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Shut up, OSPIRG.

As the OSPIRG campaign against the high price of textbooks continues to demonstrate their complete and utter inability to understand markets, a number of Econobloggers have taken a look and come to varying conclusions.

Henry at Crooked Timber suggests that textbooks have relatively inelastic demand. His intitial comment about “low demand” causing high prices on some books is, umm…backwards…he’s intuition is correct: that it costs so much to produce limited runs the books are expensive, but that factors in as “high marginal costs” not “low demand.” In a world where all firms have some pricing power, especially in publishing where one publisher might have exclusive rights to a book, higher marginal costs will mean significanly high prices as the monopolists extract rents from the market. Anyway, moving right along…

Alex Tabarrok suggests that third-party decision making is the cause. He also draws a nice parallel with healthcare, and I’m much persuaded by his take on that.

Mark Steckbeck suggests that the increase in resale has led publishers to capture the resale value in their initial price. He even does a present-value calculation, exciting!

I’m inclined to think that it’s probably all of these things in concert. Any one would be enough to increase prices some, all of them at once is enough to really amplify the effect. If kids are actually achieving a net welfare gain through resale, then the OSPIRG kiddies are trying to make people worse off, which should come as a surprise to exactly no one. Oh, and you’ll be excited to note that there’s an OSPIRG blog.

UPDATE: Commenters at Coffee Grounds point out that in a high fixed-cost industry, the supply curve is discontinuous and therefore low demand can lead to higher prices because of the discontinuity in supply. Fixed costs play a role in the entry/exit decision of the firm, and because the marginal cost of the first unit is so very high, the price of it will be as well. I considered adding a couple of graphs to the update, but stopped myself. If you must have graphs, email me and I shall construct them.

  1. Brandon says:

    I also enjoy graphs.

  2. Matt says:

    I don’t claim to know anything about economics, however, I feel it only right to point out that ‘Crooked Timber’ is not only the title of an insightful blog, but probably a gay porn movie title…

  3. Melissa says:

    So what are they doing with our money?

    My guess…using it to save trees and zoo captive Pandas in other states. Well, as side projects to making organic cheese in their bathtubs. But only because it can be sold out of a homeless guy’s backpack for profit, and this being Eugene…someone will buy it!

  4. Danimal says:

    I like graphs!

  5. Timothy says:

    Goats, probably.

  6. Danimal says:

    Yeah, probably oligopoly in the general subject matter areas and some monopolistic competition where a definitive specialty text or a professor’s preference is concerned.

    Third-party selection, by the way, is at its worst when your professor wrote the coursebook.

    As for new editions: I’ve had professors complain about them as though their hands were tied by publishers. So it’s not a simple matter to pin down just who the third party is.

    Bottom line:

    There are a number of good reasons to whine about text book prices, and you can get better information about these reasons by visiting your local economics blogs than you can by forfeiting your money to OSPIRG. I’m pretty sure the “R” in OSPIRG doesn’t stand for “lazy, ill-infoRmed whining.” So what are they doing with our money?

  7. Timothy says:

    Dan: The new edition thing, I think, is where third-party selection comes in. Professors don’t really have to bear the cost of the new book when they select it, so they don’t take that into account. There are perfectly good calculus books from 150 years ago, for instance.

    As far as the rents argument, sure, I can say that generally monopolies are bad, but I was trying to describe his point with clarity not render a judgement on it. Further, while the competitive outcome is superior from a welfare standpoint, monopoly production is better than no production. Similar to, say, prescription drugs.

    That said, I think that the text book market is more oligopoly or monopolistically competitive. There are a ton of, say, introductory economics books out there (any of which would teach the OSPIRG kids this stuff), and they’re fairly homogeneous, so the competition among them is probably good for price. But, then you’ve got the inelastic demand curve to deal with, so the price preassure from the competition isn’t as big an influence as it could be. In my opinion it’s a combination of all of those factors.

  8. Danimal says:

    Steckbecks theory of resale value capture is a neat and fairly persuasive one, although the idea that it will regularly lead to net welfare gains for students seems like a pipe dream.

    Clearly publishers aren’t content merely to sit back and reap the resale value through rent-extraction, because they frequently punch up “new editions” with the same information slightly rearranged or bundled with a useless CD-ROM, and suddenly your used textbook can’t fetch $5. Net welfare gain my ass, there.

    And, Tim, just for the sake of argument: in summarizing Henry’s suggestion, you talk about “monopolists extracting rents” as if it was perfectly acceptable. What’s wrong with OSPIRG complaining about rent extraction, which is, even econo-geeks can agree, a bad thing?

    (A: They don’t know that’s what they’re complaining about!)

    Whoops, never mind.

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