Journal Pricing and Mergers: Print v Digital Mark J. McCabe School of Economics

1. Journal Pricing and Mergers: Print v Digital Mark J. McCabe School of Economics Georgia Institute of Technology Mark J. McCabe: Journal Pricing and Mergers

2. Business Models for Commercial STM Publishers • Print Environment -- No Bundling or Price Discrimination – Why? -- (Compared to non-profits, more titles, higher prices butfewer subscriptions and lower quality) • Digital Environment -- Bundling and Price Discrimination – Why? -- (Compared to non-profits, higher prices for licenses) Mark J. McCabe: Journal Pricing and Mergers

3. Demand for PrintSTM Titles • Although scholars use journals, libraries purchase most subscriptions. • Budgets are defined for broad journal categories, e.g. biomedical. • Subject to these budgets, libraries maximize their collections’ value.  demand is for a portfolio of titles, chosen on a cost/use basis (solution to the “knapsack” problem in operations research) Mark J. McCabe: Journal Pricing and Mergers

4. Commercial Publisher Strategies in a PrintSTM World, Part I • Given the demand for title portfolios, individual journals do not compete on the basis of content. • Rather, competition is determined by the relative quality of all titles in the portfolio, and the size and distribution of library budgets. • Higher quality titles should charge higher prices. Mark J. McCabe: Journal Pricing and Mergers

5. Commercial Publisher Strategies in a PrintLegal World, Part I • In some categories of legal serials, e.g. reporters or newsletters, individual titles docompete on the basis of content. • For these titles, competition is determined by the content and costs of similar titles. • In other cases, e.g. encyclopedias or treatises, individual titles do not compete on the basis of content. • In these cases, competition is similar to the case of STM journals Mark J. McCabe: Journal Pricing and Mergers

6. Commercial Publisher Strategies in A Print World, Part II • • Market Power may increase as a publisher’s portfolio grows, • due to pecuniary externalities. • Attention must be paid to whether competition is based on • content overlap or the quality of all titles in the market portfolio • • Sources of portfolio growth: • - New titles • - Mergers Mark J. McCabe: Journal Pricing and Mergers

7. Empirical Evidence in the PrintSTM World • Higher quality titles do charge higher prices. • Commercial publishers do introduce far more titles than their non-profit counterparts. • Mergers in the biomedical portfolio market have increased market power and prices. (merger results based on 7 transactions in the period 1988-2001) Mark J. McCabe: Journal Pricing and Mergers

8. Empirical Evidence in the PrintLegal World • Price Inflation is greatest when competition is portfolio-based. • Mergers are associated with higher prices when the merging parties both control titles in the same “portfolio” categories, e.g. encyclopedias, treatises. • No apparent price effects when mergers join titles from different categories and/or similar “content” categories. (merger results based on 6 transactions in the period 1990-2000) Mark J. McCabe: Journal Pricing and Mergers

9. Market Structure and Strategies in a DigitalSTM Environment, Part I • Due to the importance of journal reputation, the digital environment does not necessarily enhance entry (this is true for both subscription-based and open access publishing) • The role of 3rd-party vendors is diminished. • Price discrimination and bundling enhance publisher margins. Mark J. McCabe: Journal Pricing and Mergers

10. Market Structure and Strategies in a DigitalSTM Environment, Part II • Library demand is for a portfolio of bundles, chosen on a cost/use basis. • Large publishers have an incentive to foreclose smaller competitors. This threatens to lower collection quality. • Because of the potential for foreclosure, mergers can be far more profitable, esp. those that result in control of 50% or more of a portfolio market. Mark J. McCabe: Journal Pricing and Mergers

11. Empirical Evidence in the Digital World • Mostly anecdotal; also the transition from print to digital is not complete. • Digital usage generally consistent with citation data. • Almost all ARL libraries appear to be licensing expensive high quality commercial bundles. • Fewer libraries are licensing lower quality bundles. • Open Access publishing can be seen as a response to the foreclosure threats faced by new and/or small publishers.

12. Antitrust Issues - Mergers, Part I •Should markets be defined on the basis of content or portfolios? • If the former, most mergers raise few concerns. •If the latter, are all combinations suspect? Mark J. McCabe: Journal Pricing and Mergers

13. Antitrust Issues - Mergers, Part II • To date, only one proposed merger has failed, possibly due to EU antitrust scrutiny (R. Elsevier/W. Kluwer, 1998). • In the US, minor divestitures occurred in West/Thomson (1996) -- In both cases, market definition was based on content. • Libraries’ effort to block or modify the 2001 Elsevier/Harcourt merger hurt by uncertainty about digital transition. (However, the UK’s OFT did acknowledge the potential relevance of a broad, portfolio type market definition.) Mark J. McCabe: Journal Pricing and Mergers

14. An example: ISI-ranked Biomed Titles, 1998 (first published 1958-67) Non-Profit (17 titles) Commercial (101 titles) Price 446 1,316 Citations 14,163 5,067 # Papers 333 235 Circulation 53 39 (circulation based on 194 medical libraries) Mark J. McCabe: Journal Pricing and Mergers

15. Reed-Elsevier Biomed Journal Statistics 1988 1998 Prices $482 $1,548 Citations 3,477 4,222 # of Papers 179 204 (ISI-ranked titles) Mark J. McCabe: Journal Pricing and Mergers

16. (Medical) Library Response? •In 1988, 15.5% of libraries subscribed to the typical Elsevier title • In 1998, 14.4% of libraries subscribed to the typical Elsevier title Mark J. McCabe: Journal Pricing and Mergers