Wednesday, March 17, 2010

College tuition is expensive enough, let alone the textbooks

Los Angeles Times article "College tuition is expensive enough, let alone the textbooks" (March 15th, 2010) offers an interesting but empirically faulty conjecture concerning textbook revisions. Textbooks are durable goods that may be bought, used, and sold. Furthermore, they are in monopolistic competition with one another. The Times suggests that editors come out with new editions to generate revenue.

A US Government Accounting Office report shows that textbook prices rose 40 percent between 2002 and 2007, and 186 percent between 1986 and 2004, so that a college student’s annual book bill averages $900!

Publishers claim sky-high prices are necessary to offset losses from used-book businesses that recirculate titles, killing sales of new books.

So publishing reps compete for their piece of the multibillion-dollar pie, throwing book release parties with refreshments and gifts for faculty, including free examination copies. Additionally, they lure professors to tweak and rewrite new editions each year, to render obsolete the slightly used copies and create new demand.

In an NBER Working Paper, "Are Durable Goods Consumers Forward Looking?" Judith Chevalier and Austen Goolsbee find that students do indeed spend approximately $900 purchasing textbooks every year. Chevalier and Goolsbee examine student sensitivity to price. Students buy books and often sell them back, used, at the end of the term. They are able to sell them for a fraction of the price (between 50%-75%) if no new edition has come out, and a smaller sum (approximately 20%) if a new edition has come out. Corrections notes in passing that this indicates students are not paying $900 net, but quite a bit less than that.

A student's willingness-to-pay, absent discounting (which Goolsbee and Chevalier do not neglect) for a book will be equal to the difference of price paid and cost recovered through resale, plus the gain a student gets from using the book in the meantime. If companies accelerate their revision cycle, a student's willingness to pay will go down.

Indeed, Goolsbee and Chevalier find just that: students are patient and forward-looking, and become more sensitive to price as the likelihood of a new revision increases. Indeed, they find that textbook firms cannot increase profits by accelerating their product cycle--the decrease in value to a patient student causes fewer sales.

They find that students are not myopic in their purchase decisions, and their sensitivity to reap greater profits appears to be incorrect, due to the patience and rational expectations of college students.

The argument offered by the Times, that textbook companies accelerate their revision cycles to gain profit, appears to be contradicted by empirical evidence.

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