Dealing with Big Deals

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Dealing with Big Deals

• Ted Bergstrom

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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.

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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.

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A short history of prices
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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.

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The Big Deal, Round 1

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Elseviers Clever Scheme

• Elsevier devised an effective way to price
  discriminate.
• Calculate each librarys current expenditure on
  paper journals.
• Multiply this by 1x 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.

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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.
• Librarys value of additional access roughly
  proportional to budget.
• Uptake rate was high and other publishers soon
  copied this trick.

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Benefits (to seller) of bundling

• Monopolists problem Demanders willingness to
  pay differs and monopolist cant tell who has
  high and who has low value. Must charge same to
  similar-looking customers.
• Cant 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.

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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.

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What happens when 5-year Big Deal contract
expires?

• Faculty addicted to
• online access.

• Must negotiate
• new contract.

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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!

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The Big Deal, Round 2
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Renewing the Big Deal

• After first round of contracts, what happens?
• Old formula doesnt work. Print subscriptions
  not useful any more.
• Bargaining for large buyers becomes one-on-one.
• Publishers can no longer credibly claim that they
  dont give discounts.
• Secret contracts commonly signed.

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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.

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A hint

• If Big Deal breaks down, library does not abandon
  publishers journals.
• Library would still buy selected individual
  journals from publisher that are worth their
  cost.

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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.

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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.

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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 XV-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.

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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.

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Nash-Rubenstein Bargaining Solution

• If a Big Deal is made at price P,
• The library gains X-P (where XV-Y, is the
  librarys 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-PP-W, so P(XW)/2

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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.

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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.

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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.

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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 Blackwells bundle
  arrangement because it thought it was losing
  subscriptions and was not getting a fair share of
  revenue.

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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 Blackwells 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 dont lose. They get
  to keep their old subscription base. Only a few
  of the bundle buyers dont already have their
  journals.

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Mark Armstrongs critique

• Blackwells argument doesnt work for new
  markets.
• The claim that your price for electronic rights
  will rise permanently if you drop paper
  subscription is not credible.
• Blackwells goals of profit-maximization for its
  journals are incompatible with society goals of
  maximizing exposure subject to break-even
  constraint.

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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.

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Tha
Professional and Cordial, throughout