Textbook market

Part 1-

a)   Our market is the textbook market in the United States. The producers are primarily a few large firms who control most of the market share, but students selling their used books are also a part of the supply. The consumers are mainly in two parts: the professors who decide which books to get, and the students who must buy the books to pass the course. The market is a global market but for this example we are focusing on just the textbook market of the United States, as other areas in the world are not experiencing the same kind of problem with highly increasing prices. The textbook market is differentiated, where all the books have different content, and can come in multiple forms. E-books have grown in popularity and in use as they are easy to use and are very accessible, as well as digital learned guides such as TopHat, McGraw-Hill Connect, and Pearson Online. The size of the U.S. textbook market is roughly 19.2 billion, this is according to the U.S. Census Bureau. There are a few interesting things about this market, there recently has been some legislation to subsidize the cost of these books, as price is often a deterrent to college. Higher levels of education has several positive externalities such as higher economic productivity, increased voter participation, and reduced crime.

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b) The X is a new, current edition textbook that provides 1 util and the Y is an older textbook, that provides exactly half the utility of a new textbook( 0.5 utils). This is because it will not have the relevant examples and questions, but the content is similar enough that the student can still learn the material from it. The cost of the older textbook is exactly half that of the new textbook. This is a fairly captive market, having only the one substitute and the utility the textbook provides to the student makes it necessary to succeed in his/her class(es). The professors who also act as a consumer do not affect the market very much as price usually is not their main concern. The content in the textbook, the credibility of the author, the date (edition recency) it was published, and, unfortunately, in some cases, the relationship between the author and professor; these all play parts in the way the professor selects the textbook so for this example we model their preferences on content, which is the main driver of the level utility in our model.

Consumption Function-

U(x,y)= X + ½ Y

Production Function-

Q(a,m) = 2A + 4M

In this production function, A = acquisition cost and M = material cost. Acquisition cost is the cost to license the content that is in the textbook, and to pay the creators for their work. We read that the licensing cost for the textbook is usually about ⅓ the cost of producing the textbooks.

Material cost is from the cost of paper, glue, ink, distribution costs and overhead cost of the machinery used to mass produce textbooks.

Although there are older students who sell their used books, they do not represent a large enough part of the market to make a huge difference in this analysis. As their books are more likely than not going to be the older edition (less utility) and the number of students who rent their books now increasing, their effect on the market is dampened.

c) The market structure for this market is differentiated product oligopoly. This is because the products in the market are differentiated, and the market power is dominated by 3-5 large firms. According to TopHat, “80 percent of the market is controlled by five textbook companies ”. Using more detailed breakdown of the market share distribution, the Four-Firm concentration ratio is approximately 0.65. Investopedia says that a market where the five firm concentration over 0.6 is considered an oligopoly.

d) There are not very many substitutes in the market, as the content in a textbook is licensed for a specific publisher, and the content in the textbook is mandatory to pass the class. The rise in textbook prices have stimulated the black market for textbooks, as there has been a marked rise in textbook piracy. There are a lot of compliments to textbooks, as digital learning guides are increasing in use, as well as study tools like Quizlet. These see a increase in demand as the textbook demand increases, showing they are complements and not substitutes. These also only enhance the content from the textbooks and do not provide the content, and are only used by students for memorization help, and deeper learning of the material.

e) The factors that affect the supply and demand of this market will always be related to the elasticities of each curve, however, there are more specific factors that contribute the the changing supply and demand of this market. The factors that affects demand are the amount of college students in a given year, as this directly changes the amount of consumers, as well as the amount of courses the average student takes. If either of these amounts goes up, demand increases, and if either of these amounts goes down, demand decreases. The factors that affect supply are the materials and material, the physical raw materials need to create the textbook and distribute, and the intellectual property form the authors and researchers who create the content of the textbook. Input prices and distribution can affect the price a lot as it is about ⅔ of the cost of the textbook. Also, the supply can be affected by new technologies, such as the slow rise of e-texts and digital learning guides like McGraw Hill Connect. These don’t necessarily compete with textbooks, as for one, they are still textbooks, just not physical, and two, they are produced by the same large firms that already dominate the market share. These newer technologies affect the supply by just adding more supply, and diversify it as well.

Part 2)

In recent years textbook prices have been rising steeply. As college students it has become increasingly harder to purchase all the textbooks for  our classes. In fact most college students will not buy or rent a textbook if they do not believe it will enhance their learning progression or if the homework isn’t taken from the book. According to the college board an average student spends $1,240 on textbooks and supplies in 2018. (Collegeboard) When compared to the average cost of $900 in 2015 there has a been a large increase of price with the past three years. (Collegeboard) There are many reasons for this price increase, we will explore two different reasons.

The first reason is the inelasticity of demand. When a student is enrolled in a class the professor chooses which textbook the student must purchase. Students are forced to buy the book on the syllabus because they have no other choice and their success in the class is partially dependent on the access to the textbook. Therefore, leading to inelasticity which affects the market in a way that even if the price of textbooks increase the price remains constant.  In this case the demand curve is completely vertical because demand does not change relative to price.

Textbooks are also an example of inelastic supply. Textbooks fall under an oligopolistic market. This is because there are very few publishers who dominate the market. The implications of having an inelastic supply is a small change in quantity produced shifts the price more than normal. A more modern and new reason for an increase in book prices is costly packages that bundle books with other avenues of learning. An example of this is learnsmart. McGraw-Hill is a textbook publisher that is used by many of my college professors throughout the years. McGraw Hill publishes textbooks but in more recent years have started bundling their textbooks with an online homework application called learnsmart.Because of a push by educators to make the classroom more interactive and online more and more professors are asking students to buy online access codes. This increases the price of textbooks because teachers sometimes require that you purchase both the textbook and the learnsmart. The main issue this cause is with the resale value of the textbooks. The issue this causes is these codes expire after one semester and without a working code the resale value of the textbook is significantly lower compared to when the textbook was the only asset needed. Earlier we discussed the inelastic demand of textbooks this is a negative impact of this inelasticity.

Further turmoil in the textbook market is coming as Cengage and McGraw Hill have announced a merger that would reduce the number of serious competitors from five to four. This would give more control in the market to the suppliers and there will likely be a change in the supply as the big textbook companies can now safely charge more per textbook.

In the chart above we can see that the suppliers now demand a higher price for the same quantity of textbooks demanded. This will lead to a shift in the market equilibrium with students buying less for more and will likely choose alternatives such as borrowing, pirating, or forgoing buying a textbook.

Part 3-

Hypothetical Change- A massive fire burns down half the supply of lumber in the local market causing the input price of paper to double. Subsequently, the cost of new textbooks increases, but the cost of the old textbooks remains the same.

 We defined material cost of producing textbooks to be paper, glue, ink, distribution costs and overhead cost of the machinery used. These make up ⅔ of the cost of producing a textbook as acquisition cost accounts for ⅓ . Of these production costs, paper is one of the smallest. Using a free instant quote website, I estimated it would cost around 5 cents a page for a 400 page book. Textbooks range anywhere from 600 to 1,200 pages but this site wouldn’t let me go beyond 400. Regardless, if this estimate is remotely accurate it shows that paper is one of the smallest costs of printing a textbook, and a change in the cost of paper will result in minimal changes in the price of the final product. However, if the half the supply of trees were burned down, this would limit the amount of textbooks able to be produced. The price of new textbooks might fluctuate slightly as paper is an input cost, but it’s such a small one that a change in its cost won’t cause much of a notable change in price. However, the supply of textbooks will be shortened severely forcing students to look for used or older textbooks. Additionally, there would be an even greater push to get textbooks transcribed online, as this eliminates almost all production costs. These online textbooks can be expensive as well and could very well be priced higher as transcriptions are rushed to meet the new demand. I do not think any prices will change drastically enough to influence the amount of students in the market but where they get their textbooks will shift significantly.

References