Dealing with Big Deals

1. Dealing with Big Deals Ted Bergstrom

2. The old regime • Back in the 20th century, libraries subscribed to paper editions of academic journals. • Journals were sold separately. • No price discrimination among universities. • Big universities had multiple subscriptions to major journals. • Small universities did not subscribe to most journals--costly subscriptions, scarce shelf space.

3. Along came the internet… • Scholars preferred downloading to visiting the library. • Marginal cost to publishers of extra subscription fell from about $.01 per page to almost $0. • Shelf space was no longer an issue for small libraries. • Big universities no longer needed multiple copies.

4. A short history of prices

5. Enter the Site License • Publishers learned to sell site licenses for online access to journals. • Some learned faster than others. • Elsevier was quickest. • The new internet technology lent itself to bundling and price discrimination.

6. The Big Deal, Round 1

7. Elsevier’s Clever Scheme • Elsevier devised an effective way to price discriminate. • Calculate each library’s current expenditure on paper journals. • Multiply this by 1+x where x~.15 • Supply electronic access to all Elsevier journals, plus paper access to previous subs for this lump sum. • This is a 5 year contract. Elsevier promised annual price will rise by no more than 7%.

8. How effective? • Elsevier knows library is willing to pay at least what paid for paper subscriptions. • Additional access costs Elsevier nothing. Libraries chose not to pay for this access before. • Library’s value of additional access roughly proportional to budget. • Uptake rate was high and other publishers soon copied this trick.

9. Benefits (to seller) of bundling • Monopolist’s problem: Demanders’ willingness to pay differs and monopolist can’t tell who has high and who has low value. Must charge same to “similar-looking” customers. • Can’t collect entire consumers’ surplus. • Due to “law of large numbers,” demand for bundles of journals less variable than demand for single journals. • Monopolist can come closer to extracting all consumers’ surplus.

10. Bundling deters entry • Libraries who bought the Big Deal were obliged to increase their payments to Elsevier by 7% per year. • Payments to Elsevier are about half of library serials budget. • Serials budgets rise at less than 3.5%. • Libraries are in perpetual cancellation mode, but bundled journals are exempt. • Adding new competing journals is not likely.

11. What happens when 5-year Big Deal contract expires? • Faculty addicted to • online access. • Must negotiate • new contract.

12. Polysyllabic Thunder • A single agency, the California Digital Library negotiates one Big Deal for all UC campuses. They negotiated a second Big Deal contract in 2004. • Afterwards a CDL spokesperson said “The economics of scholarly journals publishing are incontrovertibly unsustainable.” • And an Elsevier spokesperson said "Although the negotiation period was challenging for both parties, the tone of the discussion was professional and cordial throughout." • Beats having your pocket picked by surly amateurs!

13. The Big Deal, Round 2

14. Renewing the Big Deal • After first round of contracts, what happens? • Old formula doesn’t work. Print subscriptions not useful any more. • Bargaining for large buyers becomes one-on-one. • Publishers can no longer credibly claim that they don’t give discounts. • Secret contracts commonly signed.

15. How to bargain? • Theory of bargaining suggests that library needs to know what will happen if Big Deal bargain breaks down. • “You have to be ready to walk.” • But what is a Big Deal worth to a library? What is it worth to publisher? • Very difficult question: Big publishers have thousands of journals in hundreds of different fields.

16. A hint: • If Big Deal breaks down, library does not abandon publisher’s journals. • Library would still buy selected individual journals from publisher that are “worth their cost.”

17. A proposed recipe: • Hypothetical publisher: Call it Wiley. • Library lists its current holdings of all journals in each discipline. • Library counts the (weighted) citations to journals currently held in each discipline. • Finds minimum cost subscription list that would achieve current citation levels in all discipline swithout the Wiley package.

18. Recipe continued: • Finding this list is easy. Array journals in each discipline by cites per dollar. Work down list until necessary number of cites achieved. • Calculate total cost V of all subscriptions to journals on this list and total cost W of all subscriptions on this list that come from Wiley.

19. Recipe continued • Suppose that library buys a Big Deal site license to the entire Wiley bundle. • Calculate minimum cost Y of topping up the Wiley Big Deal bundle with non-Wiley journals to achieve current citations in all fields. • Then X=V-Y is maximum willingness to pay for the Wiley package. • Emphasize V-Y is the MOST library could pay and not be worse off. This is NOT what library should pay if it has any bargaining power.

20. Value of Big Deal to Publisher • If Big Deal falls through, publisher still gets revenue from individual subscriptions. For Wiley, we calculated this as W. • Value to Wiley of consummating Big Deal at price P is P-W.

21. Nash-Rubenstein Bargaining Solution • If a Big Deal is made at price P, • The library gains X-P (where X=V-Y, is the library’s maximum willingness to pay) • The publisher gains P-W (where W is its revenue from the library if no Big Deal is struck.) • Nash-Rubenstein theory predicts “split the difference”. • X-P=P-W, so P=(X+W)/2

22. Caveat • Suppose that a library managed to bargain so well that it got entire surplus from purchasing the bundle rather than individual journals. • It would still be paying monopoly rents equal to the profits that the monopolist would earn by selling journals individually without bundles.

23. Bundles and non-profit journals • Many non-profit societies contract with Blackwell-Wiley nee Blackwell to market and print their journals. • Examples: Econometrica, RE Studies, J of Finance, Economic Journal, Canadian Journal. • Old Regime: Societies negotiated low subscription prices, with threat to move to other publishers (MIT, Oxford, Cambridge) • Blackwell also publishes some high-priced journals that it owns. • Two operations were completely independent.

24. Enter the internet… • Blackwell now sells electronic bundles that include their own journals as well as non-profits that they publish for societies. • Blackwell price discriminates by the Elsevier first-round Big Deal formula. • Libraries pay for journals they previously bought in paper, plus a surcharge for the electronic bundle. • If library drops a paper journal, price of bundle rises so no money is saved.

25. Importance of non-profit bundles • Review of Economic Studies currently has 1500 ``stand-alone’’ subscribers and 2000 subscribers who purchased the Blackwell bundle but did not subscribe to RE Studies on its own. • Econometrica opted out of Blackwell’s bundle arrangement because it thought it was losing subscriptions and was not getting a fair share of revenue.

26. Sharing the revenue • Blackwell divides the revenue from sale of its bundles among journals in proportion to stand-alone subscription price. • But non-profit journals are both cheaper and more cited than Blackwell’s for-profits. • Econometrica, RE Studies, and J Finance supply 61% of quality-weighted cites and cost 4.5% of the total subscription price. • Blackwell argues: Societies don’t lose. They get to keep their old subscription base. Only a few of the bundle buyers don’t already have their journals.

27. Mark Armstrong’s critique • Blackwell’s argument doesn’t work for new markets. • The claim that your price for electronic rights will rise permanently if you drop paper subscription is not credible. • Blackwell’s goals of profit-maximization for its journals are incompatible with society goals of maximizing exposure subject to break-even constraint.

28. Non-profit bundles • Armstrong predicts that societies will continue to cover their costs with subscriptions, but will join together to bundle non-profit journals separately from for-profit journals. • Much as bundling allows monopolists to make higher profits, it allows non-profits to have more subscribers while covering their costs.

29. Tha Professional and Cordial, throughout