A True Market Failure: Professor Mark McCabe Talks about Problems in the STM Publishing Industry. (Poynder on Point)

Article excerpt

Mark McCabe worked as an economist in the U.S. Department of Justice's (DOJ) Antitrust Division for 7 years. Now an assistant professor at the Georgia Institute of Technology, he specializes in mergers and anticompetitive practices. McCabe believes the STM publishing market is broken. Here's why.

Q What's your interest in scholarly publishing?

A In 1998, while I was at the DOJ, I was assigned to look at the proposed merger between Wolters Kluwer and Reed Elsevier. I was immediately struck that while traditional models suggested that the merger wasn't particularly troubling from an antitrust perspective, we were receiving lot of vociferous feedback from users, and journal prices had been increasing rapidly. Something seemed to be wrong, so I began thinking about it and developed a new model for assessing the STM publishing market--a portfolio model.

Q You concluded that even where traditional analysis demonstrated no antitrust impact, mergers in this market nevertheless create anticompetitive effects and that this could explain some of the price inflation afflicting scholarly journals?

A Right. Unlike the conventional approach to this problem--which assumes that an individual user's preferences for journal content define the market and thus limit its scope to a handful of titles -- the portfolio model is based on library behavior and permits a broader antitrust market definition. Once this step is taken, the basis for the anticompetitive effects is familiar to any economics undergraduate: When the price of one journal increases, owners of other titles have an incentive to increase their prices too. Moreover, since larger portfolio firms can better internalize these "pricing externalities," they find it profitable to set their prices higher than would be observed in a market populated by smaller firms.

Q: So what's different about the scholarly publishing market?

A: One distinctive aspect of this market is that end users do not pay for the material they use since the actual purchases are mediated by the libraries. This means that the principals (the professors, the scientists, the researchers of a particular institution) ask their agent (the library) to buy whatever they need, and the agent has no way of enforcing price discipline on the users. So there is a disconnect.

Q: Nevertheless, libraries do have budgetary restraints?

A: Since librarians have no ability to control the purchasing preferences of their users vis-a-vis journals, they gut their budgets of things that they have more control over: the purchase of monographs and other areas of enquiry, etc. This explains why over the past 10 years we have seen around a 200-percent price increase, but only a 5- to 10-percent cut in titles. This is remarkable. However, it is not unique to STM journals.

Q: It's the serial publications market at large?

A: It is. Consider, for instance, the legal market. When West and Thomson merged in 1996, the U.S. Department of Justice reviewed the companies' legal serials--e.g., reporters and treatises--and in order to avoid any anticompetitive effect told them to divest all overlapping titles. Yet if you look at that merger in terms of its subsequent price impact, you see a 30-percent price jump. The only explanation of this can be the portfolio effect, since the content overlap had been eliminated.

Q: What is this portfolio effect?

A: In the typical product market, a buyer will choose one of several choices available. With journals, however, users are not normally happy having just one or two of the items on offer. They want everything. This is because, in the course of their work or research, users will want to have access to as many articles as possible since each article (let alone journal) is unique and there are thousands of new articles being published all the time. The analogy is like a consumer going into a grocery store and making buying decisions based on a portfolio of desired items. …