Dealing with Big Deals
Ted Bergstrom
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.
cost per page
for-profit
non-profit
Ecology
Economics
Atmosphere
Mathematics
Neuroscience
Physics
1.19
0.81
0.95
0.70
0.19
0.16
0.15
0.27
0.89
0.63
0.10
0.19
for-profit
non-profit
price / page
1.42
total price / page 1.42
0.29
0.36
price / cite
0.78
4.33
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.
A short history of prices
Enter the Site License
• Publishers learned to sell site licenses for
online access to journals.
• Some learned faster than others.
• Elsevier was among the quickest.
• The new internet technology lent itself to
bundling and price discrimination.
The Big Deal, Round 1
Elsevier’s Clever Scheme
• Elsevier devised an effective way to price
discriminate.
• Calculate each library’s current expenditure on
paper journals.
• Multiply this by 1+x 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%.
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.
• Library’s value of additional access roughly
proportional to budget.
• Uptake rate was high and other publishers soon
copied this trick.
Benefits (to seller) of bundling
• Monopolist’s problem: Demanders’ willingness
to pay differs and monopolist can’t tell who has
high and who has low value. Must charge same to
“similar-looking” customers.
• Can’t 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.
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.
What happens when 5-year Big Deal
contract expires?
• Faculty addicted to
online access.
• Must negotiate
new contract.
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!
The Big Deal, Round 2
Renewing the Big Deal
• After first round of contracts, what happens?
• Old formula doesn’t work. Print subscriptions
not useful any more.
• Bargaining for large buyers becomes one-onone.
• Publishers can no longer credibly claim that
they don’t give discounts.
• Secret contracts commonly signed.
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.
A hint:
• If Big Deal breaks down, library does not
abandon publisher’s journals.
• Library would still buy selected individual
journals from publisher that are “worth their
cost.”
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.
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.
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 X=V-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.
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.
Nash-Rubenstein Bargaining
Solution
• If a Big Deal is made at price P,
– The library gains X-P (where X=V-Y, is the library’s
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-P=P-W, so P=(X+W)/2
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.
Bundles and non-profit journals
• Many non-profit societies contract with WileyBlackwell 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 published some high-priced journals
that it owns.
• Two operations were completely independent.
Enter the internet…
• Wiley-Blackwell now sells electronic bundles
that include their own journals as well as nonprofits that they publish for societies.
• Wiley-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.
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 Blackwell’s bundle
arrangement because it thought it was losing
subscriptions and was not getting a fair share
of revenue.
Sharing the revenue
• Wiley-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 Blackwell’s 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 don’t lose. They get to
keep their old subscription base. Only a few of the
bundle buyers don’t already have their journals.
Mark Armstrong’s critique
• Blackwell’s argument doesn’t work for new
markets.
• The claim that your price for electronic rights
will rise permanently if you drop paper
subscription is not credible.
• Blackwell’s goals of profit-maximization for its
journals are incompatible with society goals of
maximizing exposure subject to break-even
constraint.
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.
Spending your Ecology Budget Efficiently
The Bio One Model
• A Bundle of Non-profit, Mostly Ecology Journals
• BioOne1: 86 titles including Evolution, Ursus
• BioOne2: 57 titles including Zoological Science
and Turtle and Tortoise Newsletter
• Tiered pricing structure:
• Bioone1: High schools $500, small colleges
$800 Biggest universities $15,000
• Bioone2: About 2/3 price of BioOne1
The two BioOnes
• BioOne1, launched 1999, has 1200 subscribing
universities
• BioOne2, launched 2007 has 300
• BioOne2 has about 1/10 times the eigenvalue
of BioOne1
• BioOne1 is a pretty good buy. Not so clear for
BioOne2.
Mathematica Applet
Tha
Professional and Cordial, throughout