It’s a Text Book case of Market forces

Text books are expensive. I paid about $120 on the average for my new text books and did not have good experience buying used books online. The New York Times wrote an editorial on the high price of college textbooks calling it “outrageous pricing”. I do appreciate the Congressional bill that will allow unbundled pricing. But more than this I do not see a need for any actions for setting prices.

Greg Mankiw, the author of my favorite Macroeconomics book that not only helped me learn economics  but also gave apply these to analyze news stories like McCain’s gas tax vacation, says in his blog that the Times should consider entering the market instead of editorializing. After all there are no barriers to entry, Times  has a strong brand and it already knows how to hire writers. He concludes that Times, “would not view starting a new textbook publisher as an exceptionally profitable business opportunity”

I looked at the Market Research 2007 data on Text book publishing.
Size of new text book business: $3.4 billion, growing ~3%, slower than used book segment
Market share of top 8 players: 95%
Operating margin of top 4 players: 25.6%, 20.2%, 15.7%, 13.0% (a nice margin)
Demographic characteristic: Students buying fewer books as they share or buy more used books.

I think with such strong concentration at the top and high fragmentation at the remaining 5% it is not easy to enter the market. While the students buy the books, marketing is done to the professors who recommend the books. I wonder whether the professors rely on the established brand name publisher than the author of the books. This creates barriers for new entrants despite their established brand name in other areas.

I also think margins like 15% to 25% are extremely attractive and also tells us that the publishers are not doing this just as a service to education. The continued increase in prices despite the technology, marketing strength, outsourcing and experience curve benefits is surprising. It does leads one to wonder if there is tacit price collusion. More analysis is needed to look at specific segments each of the top players specialize in and whether they split the market among themselves to avoid competing with one another.

I would like to see no more recommended textbooks and unbundling at chapter level. Professors should pick and choose separate chapters from a variety of authors (dealing directly with them instead of publishers) and suggest a proposed electronically published course pack. This sure would solve the high price of textbooks by changing the game instead of through legislation.