Greg Mankiw has an interesting article that discusses the teaching of basic economics. This caught my eye:
A common argument used to explain the high price of textbooks involves the principal agent problem between student and instructor. The instructor chooses the book, often oblivious to its price. The student has little choice but to buy the book. As a result, the publisher has substantial market power and sets the price much above cost, resulting in exorbitant profits. Or so the argument goes. I am skeptical of this story.
To be sure, there is a principal-agent problem between instructor and student, and price is much above marginal cost. But there are large fixed costs associated with publishing, so I am not convinced that price is much above average total costs. Indeed, textbook publishing has not been all that profitable in recent years.
Mankiw’s probably right about the profitability of publishing textbooks. Most older industries are competitive enough where market power doesn’t explain very much of the price. If there is a problem of excessively high textbook prices, it’s likely associated with excess costs, not excess profits.
Before regulation Q was repealed in the early 1980s, banks were not allowed to pay interest on ordinary bank accounts, and therefore engaged in “non-price competition.” Something similar happened in the airline industry before the deregulation of the late 1970s. When forced to charge higher that free market prices, airlines had competed for customers by offering better service. In neither case did the price controls lead to the excess profits one might have expected. In both cases, non-price competition raised costs.
If there is a market failure in the textbook industry (due to the principal-agent problem), it probably shows up in the form of too many textbooks to choose from, with too high a quality level. Publishers compete vigorously for choosy profs to adopt their book, by offering many options that fill a variety of market niches, and also produce books of very high quality for the same reason. I’m not sure how many principles of economics textbooks there are to choose from, but it’s more than you’d think.
Steve Rubb and I just wrote a principles of economics textbook. Our intention was to offer many of the features that people like about Mankiw (being clear and concise and not too long) while also competing in the “business examples” segment of the market, against other business-oriented books that lack those qualities.
I suspect that in a perfect world there’d be a bit fewer principles texts to choose from, and prices would be a tad lower. (Full disclosure: I’d prefer that not happen until I’m dead!) But I doubt this is a serious market failure. Mankiw observes that quality has improved dramatically in this industry. His textbook is vastly better than Samuelson’s famous 1948 intro text, which was the first in the modern style. Mankiw also points out that modern textbooks come with many digital supplements, which allow students to test themselves and learn more effectively. In addition, students can now buy electronic versions that are far cheaper than the paper versions (which often cost $200 or more.)
Markets almost never work perfectly. The key questions is, as always, what’s the alternative?
READER COMMENTS
Jon Murphy
Mar 14 2019 at 11:40am
I wonder how much the principle-agent problem will persist in coming generations. My generation was among the first to see this rapidly rising college costs. When I build my classes, I try to find low-cost alternatives that still provide the punch I want. I put a ton of effort into evaluating a textbook and choosing materials based on costs. For example, for my Law & Econ class this semester, I spent the better part of 2 weeks during the final weeks of the Fall semester (when the opportunity cost of my time, between grading and working on my own classwork, was extremely high) evaluating books. I finally settled on Cooter & Ulen’s free textbook Law & Economics, primarily because it was free but also because it was just as good (if not better) than many of the other texts on the market. Plus the one other book I assigned (Harold Winter’s Issues in Law & Economics), the total cost of course materials came to $25.
If I am representative of the professors of my generation who are beginning to teach, the principle-agent problem may be lesser going forward.
Dylan
Mar 14 2019 at 11:42am
With no disrespect intended to your forthcoming textbook, which I’m sure is excellent, I’m skeptical of the quality argument on average. When I was an undergraduate it seemed pretty rare for any student to do so much as to crack the textbook, unless there were assigned problems from the text. When I did try reading the book my experience was that it was almost always easier to find simpler and more understandable explanations for concepts I was having trouble with available for free online (even back in the late 90s).
I’m now doing an MBA and the books are included as part of the tuition, and they still have very little value. We spend far more time in class on case studies and other supplemental readings, which doesn’t leave a lot of time to read the textbook. And when I have tried to clear away extra time anyway, it has done very little to increase my understanding beyond what I got from lectures, simulations, and other exercises. The only textbook that has added real value so far is the one that I had to open up to get a code so that I could download some expensive software for free.
James
Mar 14 2019 at 11:51am
I think there are more good alternatives than people realize. For some fields where textbooks just need to cover facts that have already been known for years, there is no need to keep producing a new edition of a textbook every year. For example, there are plenty of math textbooks provided by their authors for free download. I cannot imagine that the linear algebra book selling for $100 in a college book store will be worth $100 more than the one at http://vmls-book.stanford.edu/vmls.pdf. Professors just don’t have the incentive to learn about free alternatives.
If textbook authors want to get paid for their work, electronic self publishing is still cheaper to the buyer and probably pays more per book than working with a publisher.
In fields where textbooks really do need to be updated regularly to include current topics or findings, there is probably no reason to have new editions every single year. No field advances that quickly. But textbook publishers and authors have an incentive to keep each batch of students buying new books.
Ken P
Mar 14 2019 at 11:58am
Students are also restricted by edition due to oage numver assignments and subtle content differences. Non-students can purchase the 6th edition for example for under $20. Of course you are also venturing into the used market at that point.
John hall
Mar 14 2019 at 12:48pm
I’m the type of nerd that buys textbooks to read for fun…so anything that brings down their prices is a good thing.
However, I’m not sure how far down things can go. Obviously, something like a physics 101 book in its latest edition is going to be overpriced. But I have bought a decent number of statistics texts that I doubt are used in many classes. They are also always expensive, priced between $50 and $150 usually, but not unreasonably expensive (greater than $200). I suspect it is due to the small number of books printed, which is not likely to change.
That being said, if printing costs were such a driver of the high price, you would think that a digital version would be much much cheaper, but that rarely ever happens. I’ll pay the extra 10 bucks for something I can touch.
Dustin
Mar 14 2019 at 1:32pm
My question is about the justification for continued emphasis on robust textbooks. A well thought out video, with high quality graphics, narration is very powerful and globally scalable. 3blue1brown, for example, produces videos that have higher learning value than any textbook I’ve ever used. Even for the CFA exams, I bought the textbooks but never opened them; the Kaplan videos were all I needed to crush the exams 1st go.
There are many educational videos that are done so poorly as to not be a viable substitute for textbooks (e.g. recording a lecture, ugh). But there are the examples where storytellers, visual artists, and academics all come together to produce multi-media content that truly raises the bar.
A great thing about multimedia is that it’s easily updated as the field advances. Simply splice in new bits as needed.
Brian Donohue
Mar 14 2019 at 2:27pm
Given the increase in the cost of textbooks, the poor dears must have been losing their shirts in the old days if they’re still not all that profitable now.
Christian List
Mar 14 2019 at 8:51pm
I don’t really get why textbooks are so much more expensive in the US. The prices seem absurd. In Germany a normal textbook costs 20-50€. A really expensive one maybe 80-100€, but that’s already really expensive. The 1:1-translation of Mankiws’s textbook seems to cost 40€.
I couldn’t really find out the reasons for these price differences so far. Maybe it has something to do with a mechanism (or price control) called “Buchpreisbindung”, a fixed book price, that (according to the publishers) makes mega-best-sellers like Harry Potter quite expensive (the price is not allowed to fall), but at the same time (according to them) it makes specialized literature more affordable.
Benjamin Cole
Mar 14 2019 at 9:07pm
Before regulation Q was repealed in the early 1980s, banks were not allowed to pay interest on ordinary bank accounts, and therefore engaged in “non-price competition.”—Sumner.
Let us hope economic textbooks are more accurate in terms of history.
Commercial banks could pay interest on ordinary retail bank accounts under regulation Q, but had to pay 1/4% or 1/2% less than the rate paid on bank accounts at Savings and Loans, a.k.a. the thrift industry.
I worked as a very junior lobbyist for the thrift industry in Washington DC in the 1980s. In fact, I played a very minor role in getting laws changed that liberalized S&L lending, which resulted in the collapse of much of the industry later.
The thrift industry had been set up to finance home purchases, and thus had a somewhat sacrosanct image .
There was a standard joke in the industry back in those days: “I believe in two things: Free enterprise and regulation Q!”
Matthias Goergens
Mar 14 2019 at 10:19pm
The loose leaf version in the screenshot is interesting. It looks like pure price discrimination along willingness to bear inconvenience.
Duncan E
Mar 15 2019 at 12:16am
The issue isn’t the price of textbooks so much as that there’s new editions with minor differences every year or two to kill the second hand market.
Of course the price of collage course textbooks is just part of the wider problem of collage price inflation. You HAVE to have a collage degree to get a good job/life and you HAVE to use the current edition of the text book(s) to get the collage degree.
Scott Sumner
Mar 15 2019 at 12:30pm
Dylan, I agree that many students don’t bother to read textbooks. I do believe, however, that reading an economics textbook has real value added—it did for me.
Brian, You missed the point. The old textbooks cost far less to produce.
Christian, Again, it’s non-price competition.
Ben, Perhaps you’ve forgotten the days when banks offered free toasters to depositors. Reg Q allowed no interest on demand deposits.
Brian Donohue
Mar 15 2019 at 2:46pm
So the cost of textbooks has exploded, unlike the cost of books generally. OK.
Look, people should get paid for their intellectual property, but if you think this isn’t a case of professors discovering a heretofore unexploited revenue source and wringing as much as they can out of a bloated system, you’re the one missing the point.
Scott Sumner
Mar 16 2019 at 4:41pm
Brian, You said:
“So the cost of textbooks has exploded, unlike the cost of books generally. OK.”
Yes, and I explained why in my post—non-price competition. That doesn’t apply to most books, which are not assigned by third parties. Don’t you think it would be more effective to respond to my specific explanation, and tell me why it’s wrong, rather than just roll your eyes at the idea?
Furthermore, you seem to suggest I deny any sort of market failure here, whereas I actually suggest just the opposite:
“I suspect that in a perfect world there’d be a bit fewer principles texts to choose from, and prices would be a tad lower.”
Christian, I explain why non-price competition occurs, the books are assigned by the professor, but bought by the student. Why should the professor care about the price?
And yes, I think price competition is more efficient.
Ben, Checking accounts are ordinary bank accounts. For the vast majority of people I know, their checking account is their only bank account. In any case, what’s your point?
Christian List
Mar 15 2019 at 3:31pm
And why is there no price competition? Are you happy that there is no price competition? Do you think this is right? Is there a hidden message in your blog entry? Sorry your essay is a bit too nebulous and too Straussian (?) for me to fully grasp what you mean.
Benjamin Cole
Mar 15 2019 at 9:51pm
Before regulation Q was repealed in the early 1980s, banks were not allowed to pay interest on ordinary bank accounts, and therefore engaged in “non-price competition.” –Sumner.
Scott, you wrote “ordinary bank accounts.”
Commercial banks could pay interest on passbook accounts, that is ordinary bank or saving accounts but not on checking accounts, under regulation Q.
However commercial banks had to pay 1/4% or 1/2% less than the thrifts on the passbook accounts, under regulation Q.
Until the late 1970s, neither banks nor thrifts could pay interest on checking accounts. Eventually the NOW accounts came in and the whole system collapsed and was mercifully euthanized.
I remember the free toasters and waffle irons. But those were offered on checking accounts, not on ordinary bank accounts.
Phil H
Mar 16 2019 at 2:36am
I sometimes wonder if textbooks aren’t one of the very few books whose pricing is vaguely connected with their value. To me, the miracle of books is that so many different, amazing books are the same price. You can pay approximately 10 dollars for a paperback, and you might get some silly potboiler; or you might get a classic of literature that will nourish your spirit for your entire life; or you might get instruction on a skill or some knowledge that will empower you endlessly. This miraculous “market failure” makes me laugh for joy every time I’m in a bookstore.
If textbooks buck this trend, it seems to me that they might actually approach *closer* to market conditions (assuming that in an efficient market, the prices of books would converge on their value to the reader) than most books. I’m not sure that analysis as a market failure is going to be very helpful!
Joris
Mar 19 2019 at 6:50am
There is a market failure in the education market. It’s not just that textbooks would be cheaper in a better functioning market, they wouldn’t be used anymore by 99% of the students. The digital supplements wouldn’t be a supplement, they would be the course. In fact this is already the case with many of the MOOCs.
You are right of course that currently there is competion on quality in the textbook market. But isn’t it so that when there is competion on quality the profit margins are usually higher?
And even when the profit margins stay the same,the profit per book is higher due to the price being so much higher.
Like you said, this results in too many textbooks to choose from, because even in a small niche you can still make a small profit.
It also means that for the most popular textbooks, like that of Mankiw, the claim of exorbitant profits being made is very true.
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