Textbook economics: More than just price

| Staff Columnist

Like clockwork at the beginning of the year, there appears in every university’s newspaper an editorial or two about textbooks and their extremely high prices. Generally, there are some suggestions about ways to make the books cheaper or ideas that would otherwise purport to save students money. I love the optimism, I honestly do. I am, however, an economics major. Thomas Carlyle, the Scottish historian, has called my field “the dismal science,” and he’s spot-on with that moniker. Here’s the truth: There is no such thing as a cheap textbook. Moreover, there never will be.

The problem with just about every article that comes out attacking the textbook industry is that the author fails to take into account the hidden production costs of making the books. Allow me to paraphrase Dr. Karen Braun, a former professor of mine and current professor of accountancy at Case Western Reserve University. She co-wrote a textbook on managerial accounting. According to Braun, the textbook that retails for $210 costs roughly $4 to print, bind and ship.

Now, I can see exactly where arguments against the exorbitant prices of textbooks come from. They spawn from people seeing the production cost and the production cost alone. In that case, somebody’s making $206 in pure profit. However, this is not entirely the case. The economics of the textbook market are very different from the economics of the luxury goods market, where an item like a pair of Marc Jacobs shoes, which actually do cost nearly nothing to make, routinely run $750 a pair and yield extraordinary profits per unit sold.

Claiming that the retail price is just a many-thousand percent markup of a $4 book is utterly incorrect. Publishers incur tens of thousands of dollars in expenses related to the creation and sale of a textbook and its related materials. To go back to Dr. Braun’s accounting text, the standard set of Powerpoint slides that comes with the teacher’s package costs in excess of $15,000 to have designed professionally and revised and to have clip-art pictures licensed for digital distribution. Costs certainly don’t stop there. Teacher guides and portfolios with information on how best to present the material to students must be prepared. And no, we’re not done yet.

After the entire package is created, the books still need to be sold. Enter the regional sales representatives. These people travel from school to school trying to sell professors on using specific textbooks. Publishing conglomerates like Thomson Reuters and Pearson, as well as every other textbook publisher on the planet, hire dozens, and their salaries must be paid. This factors into the cost of the book too. Finally, most publishers have buy-back agreements. They are thus liable for refunding money to bookstores for unsold textbooks. That’s another routinely incurred cost they must deal with.

In economics there’s a concept called “marginal cost.” In short, it’s the production cost of each subsequent item produced. The marginal cost to produce a textbook, as stated above, is about $4. But it’s a fallacy to argue that those few dollars are the true cost of the book. The marginal cost of the second through nth books may be $4, but the marginal cost of the first textbook contains the thousands of dollars of design costs previously incurred by the publisher. The fixed costs associated with the first book must be taken into account.

If you want to read an up-to-date textbook—a proposition that I concede is probably much more important in a science book than in an ancient history text—you have to pay for it. High prices are not something that you can simply overcome by, as some might suggest, selling loose-leaf or electronic editions. That’ll have nearly no impact on price. Additionally, the argument that prices are high because publishers must make up for the money they don’t collect when books are resold is an irrelevant catch-22.

Textbooks are expensive because they cost a lot to create. It’s as simple as that. An overwhelming majority of production costs is sunk into research and design and can only be recouped through higher retail prices. It’s a sad fact of the textbook market. I don’t like it any more than the next guy, but that’s just how it is.

  • Matt

    Actually it costs about $2M to get a good biology book produced. Where’s the fleece? Or your evidence?

  • Matt

    Actually it costs about $2M to get a good biology book produced. Where’s the fleece? Or your evidence?

  • Tim Lamont

    Whatever its a joke and they are fleecing college kids and thier families .
    The overwheling cost of tuition certainly should go towards the development of these textbooks… that are barely used in many cases. Hilarious articale to defend larceny.

  • Joe

    I cannot believe how timeless these discussions are. Reading this article a year later still makes me consider and reconsider my personal position on this issue.

    It feels like the entire argument hinges upon three questions: are the new editions worth as much or even more than the previous editions, are the profit margins too high, and should student go through the pains to compare editions before buying.

    Sonja says that new editions do not contain enough new information to require an update. I can’t say I would put that label on it just yet. She argues, “I Promise you, Nothing you learn as an undergrad is sufficiently cutting edge to require your text books be updated every 2 years.” I ask her, how long should authors wait until they bring out a new edition? And, in order to stay competitive, who is to say that a new edition is not preferred over an old edition? If I am an undergraduate student today, do I not deserve to the most up to date information for my education, regardless of the fact that there may not be many major changes? I think, looking at it from a students perspective, the opportunity cost of an undergraduate student comparing various editions to find differences is too high. I agree that most authors do give the improvements to the new editions in the preface of the textbook, but an undergraduate college student, generally a novice in the field of study, will certainly not be able to tell the difference. In fact, identifying the the difference itself may still not be a problem, but discerning whether the difference is significant is difficult. Moreover, most students trust the professors who guide the mandate of new editions of textbooks for the courses, and they generally tell students whether it is okay to buy the old edition within a first couple of days of classes. At that point, it is up to the student to decide. I feel that Sonja’s expertise in her field of study distorts the true nature of the situation from a students perspective. The rational student considers not only what the current cost of the textbook is, but also how long he or she will need to keep the textbook, the resale value of the textbook, and psychologically, whether he or she is getting the best and most up to date information. For example, many Chemistry textbooks (Organic Chemistry and General Chemistry in particular) are used throughout the year (2 semesters at least) and are needed on the student bookshelves the entire undergraduate career. Many courses such as Biochemistry and Polymer Chemistry also require a working knowledge of introductory chemistry concepts. Therefore, most students prefer to buy the new editions.

    Are the profit margins too high? Simple answer is yes. This is because when considering profit on the margin you consider the marginal cost of producing an additional book to the market price of the book. Remember one of your principles of economics: rational people think on margin. I feel that Richard is confusing average total cost with marginal cost. In a perfectly competitive market, marginal cost should equal the price. Average total cost is what a textbook firm needs to consider in the long run to stay in business. It is true that the textbook industry is not perfectly competitive and is probably an oligopoly. Currently, seeing how the industry does make a profit, more authors and publishers will enter the market in the long run, and the price of textbooks will drop because the supply will increase. Meanwhile, some students do go without textbooks, and publishers do price discriminate (compare your favorite book’s American Edition to the equivalent International Edition). I think that neither the costs to the publishers nor their profit margins need to be blown out of proportion. Remember with an oligopoly, even when the average total cost becomes equal to the price, you still have dead-weight losses.

    If you consider this issue from a supply and demand perspective, there is no issue at all. Only the people who have a higher willingness to pay than the price of the textbook, buy the textbook. Those students who can’t pay such high prices do without a book, use class notes, borrow the book from the library, or buy an older edition: these consumers are a part of the dead-weight losses. The government also does its part to reduce the dead-weight losses. How do you think most people get through college, financially? The answer is financial aid. This can be seen as a subsidy to correct the market outcome.

    Therefore, urging every one to buy an older textbook because the change in the information in a new edition is insignificant (Sonja), or urging every one to buy a new textbook because the consumers should, for some reason, respect the costs incurred by the publisher and the author (Richard) is inane. Adam Smith said it best: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” And hence, I urge everyone to act selfishly.

  • Richard Jesse Markel

    In response again to “Sonja”

    “I can’t decide if it is cute, or weird, that you think the content of immediately upcoming undergraduate economics text books is going to be affected by the recent crash…”

    I respond: In light of this most recent accusation, I’ll tell you that not only have the books changed, they’ve changed drastically. Clearly your understanding of business cycle models is lacking. Being that you’re not an economics student I’ll put it in layman’s terms for you:

    Not only have the intermediate and advanced economics texts changed, but they’ve changed a lot. Mankiw’s book is the best example because he updates it so frequently. The new 7th edition of his Maceconomics text contains a completely different model of the business cycle. Not just some new graph or a nifty picture, but a completely different model. Instead of using the IS/LM model as the definitive model of viewing economics, he has introduced an entirely different dynamic model of aggregate demand and supply with completely different mathematical underpinnings. The publication of the book was pushed back to accommodate said changes.

    Another example would be Robert J. Barro’s “Macroeconomics: A Modern Approach.” The book was overhauled a few years ago (and not updated since) to reflect the best economic models of the time. Since Barro was demonstrating what his new-classical school of thought considered and still considers to be the best model of business cycles, he’s had no need to republish. Thus no new useless updates as you would assert there to be.

    If you’re going to pick a fight with my argument, I’d highly recommend not trying to scrutinize a collection of books that are currently sitting on my shelves and not your own. I called myself out for being haughty in an earlier response. The tone was undeserved for the person I responded to. You, however, seem intent on trying to belittle me by making accusations about my argument. Read the 6th edition of Mankiw’s intermediate macro text, then read the 7th. Read Barro’s old intermediate macro texts, then read his latest one. As for a textbook being updated for the current recession, reading those four should keep you busy for a while. If you’re so inclined, you can also go down to the tax accounting section of the bookstore and find a copy of Spilker’s “Taxation of Individuals and Business Entities.” Updates for the ’09 bailout? That seems like a readily obvious example of a text changing because of the recession – they even said so on the cover.

    If you think my tone is harsh, it’s because you’re petty jabs at me are unprovoked, unnecessary, and untrue.

  • Sonja

    The discussion is really about the textbook publishing industry, less about the profit margins of college book stores. I think we can all agree here, new copy of a new edition of any given text book will be more expensive in a book store then it will be online. The question is whether the new editions have enough new information to justify their high cost relative to the (suddenly obsolete) old edition.

    I claim for most students, most of the time, their new edition won’t have anything new in it. I encourage all students faced with the prospect of buying a new edition to compare the two books, and ask themselves whether the changes are worth the significant difference in price between the new new edition and the used old edition.

    Although the data about the profit margins of college stores is irrelevant to this conversation, it is important to point out its source in order to remind readers that data offered by a trade group is useless to making decisions that involve the trade in question. It’s not unbiased. NACS stands for National Association of College Stores, “The leading resource and advocate for the higher education retail market.” In short, that link is useless because it’s off topic, but if it were on topic, it would still be useless because it links to data from a trade group – which is by definition biased.

  • Iris

    College bookstores don’t make any more or less on their textbooks than average stores like Target or Wal-mart do on their merchandise. For a book they sell at $140, they paid the publisher $120 for it. Out of the $20 they make, they are paying their staff, keeping their lights on, paying to get the books shipped to them, and making their profit.

    Breakdown of textbook costs:
    http://www.nacs.org/common/research/textbook$.pdf

  • sonja

    Oh yeah – also – can you look up the profit margins for the textbook industry? Your mishmash of anecdotal evidence and salary levels is useless towards making your argument.

  • sonja

    “While I will certainly admit that my examples are really only drawn from my areas of study, I can tell you that there are probably a great many science and engineering texts that require up-to-date information.”

    “Probably”? So you don’t know, you are guessing. It would be worthwhile for you, or some student group – the newspaper, the undergraduate student government – to collect 5 or 10 books and compare the most recent edition to the previous edition.

    I can’t decide if it is cute, or weird, that you think the content of immediately upcoming undergraduate economics text books is going to be affected by the recent crash. I urge you to run this claim by one of your professors. Report back.

  • Richard Jesse Markel

    In response to Sonja’s statement against updated textbooks, I’d point out two things. First, I conceded that how new or dated the book is can only really matters with topics that are dynamic and constantly updating. I’d point out topics that I am particularly familiar with like accounting and economics. In accounting, the regulations and rules change quite frequently. Two relevant examples are an intermediate accounting text I had to purchase that was completely overhauled as of the year of publication to include international financial accounting standards that are becoming the norm of US accounting. In accounting, the WashU bookstore sells a taxation text that has been updated to include the American Recovery and Reinvestment Act of 2009, otherwise known as the “bailout.”

    Another example would be the latest edition of N. Gregory Mankiw’s “Macroeconomics.” In lieu of recent economic events, the macroeconomic models are being reworked and completely new information added to the text in order that it might more accurately reflect modern economic theory.

    While I will certainly admit that my examples are really only drawn from my areas of study, I can tell you that there are probably a great many science and engineering texts that require up-to-date information. Legal texts too.

    I can understand what some of the other comments are saying and I certainly was less than lucid with my first comment that could be read as being haughty. I see that there are different ways of arguing this position. However I do have to insist that textbooks, save for the aforementioned “ancient history” and similar texts, really ought to be updated to be complete and contain the most relevant information to students.

    ~Richard Jesse Markel

  • ” textbooks have much shorter lifespans.”
    Textbooks don’t actually have short life spans, or, don’t necessarily. I Promise you, Nothing you learn as an undergrad is sufficiently cutting edge to require your text books be updated every 2 years.
    Getting cheaper text books is as simple as buying last year’s edition. Look for yourself, there is very little new information in the new editions. They correct a couple of typos, and change the pagination to make it harder for you to know what pages to read. This system is an example of Planned Obsolescence.
    You can beat it. Buy the old edition.

  • Harold Kingsberg

    Although parts of that last post of yours were certainly correct, others were not – and you should be embarrassed that you did not think to do five minutes worth of research before posting such a high-handed response.

    To quote you:

    “In general, your medical product sells at a price closer to a monopoly price whereas the textbook market is significantly more competitive.”

    It’s generally taught in Intro to Microeconomics that monopolistic price schemes lead to higher prices than competitive ones. This is because a monopoly can restrict supply to jack up prices whereas in a competitive market, such tactics merely limit one’s own profit. The monopoly should therefore lead to higher prices, not lower ones. Ergo, your quotation should never, but never, be used to justify higher prices in the competitive market.

    On the other hand, it’s possible that that particular quotation was simply meant as a means to differentiate the two markets. However, if you had taken thirty seconds to perform a Google search for “surgical sealant,” you would have found that there is no monolithic surgical sealant company with the capability to influence prices in the way that a monopoly could. This effectively means that we’re comparing one monopolistic competition market (textbooks) with another (surgical sealant).

    The rest of your argument (the shorter lifespan of the textbook) is sensible.

    So, tell me, were those convoluted ramblings like the post you responded to? Were they convoluted ramblings like the post _I_ responded to? Or perhaps would you be gracious and label this post a case of “informed argument”?

  • Richard Jesse Markel

    Au contraire,

    We are NOT a captive market. People who make that argument assume an inherent laziness about book-buyers that is rather irrational. Textbooks can easily be purchased via websites like Half.com or from companies like Amazon who typically charge a lot less than the school bookstore.

    With regard to your example, you are comparing apples to oranges. Medical equipment and textbooks are vastly different commodities. In general, your medical product sells at a price closer to a monopoly price whereas the textbook market is significantly more competitive. Name a subject and you can find anywhere from one or two all the way up to dozens of textbooks competing to be used in classrooms. Furthermore, it is a completely specious argument that you make because of the vastly different legal ownership protections put on the commodities (books v. medical equipment). A patent wears off much faster than a copyright thus the medical item and the books are rather incomparable. This has significant impacts on the short versus long-run viability of producing the product. The dynamic nature of the product also affects pricing schemes. Whereas a product like a surgical sealant will probably be used for the next great many years to glue broken people back together again, textbooks have much shorter lifespans.

    In short, the two markets are not comparable. Furthermore, if you’d have read the Letter to the Editor from an issue or two back regarding professors and textbooks, you’d realize that your assertion that “…professors don’t really care about the price of the book…” is factually inaccurate. I do respect those who stand to disagree with me, however I do ask that people make informed arguments instead of convoluted ramblings with specious examples.

  • Jack

    I’m sorry, but your conclusion that textbooks cost students a lot because the fixed cost for producing the first book is really high is not really on the money. I worked in the engineering department of a large medical products company this summer. One of our products (a surgical sealant) sells for about 1500 and costs about 50 to make, so this is actually a smaller profit marginal (percentage) than a textbook. However, I have to say that the development costs are far over ten times the thousands of dollars it costs to produce a book, yet this company still turns a huge profit. This sealant cost over 100million and several years to develop, the packaging engineering (cardboard box, vials, plastic bags, syringes) probably cost more than the entire development cost of a textbook.

    Textbooks cost a lot to produce, but so does everything else, and most of them don’t don’t enjoy the ridiculous profit margins that books do. Textbooks are expensive because we are a captive market. The salespeople can sell expensive books to professors because professors don’t really care about the price of the book. Students have to buy the books at the high prices because they usually have no other option, and thats why books are expensive

  • Pingback: LongTailEconomics.com » Blog Archive » Textbook economics: More than just price (Student Life)()

  • Frances

    You can also check out http://www.DealOz.com , DealOz compares 200 bookstore prices and free discount coupons too. Their coupons are valid and have saved over $500 on my textbooks.

    • Markelhater

      Reading this article is genuinely frustrating. Markel, you claim to be an economist, yet you claim firms in a monopolistic environment would not maximize their profits when given the opportunity. Is anyone else confused by that? Because I certainly am. The consumers face no other alternative choices for their textbooks aside from older editions therefore publishers act as monopolists.

      Also, the snippet about the $15000 fixed cost was cute, but insubstantial in cases where a textbook is widely sold. The fixed cost argument is only valid when there are a low number of prints, or in the case of an anthology where multiple acclaimed authors require substantial payment.

      This article is uninformed drivel. I wish that I could put a warning over it stating the following: “stop, the following article will only frustrate an informed reader, all those who wish to waste time may proceed.”