11/09/2012

Price discrimination and textbooks

Supap Kirtsaeng was a graduate student that made around $900,000 in revenue by purchasing textbooks at discounted prices in Thailand and selling them in the United States for a profit.  He was sued and now the Supreme Court is facing the decision whether to allow importation of textbooks from countries where they are sold at significantly lower prices than the United States.  Some might think the price of textbooks would drop if the court rules in favor of Kirtsaeng, but one author describes why textbooks will continue to be expensive regardless of the Supreme Court's decision.  Her argument involves the issue of price discrimination.  In the United States, we are willing to pay a higher price than students in other countries so we get charged a higher amount.  If the prices were lowered here, then they would need to be raised in other countries and sells would drop. 

I have always been frustrated by the amount I spend for textbooks, but prior to this class I never realized that it was due to price discrimination. As students we know that we need to purchase the textbooks in order to perform well in a class so we pay the price no matter how outrageous it may be.  I have usually tried to shop around for the best prices when purchasing textbooks, but this article encouraged me to be even more price-sensitive and do all that I can to find the best possible deal. 

8 comments:

Dave Tufte said...

Patrick: 94/100 for a correctly spelled word that's used inappropriately.

This is a hot button issue with students (and parents).

First, note how closely the first paragraph follows the story line for pharmaceuticals: same thing sold at different prices in different locations, and some people making a mint off of arbitrage.

Second, I'm not sure what is wrong with charging a higher price to people that are willing to pay more. Lots of industries do this. Having said that, the social "rules" for who is allowed to charge a mark-up without criticism and who is not are not exactly logical. So, text publishers aren't allowed to do something that publishers of bestsellers do routinely (airlines too).

Third, I am not sympathetic to students' complaints about textbook prices (sorry Patrick, and everyone else who's going to yell at me in the comments ;) College education is an extraordinarily good investment (sorry, not so much for MBA's) because most of the cost is picked up by someone else. So, most students are already getting a great deal, no matter how much the price of texts is marked up. It's rather similar to getting a coupon for a chain restaurant, and then complaining that they have the audacity to charge you full price for drinks when the rest of your meal is discounted. Again, there isn't a good reason why that's acceptable, but textbook pricing is not.

BTW: Think about this; the state picks up most of the costs of your professors' salaries and benefits, and most of the costs of putting up and stocking new buildings. So, they aren't exactly cheap when it comes to subsidizing third parties on behalf of students. And there's nothing stopping them from paying the publishers directly for texts, and then selling them to you at what students consider a fair price. And yet they don't; dichotomies like that are usually a good sign that there's some interesting economics afoot. I'm not sure what that is, but I do know this is almost exactly what the K-12 schools do. Here's a comforting thought: perhaps college textbooks are expensive because professors reserve the right to choose books with small (and expensive) print runs that present diverse viewpoints, than putting up with the lowest common denominator texts foisted by administrators on K-12 teachers who don't have much input.

Miz Ava said...

I think the primary reason the state government is not purchasing textbooks from the publishers directly is to avoid a Tragedy of the Commons. I think that the added cost of textbooks is enough to discourage some from pursuing an education. This is an economic cost that is not worth it to them.

I disagree with the first paragraph of the article. The "cost basis" of textbooks over time is reduced and the marginal cost of producing a new edition is lower. I have often noticed that the newest editions of textbooks rarely come with significant amounts of new information or a total redesign of the textbook. There is a small amount of updated information with a few new pictures. I realize that this may not be the case for all subject areas, but the publishers incur a majority of the cost when the first textbook is written.

Owen said...

I don't understand how the Supreme Court can possible make this illegal. If the textbook manufactures want to sell textbooks in foreign countries and give entrepreneurs opportunities to make money on the price difference, how can the Supreme Court do anything about it? This is what is wrong with America today, someone finds a way to legitimately make money by working the system to their advantage and the government always steps in and makes it illegal. I would hope that the Supreme Court won’t overstep their Constitutional boundaries on this one and let people continue to profit from this.

Aiden said...

I appreciate the comment by Owen. How can the Supreme Court step in and make it illegal for someone to purchase overseas and then distribute in the United States. My question would be, how is this any different from companies that purchase product from and foreign distributor and then sales this product for a profit? We utilize this type of system everyday of our lives. We also do the same thing in a local or national manner as well. Many are now looking online to find individuals that are selling textbooks via the internet everyday. Ultimately, there is not any difference in this situation either.
My hope is that the SC will not impose themselves in any way and allow our citizens to shop for the product with the best price possible. Worst case scenario, in my eyes, is that they see a reduction in sales to the point that they may need to reduce prices in order to offset the desire of customers to search for better prices.

Aiden said...

I appreciate the comment by Owen. How can the Supreme Court step in and make it illegal for someone to purchase overseas and then distribute in the United States. My question would be, how is this any different from companies that purchase product from and foreign distributor and then sales this product for a profit? We utilize this type of system everyday of our lives. We also do the same thing in a local or national manner as well. Many are now looking online to find individuals that are selling textbooks via the internet everyday. Ultimately, there is not any difference in this situation either.
My hope is that the SC will not impose themselves in any way and allow our citizens to shop for the product with the best price possible. Worst case scenario, in my eyes, is that they see a reduction in sales to the point that they may need to reduce prices in order to offset the desire of customers to search for better prices.

Michael said...

I found Patrick's post on price discrimination with regards to textbooks to be very intriguing. Like Patrick, I have never given much thought to price discrimination within the textbook market. I do however differ in opinion from Patrick's viewpoint. I like the idea of free markets, so I would prefer the government not to get more involved than they already are. As stated by Dr. Tufte, we already receive tremendous price breaks on the cost of our education. With that said, textbook pricing is not likely to change, so students should change their perspective. They should think of it not in terms of cost, but rather consider it an investment in themselves and their future.

Dave Tufte said...

Miz Ava: 50/50
Owen: 47/50 for pluralization
Aiden: 38/50 for 4 errors.


Lots of action to review with these 4 comments.

Miz Ava: I'm not sure I follow your logic about the government's decision(s). On your second point, if the publishers incur most of the cost with the first edition, then they are probably in a position where they need to price discriminate to make enough profit on later editions to justify the initial fixed costs.

Owen and Aiden: I think the Supreme Court should consider that the publishers are taking advantage of a positive externality. They are choosing to price discriminate, and then relying on the government protecting the borders to prevent arbitrage. To me, that seems like a reason to not support the publishers: they've been getting something they're not paying for.

Thanks Michael! I think what most concerns me about this is the very common, but a bit unfair, behavior of consumers to complain about all prices. Before college was subsidized, people complained about tuition costs, not textbook costs. Now that they are getting tuition subsidized, they've just moved on to textbooks. I wonder if textbooks were subsidized (which universities, including SUU, are already doing as through their library budgets) whether students will just complain about the next thing ... perhaps meal plans are too expensive.

Dave Tufte said...

Oops. Michael 50/50.