drugs is an analogous intellectual property protection.

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