Journal pricing issues: an economic perspective By Arthur W.
Hafner, Ph.D.
Director, Division of Library and Information Management
Thomas J. Podsadecki, M.B.A. Staff Associate
William P. Whitely, M.B.A. Assistant Division Director for Information Management American Medical Association 515 North State Street Chicago, Illinois 60610
Scientific journal prices have increased markedly in the past two decades, outpacing inflation by severalfold. Such increases challenge the librarian's ability to manage acquisitions resources effectively and threaten the mission of the health sciences library as a resource for present and future scientific information needs. Explanations for serial price increases vary with the point of view considered. Publishers, librarians, faculty, and consumers of scientific information perceive the situation differently. This paper provides an economic analysis of each group's views. Particular emphasis is given to the aspects of journal publishing and pricing that foster price increases. In addition, the paper examines the problems of dualpricing structures and narrowly focused journals that cater to subspecialties of medicine. Suggested responses to subscription rate increases are offered to curtail further increases and to avoid the potential detrimental effects of reduced library collections. Since one of the underpinnings of education is threatened by reductions in library collections, actions must be taken by publishers, librarians, faculty, and professional associations to ameliorate the present situation and to limit additional increases in serial prices.
Scientific journal prices in the United States have increased markedly in the past two decades, often outpacing general inflationary pressures by severalfold. During the twenty-four year period 1965-1989, the average price per journal subscription for Brandon/Hill titles has increased by 633% ($13.90 to $101.92) [1]. In 1988 scholarly journal prices increased by more than 2.5 times the U.S. rate of inflation as measured by the Consumer Price Index (CPI). Journal prices in 1987 rose more than five times the U.S. inflation rate [2]. Increases have been especially striking for non-U.S. journals, which may account for more than 50% of a library's total journal expenditures. Journal price increases have not gone unnoticed. The upward trends have been described, discussed, Bull Med Libr Assoc 78(3) July 1990
and analyzed in the library literature since the early 1960s and are covered with increasing frequency today in scientific publications such as Science [3]. The price increases have also attracted the attention of the Medical Schools Section of the American Medical Association, which introduced a resolution at the June 1988 Annual Meeting to review and study the issue. The Medical Library Association's Executive Director Raymond A. Palmer, speaking on behalf of its members, provided testimony to the AMA's Reference Committee F [4]. In health sciences centers, librarians have adopted stop-gap measures such as journal subscription cancellations and collection retrenchment, among others, to absorb rate increases. However, the palliative 217
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measures used by librarians threaten the role of the health sciences library as a center of interactive knowledge and a resource for present and future scientific information needs.
Librarians have adopted stop-gap measures such as journal subscription cancellations and collection retrenchment, among others, to absorb rate increases. This paper provides an economic perspective on the views of publishers, librarians, faculty, and other consumers of scientific Information. Regardless of the point of view assumed, however, the detrimental effects of significant journal price increases are many and include diminished availability of the resources necessary for acquiring knowledge, for reviewing and conducting research, and for supporting programs of continuing education. THE PUBLISHER'S VIEWPOINT From the publisher's perspective, scholarly journal publishing is a business. The publisher's objectives and responsibilities are similar to those in any business venture-to generate revenue, to cover fixed and variable costs, and to realize the greatest possible net return on invested capital. Profits earned through successful management may be retained to finance corporate growth and investment or disbursed to stockholders as dividends. Managers of the publishing concern bear a fiduciary responsibility to shareholders to maximize the value of the stock. Even the nonprofit publisher must maintain economic viability. Although the primary mission of the nonprofit publisher may not involve returns to investors, the publisher's long-term viability is in question unless the enterprise is well managed. From this perspective, increases in fixed and variable costs of publishing have resulted in price increases. Production supplies are purchased in a competitive marketplace at market-determined prices. Except in cases where the publisher is large enough to negotiate discounts on bulk purchases, prices paid reflect market forces over which the individual publisher exerts no influence. For example, each time a labor contract is negotiated or a purchase agreement signed, the costs for labor, paper, and other production materials change, with prevailing market conditions dictating the extent of that change. Other costs must be incorporated into a journal's pricing scheme. These costs include printing and binding; editorial, composition, and finishing costs; postage (which may exceed the cost of the product shipped); and circulation and fulfillment charges. The 218
costs of these factors of production, individually and together, have increased significantly in recent years [5]. Further, the impact of these increases on the publisher cannot be accurately measured by examining the CPI, since it does not take paper, typesetting, and postage cost increases into account [6]. The impact of cost increases on publishers would be better measured by the Producer Price Index (PPI). Non-U.S.-based publishers must also consider potential fluctuations in the exchange rate for U.S. currency when establishing their pricing structure. In setting subscription rates before production, the publisher estimates the future value of the dollar with respect to international currencies. This value fluctuates widely and has fallen by over 40% relative to many currencies since 1985 [7]. Foreign publishers compensate for expectations of a weakened dollar by offering subscriptions to the U.S. market at higher rates than for other subscribers. Since the dollar is expected to be worth less in relation to their domestic currency, it takes more dollars to equal a foreign publisher's currency unit. To compensate for the rate differential, the price (quoted in dollars) increases for foreign published titles.
The publisher's objectives and responsibilities are similar to those in any business venture-to generate revenue, to cover fixed and variable costs, and to realize the greatest possible net return on invested capital. By setting subscription rates far before production, the journal publisher decreases publication risk and establishes a front-end cash flow [8]. Unlike monograph publishing where production costs may never be fully recovered, the costs of publishing a journal are collected before publication and can be used to meet printing and production costs. The publisher produces only enough journal copies to meet subscription and potential back orders, so that unplanned investments in inventory rarely occur. In publishing monographs, on the other hand, the costs of editing, printing, and binding are paid by the publisher before any sales are made. These up-front costs will never be recovered if the book fails to sell. To the publisher, the inherent time value of money is significant. Depending on how subscription rates are established, the publisher may be able to cover production costs and realize interest accumulated on the prepaid subscription dollars. According to Robert I. Maxwell of Maxwell Communications Corporation, Bull Med Libr Assoc 78(3) July 1990
Journal pricing issues I set up a perpetual financing machine through advance subscriptions as well as the profits on the sales themselves. It is a cash generator twice over [9].
In setting subscription rates, publication costs are distributed among all subscribers. When the number of subscribers falls, the costs are spread over a narrower base and each subscriber's mean price rises [10]. This can lead to a vicious circle where subscribers drop journals due to their high prices and the remaining subscribers are forced to bear even higher prices [11].
Many associations publish inexpensive, high-quality journals. Because these associations have a large number of members/subscribers and because they are nonprofit, their prices are often lower than the prices of for-profit publishers. Publications with large subscriber bases tend to be less expensive than specialty journals. Many associations publish inexpensive, high-quality journals. Because these associations have a large number of members /subscribers and because they are nonprofit, their prices are often lower than the prices of for-profit publishers. It is interesting to note that as recently as the 1950s, scientific publishing was controlled primarily by scientific associations [12].
Perceived market oppportunities Publishers support new business ventures to fulfill fiduciary responsibilities toward shareholders, to diversify the interests of the publishing concern, and to take advantage of perceived market opportunities. Retained earnings from well-established titles finance corporate growth and reinvestment. Growth may be accomplished by funding the purchase of a publishing operation from a smaller concern or by supporting new journals during their early years of publication. Such is good business practice. A new journal takes from five to eight years, with a minimum of 200 to 700 subscribers, to become profitable [13-14]. In the intervening period, however, the publisher loses money. These losses are covered, in part, by profits the publisher earns on well-established titles. Once the new journal gains acceptance and the subscriber base expands, the profits generated can be used to finance another fledgling title. Publishers continually monitor the environment of scholarly journal publishing to evaluate and assess consumer needs, to meet perceived consumer demand, and to strengthen the publisher's strategic market position. Researchers, scholars, and educators Bull Med Libr Assoc 78(3) July 1990
demand forums for their manuscripts; the publisher willingly develops journals that target the specific interests of these consumer/contributors, a practice known as twigging [15]. As new areas of science unfold and "hyper-specialties" develop, journal editors receive growing numbers of specialized manuscripts that are difficult to place in existing journals. Because the manuscripts are of scientific merit and deserve a place in the published literature, editors often approach the publisher about ways to accommodate these papers. Rather than allowing existing journals to expand indefinitely in size and scope, the publisher analyzes the economic viability of a new journal venture. If economically feasible, the publisher creates a new journal, more specialized in focus and appealing to an identified subset of readers. In developing the new journal, the publisher responds to valid competitive concerns. If the publisher does not publish a manuscript and a competitor does, the publisher's market position may be weakened [16]. Since there are fewer subscribers for the new journal, its costs must be distributed over a narrower base. Therefore, subscription rates are higher for these specialized journals.
Market segments Although libraries are the primary subscription purchasers, individuals also purchase journals for personal use. Because current issues of some popular journals may be difficult to access in a large academic or health sciences library, consumers of the literature may purchase subscriptions simply to ensure timely availability. Thus, the journal publisher produces for two distinct markets, institutional and individual purchasers. Although the marginal costs of producing for each are not vastly different, large subscription rate differentials exist between these two markets [17]. Publishers offer two explanations for the dual-pricing scheme. The publisher reasons that the library copy is used by many consumers, whereas the individual copy is used by only one or a few. Thus, the value (or marginal benefit) derived from an individual subscription is less than that derived from an institutional subscription. Because of this difference in benefits, the publisher sets the subscription cost for the individual subscriber at a rate that is less than that for the institutional subscriber. In classic economic theory, price is determined, in part, by equating the benefits derived from a product with the costs of bringing that product to market. Thus, the publisher further reasons, because the benefit for the institutional subscriber is greater than for the individual subscriber, the institutional price of the journal can be correspondingly greater. In addition, for a new journal marketed to a spe219
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cialized niche with few individual subscribers, the publisher's income and break-even projections are determined by institutional subscriptions [18]. To attract the interest of individuals, subscriptions are offered at rates that cover only printing, paper, and postage costs. Thus, individuals can subscribe at lower rates. THE LIBRARIAN'S VIEWPOINT
Journal price increases have placed greater demands on library administrators for the effective allocation of budgetary resources. The serials budget is a major concern in that journals typically comprise 70% to 85% of most collections [19]. In managing price increases, the librarian has been left with few alternatives. These include * reducing subscriptions; * decreasing monograph purchases; * requesting an additional budgetary allocation or using library endowment funds; * curtailing or eliminating other library services to direct more money toward subscriptions; * increasing cooperative, resource-sharing efforts; * soliciting financial support from departments or journal gift subscriptions from faculty, or engaging in fund-raising efforts; * deferring capital equipment purchases or postponing physical plant improvements; * reducing staff size, such as part-time student help; and * charging or increasing library membership or user fees.
Librarians know it is unethical for a manufacturer to elevate prices artificially to earn excess returns. Librarians acknowledge that journal publishers must include the costs of paper, labor, printing, and postage in their subscription rates [20]. However, the allowances that some publishers have made in prices to counter increases in the costs of raw materials and fluctuations in currency exchange rates are liberal, at best. It has been reported that one prominent European journal publisher enjoys a profit margin of 47% on sales [21]. Librarians are aware of the publisher's practice of using the income from successful journals to fund new initiatives and to finance corporate growth. However, librarians also know it is unethical for a manufacturer to elevate prices artificially to earn excess returns. As publishers' earnings increase, more money can be retained for growth. With expansion 220
and the formation of conglomerates, the publisher exerts more influence in the journal publishing market. The monopoly power of the publisher increases and competition decreases. Librarians are concerned that large publishing enterprises lack basic cost-control pressures that operate in competitive industries. In competitive markets, the producer who reduces costs the most will realize the highest profit margins when selling at the marketdetermined price. However, because cost overruns can be passed on directly to subscribers, the incentive for an efficient production process is absent. Publishers can earn the same profits merely by increasing their subscription rates in proportion to the cost of the goods produced. Furthermore, the effect of price increases on competition is opposite to that predicted by classical economic theory. Rather than serving as a stimulus, increases in journal prices act as a barrier to competition [22]. Economic theory predicts that a high profit potential in a given industry attracts new producers, leading to an expanded output and reduced prices. Vigorous competition in the journal publishing industry should motivate producers to reevaluate production processes, to streamline operations, to minimize production costs, and to offer journals at competitive prices. Lower prices and reduced profit margins would then make the market less attractive to further competitive entry. Yet, the opposite occurs in journal publishing. When journal prices increase, the market becomes more attractive to publishers and new journal producers enter the market. However, the librarian's allocation decision becomes more difficult, causing the librarian to become more selective about the journals purchased. When subscription reductions are necessary due to price increases, librarians tend to continue to purchase established, indexed titles rather than newly published, nonindexed journals. If purchased, these newer titles would compete with existing journals, forcing publishers to contain costs and reduce prices. Unfortunately, when price increases force librarians to make journal selections with limited resources, new titles are often disregarded. Potential competitors are driven from the market after failing to generate enough subscribers to support continued production. Therefore, when serials prices increase and the allocation decision becomes more difficult, the librarian limits the proportion of the budget allocated to new journals. As a result, an essential link is broken in the chain of events leading to increased competition in the journal publishing market.
Market opportunities From the librarian's perspective, publishers evaluate market opportunities based solely on economic reBull Med Libr Assoc 78(3) July 1990
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turn and strategic market position without full consideration of the needs of the journal purchaser for access to timely, reasonably priced information. For example, twigging is used as a marketing tool to prevent competing journals from arising and to establish a monopoly over the publication of certain types of scientific information.
The publisher that is first to produce a journal in a given discipline has a competitive advantage in obtaining manuscripts for publication and can effectively eliminate competition, especially if the parent journal from which the new journal sprouted is well received. In twigging, the publisher develops a journal for a subspecialty field or scientific niche. The idea of niche marketing is useful in times of rapid advancement, when new areas of scientific interest are evolving in disciplines such as computer science and molecular biology. The publisher that is first to produce a journal in a given discipline has a competitive advantage in obtaining manuscripts for publication and can effectively eliminate competition, especially if the parent journal from which the new journal sprouted is well received. Twigging serves two other important purposes: it provides profits for the publisher and limits the number of pages in a journal. This is important from the advertiser's perspective that physicians dislike thick scholarly journals [23].
Market segments Although librarians understand the publisher's rationale for establishing a dual-pricing scheme, they reject the publisher's marginal benefit and break-even explanations. From the librarian's perspective, the publisher's dual-pricing scheme is neither rational nor justifiable. Under dual pricing, identical products are sold to different market segments at different prices; the price variations fail to reflect cost differences in producing or selling the product. By charging institutional subscribers a higher rate than individuals, the publisher is using funds from institutional subscribers to subsidize the lower rates offered to individuals. In addition, the publisher increases revenues by discriminating between purchasers. By offering subscriptions at two rates, the publisher generates greater revenues than if a single rate were charged to all subscribers [24]. To price discriminate effectively, the publisher must be a monopolist and the market must be comprised of separable or insulated segments. Separable segBull Med Libr Assoc 78(3) July 1990
ments mean that no transfer of product can occur from the low-cost group to the high-cost group. A transfer could happen, for example, if an individual subscriber were to donate a subscription to a library; the library could then cancel its more expensive institutional subscription. Librarians avoid such arrangements in the belief that collection continuity and completeness, as well as the library's educational mission, might be compromised by relying on journals informally donated by individuals. Thus, the institutional and individual buyers' groups can be considered effectively separate. As a final condition for price discrimination, each segment must respond differently to changes in journal price. That is, each group must have a different price elasticity of demand. Price elasticity is the change in quantity purchased divided by the change in price. In price discrimination schemes, the segment with the most inelastic demand is charged the highest price. With regard to price elasticity, the librarian's demand for journals and serials is price inelastic. That is, large changes in price have only a small effect on total demand for the journal. Because comprehensiveness, completeness, and continuity in the collection is important, librarians are less responsive than individual subscribers to changes in price.
The scholarly journal market is fertile ground for price discrimination. As a single producer of a unique title, the publisher is effectively a monopolist. Inelastic demand reflects both the poor availability of substitutes and the high implicit costs of subscription cancellation. For scholarly journals, no substitute exists for the print version of a highly regarded title, either in terms of other journals or other information formats such as microfilm. Since there are no substitutes, price increases may not lead to subscription cancellations. The librarian's inelastic demand also reflects high implicit subscription cancellation or switching costs. The loss of continuity in the collection, the number of faculty complaints, and service gaps are used as measures for these switching costs. Given these requirements, the scholarly journal market is fertile ground for price discrimination. As a single producer of a unique title, the publisher is effectively a monopolist. In addition, the journal market is composed of two separate segments, each having a different elasticity of demand. Since the library demand for journals is more price inelastic, the publisher charges more for institutional subscriptions. 221
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THE FACULTY'S VIEWPOINT
The faculty, staff, researchers, and academicians in any organization comprise both the consumers and the creators of scholarly literature. This group, though, is uninformed on library problems and the challenges of serials management, just as librarians may be unaware of the research and laboratory management problems of faculty. From the perspective of the consumers of information, the library's primary mission is to support the research and teaching initiatives of faculty members through timely service. Reductions in library holdings that result in service delays frustrate faculty members who view information as a perishable commodity. That is, analogous to produce, information loses its value to the faculty member over time. Information not available today is worth less tomorrow. Because of dependence on timely access to information, faculty consider reductions in journal holdings to be detrimental.
Information loses its value to the faculty member over time. Information not available today is worth less tomorrow. Because of dependence on timely access to information, faculty consider reductions in journal holdings to be detrimental. Most medical educators concede that medical journals and books are the primary sources of continuing medical education (CME) for physicians. These journals play an important role in competency and are related to quality of patient care [25]. Impaired access to information sources provided by a health sciences library might lead to suboptimal training of physicians and to greater difficulties in keeping abreast of developments in medicine. As a result, physicians could be exposed to increased numbers of professional liability suits [26-28]. Further, as consumers of information, faculty encourage the purchase of journals necessary for research endeavors. Unfortunately, faculty are often neither skilled in evaluating serial quality nor are they aware of journal prices. Faculty requests for journal subscription purchases are complicated in that once a journal is purchased, faculty resist its cancellation. A quip familiar to many librarians is that it takes only one faculty member to start a library subscription but faculty consensus to stop it [29]. As producers of scientific information, faculty encourage the development of new forums as outlets for research. Publishers obligingly respond by expanding or creating journals to fit researchers' demands. Where tenure, salary increases, and continued 222
grant support depend on a lengthy bibliography, faculty must publish their research findings. Faculty seek to publish research findings in the most visible, widely used journals. By publishing in highly regarded journals, faculty can communicate their findings to a greater number of colleagues, further enhancing the researcher's reputation as a scientific investigator. Studies of European journals show, however, that these highly valued journals are also the ones experiencing the most rapid increases in price. Value, as measured by use and citation frequency, among others, correlates directly with subscription price [30]. Thus, by submitting manuscripts and supporting continued subscription to these highvalue journals, the faculty are indirectly supporting increases in library costs.
RECOMMENDATIONS FOR ACTION Because of the potential impact of reduced collections on the mission of the health sciences center library, actions should be taken immediately by publishers, librarians, and faculty to stabilize the journal market. Each group can play a significant and important role in preventing an undermining of education. First, each group should encourage federal funding agencies to support the publication and purchase of research findings, allowing researchers to subscribe to a spectrum of periodicals. Although federal funding of basic research has grown significantly in the past two decades, funding for the dissemination of research results through journal publication has not enjoyed a high priority. Faculty, publishers, and librarians should adapt and use alternative formats for the submission, publication, and purchase of information. With the prevalence of electronic publishing, researchers could submit manuscripts on disk or in camera-ready form to reduce the publisher's production costs. These savings in editorial costs should translate to a savings in subscription costs to libraries. Librarians, with the help of subject experts, should produce a journal review column to provide authoritative information on journal quality, value, and price. Publishers should institute page charges for journal contributors, but waive the charges if the library at the author's affiliated institution subscribes to the journal. Finally, each group should refuse to participate in the editing, publishing, or purchasing of compilations and proceedings that duplicate information already published in another format or journal.
CONCLUSION The problem of scholarly journal price inflation will not be resolved soon. Although the dollar has staBull Med Libr Assoc 78(3) July 1990
Journal pricing issues
bilized over the past two years, the costs of labor, materials, and other factors of production continue to increase. Nonetheless, a proliferation of scholarly literature by journal publishers can be expected. In the short term, effective serials management will remain a challenge for the librarian. Libraries will encounter further difficulties in using limited resources to select from a growing pool of potentially relevant information. The role that the publisher, librarian, and faculty will play in resolving the crisis has not been determined. Because of the potential impact of reduced collections on the mission of the health sciences center library, each group has a stake in working to contain the rise in scholarly journal prices and to stabilize the volatile journal market.
ACKNOWLEDGMENTS The authors give special thanks to the North Atlantic Health Science Librarians who, as part of their continuing education program at the 1989 New England Healthcare Assembly, provided the authors with a forum for presenting many of the ideas discussed in this paper. The authors also express their appreciation to Thomas M. Mick and Patricia R. Dragisic of the AMA's Division of Library and Information Management for their technical advice and contributions in preparing this article. Finally, the authors extend their acknowledgments to C. Diane Holtz, Rye Free Reading Room, Rye, New York, and Jack A. Hicks, Deerfield Public Library, Deerfield, Illinois, for their helpful comments. REFERENCES 1. BRANDON AN, HILL DR. Selected list of books and journals for the small medical library. Bull Med Libr Assoc 1989 Apr;77(2):139-69. 2. KNAPP LC, LENZINI RT. Price index for 1988: U.S. periodicals. Libr J 1988 Apr 15;113(7):35-41. 3. HOLDEN C. Libraries stunned by journal price increases. Science 1987 May 22;236(4804):908-9. 4. PROCEEDINGS OF THE HOUSE OF DELEGATES, 1988. Chicago: American Medical Association, 1988:406, 491. 5. Cox B. Scholarly journal prices. Ser Libr 1987 Oct/Nov; 13(2/3):135-8. 6. HOLDEN, Op. cit., 909.
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7. HAMAKER C. Serials costs and the carrying ability of serials budgets 1987. Ser Libr 1987 Oct/Nov;13(2/3):129-34. 8. WHITE HS. Scholarly publishers and libraries: a strained marriage. Schol Publ 1988 Apr;19(3):125-9. 9. THOMPSON JC. Journal costs: perception and reality in the dialogue. Coll Res Libr 1988 Nov;49(6):481-2. 10. GREENE PEN, III. Serials prices: an historical perspective. Ser Libr 1986/87 Dec/Jan;11(3/4):19-29. 11. HOLDEN, Op. cit., 909. 12. ABELSON PH. Combating high journal costs. Science 1989 Jun 9;244(4909):1125. 13. Cox, op. cit., 135-6. 14. KARGER T. Personal communication, May 3, 1989. 15. WHITE HS. The journal that ate the library. Libr J 1988 May 15;113(9):62-3. 16. DOUGHERTY RM, JOHNSON BL. Periodical price escalation: a library response. Libr J 1988 May 15;113(9):27-9. 17. DYL EA. A note on price discrimination by academic journals. Libr Q 1983 Apr;53(2):161-8. 18. KARGER T. Personal communication, May 3, 1989. 19. PASCARELLI AM. Will libraries exist in the year 2000? The effect of prices on collections [guest editorial]. Bull NY Acad Med 1989 Oct;65(8):859-65. 20. STANGL P. Letter to the editor. Bull Med Libr Assoc 1989
Jan;77(1):80-4. 21. HOUBECK RL, JR. If present trends continue: forecasting and responding to journal price increases. Ser Libr 1987 Oct/Nov;13(2/3):113-27. 22. HOUBECK RL, JR. If present trends continue: responding to journal price increases. J Acad Libr 1987 Sep;13(4):21420. 23. CARROLL TJ. Personal communication, Apr 10, 1989. 24. JOYCE P, MERz TE. Price discrimination in academic journals. Libr Q 1985 Jul;55(3):273-83. 25. FARNSWORTH PB. The elimination of the requirement for medical libraries in hospitals. NY State J Med 1989 Nov; 89(11):601-2. 26. HAFNER AW, FILIPowIcz AB, WHITELY WP. Computers in medicine: liability issues for physicians. Int j Clin Monit Comput 1989;6:185-94. 27. HAFNER AW. Computers and the legal standard of care. Arch Ophthalmol 1989 Jul;107(7):966. 28. KIBBLE-SMITH BG, HAFNER AW. The effect of the information age on physicians' professional liability. DePaul Law R 1986 Fall;36(1):69-94. 29. PAUL H. Serials: higher prices vs. shrinking budgets. Ser Libr 1984 Winter;9(2):3-12. 30. HOUBECK RL, JR. British journal pricing: enigma variations, or what will the U.S. market bear? Libr Acq: Pract Theor 1986;10(3):183-97.
Received June 1989; accepted July 1989
223
Hafner, Ph.D.
Director, Division of Library and Information Management
Thomas J. Podsadecki, M.B.A. Staff Associate
William P. Whitely, M.B.A. Assistant Division Director for Information Management American Medical Association 515 North State Street Chicago, Illinois 60610
Scientific journal prices have increased markedly in the past two decades, outpacing inflation by severalfold. Such increases challenge the librarian's ability to manage acquisitions resources effectively and threaten the mission of the health sciences library as a resource for present and future scientific information needs. Explanations for serial price increases vary with the point of view considered. Publishers, librarians, faculty, and consumers of scientific information perceive the situation differently. This paper provides an economic analysis of each group's views. Particular emphasis is given to the aspects of journal publishing and pricing that foster price increases. In addition, the paper examines the problems of dualpricing structures and narrowly focused journals that cater to subspecialties of medicine. Suggested responses to subscription rate increases are offered to curtail further increases and to avoid the potential detrimental effects of reduced library collections. Since one of the underpinnings of education is threatened by reductions in library collections, actions must be taken by publishers, librarians, faculty, and professional associations to ameliorate the present situation and to limit additional increases in serial prices.
Scientific journal prices in the United States have increased markedly in the past two decades, often outpacing general inflationary pressures by severalfold. During the twenty-four year period 1965-1989, the average price per journal subscription for Brandon/Hill titles has increased by 633% ($13.90 to $101.92) [1]. In 1988 scholarly journal prices increased by more than 2.5 times the U.S. rate of inflation as measured by the Consumer Price Index (CPI). Journal prices in 1987 rose more than five times the U.S. inflation rate [2]. Increases have been especially striking for non-U.S. journals, which may account for more than 50% of a library's total journal expenditures. Journal price increases have not gone unnoticed. The upward trends have been described, discussed, Bull Med Libr Assoc 78(3) July 1990
and analyzed in the library literature since the early 1960s and are covered with increasing frequency today in scientific publications such as Science [3]. The price increases have also attracted the attention of the Medical Schools Section of the American Medical Association, which introduced a resolution at the June 1988 Annual Meeting to review and study the issue. The Medical Library Association's Executive Director Raymond A. Palmer, speaking on behalf of its members, provided testimony to the AMA's Reference Committee F [4]. In health sciences centers, librarians have adopted stop-gap measures such as journal subscription cancellations and collection retrenchment, among others, to absorb rate increases. However, the palliative 217
Hafner et al.
measures used by librarians threaten the role of the health sciences library as a center of interactive knowledge and a resource for present and future scientific information needs.
Librarians have adopted stop-gap measures such as journal subscription cancellations and collection retrenchment, among others, to absorb rate increases. This paper provides an economic perspective on the views of publishers, librarians, faculty, and other consumers of scientific Information. Regardless of the point of view assumed, however, the detrimental effects of significant journal price increases are many and include diminished availability of the resources necessary for acquiring knowledge, for reviewing and conducting research, and for supporting programs of continuing education. THE PUBLISHER'S VIEWPOINT From the publisher's perspective, scholarly journal publishing is a business. The publisher's objectives and responsibilities are similar to those in any business venture-to generate revenue, to cover fixed and variable costs, and to realize the greatest possible net return on invested capital. Profits earned through successful management may be retained to finance corporate growth and investment or disbursed to stockholders as dividends. Managers of the publishing concern bear a fiduciary responsibility to shareholders to maximize the value of the stock. Even the nonprofit publisher must maintain economic viability. Although the primary mission of the nonprofit publisher may not involve returns to investors, the publisher's long-term viability is in question unless the enterprise is well managed. From this perspective, increases in fixed and variable costs of publishing have resulted in price increases. Production supplies are purchased in a competitive marketplace at market-determined prices. Except in cases where the publisher is large enough to negotiate discounts on bulk purchases, prices paid reflect market forces over which the individual publisher exerts no influence. For example, each time a labor contract is negotiated or a purchase agreement signed, the costs for labor, paper, and other production materials change, with prevailing market conditions dictating the extent of that change. Other costs must be incorporated into a journal's pricing scheme. These costs include printing and binding; editorial, composition, and finishing costs; postage (which may exceed the cost of the product shipped); and circulation and fulfillment charges. The 218
costs of these factors of production, individually and together, have increased significantly in recent years [5]. Further, the impact of these increases on the publisher cannot be accurately measured by examining the CPI, since it does not take paper, typesetting, and postage cost increases into account [6]. The impact of cost increases on publishers would be better measured by the Producer Price Index (PPI). Non-U.S.-based publishers must also consider potential fluctuations in the exchange rate for U.S. currency when establishing their pricing structure. In setting subscription rates before production, the publisher estimates the future value of the dollar with respect to international currencies. This value fluctuates widely and has fallen by over 40% relative to many currencies since 1985 [7]. Foreign publishers compensate for expectations of a weakened dollar by offering subscriptions to the U.S. market at higher rates than for other subscribers. Since the dollar is expected to be worth less in relation to their domestic currency, it takes more dollars to equal a foreign publisher's currency unit. To compensate for the rate differential, the price (quoted in dollars) increases for foreign published titles.
The publisher's objectives and responsibilities are similar to those in any business venture-to generate revenue, to cover fixed and variable costs, and to realize the greatest possible net return on invested capital. By setting subscription rates far before production, the journal publisher decreases publication risk and establishes a front-end cash flow [8]. Unlike monograph publishing where production costs may never be fully recovered, the costs of publishing a journal are collected before publication and can be used to meet printing and production costs. The publisher produces only enough journal copies to meet subscription and potential back orders, so that unplanned investments in inventory rarely occur. In publishing monographs, on the other hand, the costs of editing, printing, and binding are paid by the publisher before any sales are made. These up-front costs will never be recovered if the book fails to sell. To the publisher, the inherent time value of money is significant. Depending on how subscription rates are established, the publisher may be able to cover production costs and realize interest accumulated on the prepaid subscription dollars. According to Robert I. Maxwell of Maxwell Communications Corporation, Bull Med Libr Assoc 78(3) July 1990
Journal pricing issues I set up a perpetual financing machine through advance subscriptions as well as the profits on the sales themselves. It is a cash generator twice over [9].
In setting subscription rates, publication costs are distributed among all subscribers. When the number of subscribers falls, the costs are spread over a narrower base and each subscriber's mean price rises [10]. This can lead to a vicious circle where subscribers drop journals due to their high prices and the remaining subscribers are forced to bear even higher prices [11].
Many associations publish inexpensive, high-quality journals. Because these associations have a large number of members/subscribers and because they are nonprofit, their prices are often lower than the prices of for-profit publishers. Publications with large subscriber bases tend to be less expensive than specialty journals. Many associations publish inexpensive, high-quality journals. Because these associations have a large number of members /subscribers and because they are nonprofit, their prices are often lower than the prices of for-profit publishers. It is interesting to note that as recently as the 1950s, scientific publishing was controlled primarily by scientific associations [12].
Perceived market oppportunities Publishers support new business ventures to fulfill fiduciary responsibilities toward shareholders, to diversify the interests of the publishing concern, and to take advantage of perceived market opportunities. Retained earnings from well-established titles finance corporate growth and reinvestment. Growth may be accomplished by funding the purchase of a publishing operation from a smaller concern or by supporting new journals during their early years of publication. Such is good business practice. A new journal takes from five to eight years, with a minimum of 200 to 700 subscribers, to become profitable [13-14]. In the intervening period, however, the publisher loses money. These losses are covered, in part, by profits the publisher earns on well-established titles. Once the new journal gains acceptance and the subscriber base expands, the profits generated can be used to finance another fledgling title. Publishers continually monitor the environment of scholarly journal publishing to evaluate and assess consumer needs, to meet perceived consumer demand, and to strengthen the publisher's strategic market position. Researchers, scholars, and educators Bull Med Libr Assoc 78(3) July 1990
demand forums for their manuscripts; the publisher willingly develops journals that target the specific interests of these consumer/contributors, a practice known as twigging [15]. As new areas of science unfold and "hyper-specialties" develop, journal editors receive growing numbers of specialized manuscripts that are difficult to place in existing journals. Because the manuscripts are of scientific merit and deserve a place in the published literature, editors often approach the publisher about ways to accommodate these papers. Rather than allowing existing journals to expand indefinitely in size and scope, the publisher analyzes the economic viability of a new journal venture. If economically feasible, the publisher creates a new journal, more specialized in focus and appealing to an identified subset of readers. In developing the new journal, the publisher responds to valid competitive concerns. If the publisher does not publish a manuscript and a competitor does, the publisher's market position may be weakened [16]. Since there are fewer subscribers for the new journal, its costs must be distributed over a narrower base. Therefore, subscription rates are higher for these specialized journals.
Market segments Although libraries are the primary subscription purchasers, individuals also purchase journals for personal use. Because current issues of some popular journals may be difficult to access in a large academic or health sciences library, consumers of the literature may purchase subscriptions simply to ensure timely availability. Thus, the journal publisher produces for two distinct markets, institutional and individual purchasers. Although the marginal costs of producing for each are not vastly different, large subscription rate differentials exist between these two markets [17]. Publishers offer two explanations for the dual-pricing scheme. The publisher reasons that the library copy is used by many consumers, whereas the individual copy is used by only one or a few. Thus, the value (or marginal benefit) derived from an individual subscription is less than that derived from an institutional subscription. Because of this difference in benefits, the publisher sets the subscription cost for the individual subscriber at a rate that is less than that for the institutional subscriber. In classic economic theory, price is determined, in part, by equating the benefits derived from a product with the costs of bringing that product to market. Thus, the publisher further reasons, because the benefit for the institutional subscriber is greater than for the individual subscriber, the institutional price of the journal can be correspondingly greater. In addition, for a new journal marketed to a spe219
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cialized niche with few individual subscribers, the publisher's income and break-even projections are determined by institutional subscriptions [18]. To attract the interest of individuals, subscriptions are offered at rates that cover only printing, paper, and postage costs. Thus, individuals can subscribe at lower rates. THE LIBRARIAN'S VIEWPOINT
Journal price increases have placed greater demands on library administrators for the effective allocation of budgetary resources. The serials budget is a major concern in that journals typically comprise 70% to 85% of most collections [19]. In managing price increases, the librarian has been left with few alternatives. These include * reducing subscriptions; * decreasing monograph purchases; * requesting an additional budgetary allocation or using library endowment funds; * curtailing or eliminating other library services to direct more money toward subscriptions; * increasing cooperative, resource-sharing efforts; * soliciting financial support from departments or journal gift subscriptions from faculty, or engaging in fund-raising efforts; * deferring capital equipment purchases or postponing physical plant improvements; * reducing staff size, such as part-time student help; and * charging or increasing library membership or user fees.
Librarians know it is unethical for a manufacturer to elevate prices artificially to earn excess returns. Librarians acknowledge that journal publishers must include the costs of paper, labor, printing, and postage in their subscription rates [20]. However, the allowances that some publishers have made in prices to counter increases in the costs of raw materials and fluctuations in currency exchange rates are liberal, at best. It has been reported that one prominent European journal publisher enjoys a profit margin of 47% on sales [21]. Librarians are aware of the publisher's practice of using the income from successful journals to fund new initiatives and to finance corporate growth. However, librarians also know it is unethical for a manufacturer to elevate prices artificially to earn excess returns. As publishers' earnings increase, more money can be retained for growth. With expansion 220
and the formation of conglomerates, the publisher exerts more influence in the journal publishing market. The monopoly power of the publisher increases and competition decreases. Librarians are concerned that large publishing enterprises lack basic cost-control pressures that operate in competitive industries. In competitive markets, the producer who reduces costs the most will realize the highest profit margins when selling at the marketdetermined price. However, because cost overruns can be passed on directly to subscribers, the incentive for an efficient production process is absent. Publishers can earn the same profits merely by increasing their subscription rates in proportion to the cost of the goods produced. Furthermore, the effect of price increases on competition is opposite to that predicted by classical economic theory. Rather than serving as a stimulus, increases in journal prices act as a barrier to competition [22]. Economic theory predicts that a high profit potential in a given industry attracts new producers, leading to an expanded output and reduced prices. Vigorous competition in the journal publishing industry should motivate producers to reevaluate production processes, to streamline operations, to minimize production costs, and to offer journals at competitive prices. Lower prices and reduced profit margins would then make the market less attractive to further competitive entry. Yet, the opposite occurs in journal publishing. When journal prices increase, the market becomes more attractive to publishers and new journal producers enter the market. However, the librarian's allocation decision becomes more difficult, causing the librarian to become more selective about the journals purchased. When subscription reductions are necessary due to price increases, librarians tend to continue to purchase established, indexed titles rather than newly published, nonindexed journals. If purchased, these newer titles would compete with existing journals, forcing publishers to contain costs and reduce prices. Unfortunately, when price increases force librarians to make journal selections with limited resources, new titles are often disregarded. Potential competitors are driven from the market after failing to generate enough subscribers to support continued production. Therefore, when serials prices increase and the allocation decision becomes more difficult, the librarian limits the proportion of the budget allocated to new journals. As a result, an essential link is broken in the chain of events leading to increased competition in the journal publishing market.
Market opportunities From the librarian's perspective, publishers evaluate market opportunities based solely on economic reBull Med Libr Assoc 78(3) July 1990
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turn and strategic market position without full consideration of the needs of the journal purchaser for access to timely, reasonably priced information. For example, twigging is used as a marketing tool to prevent competing journals from arising and to establish a monopoly over the publication of certain types of scientific information.
The publisher that is first to produce a journal in a given discipline has a competitive advantage in obtaining manuscripts for publication and can effectively eliminate competition, especially if the parent journal from which the new journal sprouted is well received. In twigging, the publisher develops a journal for a subspecialty field or scientific niche. The idea of niche marketing is useful in times of rapid advancement, when new areas of scientific interest are evolving in disciplines such as computer science and molecular biology. The publisher that is first to produce a journal in a given discipline has a competitive advantage in obtaining manuscripts for publication and can effectively eliminate competition, especially if the parent journal from which the new journal sprouted is well received. Twigging serves two other important purposes: it provides profits for the publisher and limits the number of pages in a journal. This is important from the advertiser's perspective that physicians dislike thick scholarly journals [23].
Market segments Although librarians understand the publisher's rationale for establishing a dual-pricing scheme, they reject the publisher's marginal benefit and break-even explanations. From the librarian's perspective, the publisher's dual-pricing scheme is neither rational nor justifiable. Under dual pricing, identical products are sold to different market segments at different prices; the price variations fail to reflect cost differences in producing or selling the product. By charging institutional subscribers a higher rate than individuals, the publisher is using funds from institutional subscribers to subsidize the lower rates offered to individuals. In addition, the publisher increases revenues by discriminating between purchasers. By offering subscriptions at two rates, the publisher generates greater revenues than if a single rate were charged to all subscribers [24]. To price discriminate effectively, the publisher must be a monopolist and the market must be comprised of separable or insulated segments. Separable segBull Med Libr Assoc 78(3) July 1990
ments mean that no transfer of product can occur from the low-cost group to the high-cost group. A transfer could happen, for example, if an individual subscriber were to donate a subscription to a library; the library could then cancel its more expensive institutional subscription. Librarians avoid such arrangements in the belief that collection continuity and completeness, as well as the library's educational mission, might be compromised by relying on journals informally donated by individuals. Thus, the institutional and individual buyers' groups can be considered effectively separate. As a final condition for price discrimination, each segment must respond differently to changes in journal price. That is, each group must have a different price elasticity of demand. Price elasticity is the change in quantity purchased divided by the change in price. In price discrimination schemes, the segment with the most inelastic demand is charged the highest price. With regard to price elasticity, the librarian's demand for journals and serials is price inelastic. That is, large changes in price have only a small effect on total demand for the journal. Because comprehensiveness, completeness, and continuity in the collection is important, librarians are less responsive than individual subscribers to changes in price.
The scholarly journal market is fertile ground for price discrimination. As a single producer of a unique title, the publisher is effectively a monopolist. Inelastic demand reflects both the poor availability of substitutes and the high implicit costs of subscription cancellation. For scholarly journals, no substitute exists for the print version of a highly regarded title, either in terms of other journals or other information formats such as microfilm. Since there are no substitutes, price increases may not lead to subscription cancellations. The librarian's inelastic demand also reflects high implicit subscription cancellation or switching costs. The loss of continuity in the collection, the number of faculty complaints, and service gaps are used as measures for these switching costs. Given these requirements, the scholarly journal market is fertile ground for price discrimination. As a single producer of a unique title, the publisher is effectively a monopolist. In addition, the journal market is composed of two separate segments, each having a different elasticity of demand. Since the library demand for journals is more price inelastic, the publisher charges more for institutional subscriptions. 221
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THE FACULTY'S VIEWPOINT
The faculty, staff, researchers, and academicians in any organization comprise both the consumers and the creators of scholarly literature. This group, though, is uninformed on library problems and the challenges of serials management, just as librarians may be unaware of the research and laboratory management problems of faculty. From the perspective of the consumers of information, the library's primary mission is to support the research and teaching initiatives of faculty members through timely service. Reductions in library holdings that result in service delays frustrate faculty members who view information as a perishable commodity. That is, analogous to produce, information loses its value to the faculty member over time. Information not available today is worth less tomorrow. Because of dependence on timely access to information, faculty consider reductions in journal holdings to be detrimental.
Information loses its value to the faculty member over time. Information not available today is worth less tomorrow. Because of dependence on timely access to information, faculty consider reductions in journal holdings to be detrimental. Most medical educators concede that medical journals and books are the primary sources of continuing medical education (CME) for physicians. These journals play an important role in competency and are related to quality of patient care [25]. Impaired access to information sources provided by a health sciences library might lead to suboptimal training of physicians and to greater difficulties in keeping abreast of developments in medicine. As a result, physicians could be exposed to increased numbers of professional liability suits [26-28]. Further, as consumers of information, faculty encourage the purchase of journals necessary for research endeavors. Unfortunately, faculty are often neither skilled in evaluating serial quality nor are they aware of journal prices. Faculty requests for journal subscription purchases are complicated in that once a journal is purchased, faculty resist its cancellation. A quip familiar to many librarians is that it takes only one faculty member to start a library subscription but faculty consensus to stop it [29]. As producers of scientific information, faculty encourage the development of new forums as outlets for research. Publishers obligingly respond by expanding or creating journals to fit researchers' demands. Where tenure, salary increases, and continued 222
grant support depend on a lengthy bibliography, faculty must publish their research findings. Faculty seek to publish research findings in the most visible, widely used journals. By publishing in highly regarded journals, faculty can communicate their findings to a greater number of colleagues, further enhancing the researcher's reputation as a scientific investigator. Studies of European journals show, however, that these highly valued journals are also the ones experiencing the most rapid increases in price. Value, as measured by use and citation frequency, among others, correlates directly with subscription price [30]. Thus, by submitting manuscripts and supporting continued subscription to these highvalue journals, the faculty are indirectly supporting increases in library costs.
RECOMMENDATIONS FOR ACTION Because of the potential impact of reduced collections on the mission of the health sciences center library, actions should be taken immediately by publishers, librarians, and faculty to stabilize the journal market. Each group can play a significant and important role in preventing an undermining of education. First, each group should encourage federal funding agencies to support the publication and purchase of research findings, allowing researchers to subscribe to a spectrum of periodicals. Although federal funding of basic research has grown significantly in the past two decades, funding for the dissemination of research results through journal publication has not enjoyed a high priority. Faculty, publishers, and librarians should adapt and use alternative formats for the submission, publication, and purchase of information. With the prevalence of electronic publishing, researchers could submit manuscripts on disk or in camera-ready form to reduce the publisher's production costs. These savings in editorial costs should translate to a savings in subscription costs to libraries. Librarians, with the help of subject experts, should produce a journal review column to provide authoritative information on journal quality, value, and price. Publishers should institute page charges for journal contributors, but waive the charges if the library at the author's affiliated institution subscribes to the journal. Finally, each group should refuse to participate in the editing, publishing, or purchasing of compilations and proceedings that duplicate information already published in another format or journal.
CONCLUSION The problem of scholarly journal price inflation will not be resolved soon. Although the dollar has staBull Med Libr Assoc 78(3) July 1990
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bilized over the past two years, the costs of labor, materials, and other factors of production continue to increase. Nonetheless, a proliferation of scholarly literature by journal publishers can be expected. In the short term, effective serials management will remain a challenge for the librarian. Libraries will encounter further difficulties in using limited resources to select from a growing pool of potentially relevant information. The role that the publisher, librarian, and faculty will play in resolving the crisis has not been determined. Because of the potential impact of reduced collections on the mission of the health sciences center library, each group has a stake in working to contain the rise in scholarly journal prices and to stabilize the volatile journal market.
ACKNOWLEDGMENTS The authors give special thanks to the North Atlantic Health Science Librarians who, as part of their continuing education program at the 1989 New England Healthcare Assembly, provided the authors with a forum for presenting many of the ideas discussed in this paper. The authors also express their appreciation to Thomas M. Mick and Patricia R. Dragisic of the AMA's Division of Library and Information Management for their technical advice and contributions in preparing this article. Finally, the authors extend their acknowledgments to C. Diane Holtz, Rye Free Reading Room, Rye, New York, and Jack A. Hicks, Deerfield Public Library, Deerfield, Illinois, for their helpful comments. REFERENCES 1. BRANDON AN, HILL DR. Selected list of books and journals for the small medical library. Bull Med Libr Assoc 1989 Apr;77(2):139-69. 2. KNAPP LC, LENZINI RT. Price index for 1988: U.S. periodicals. Libr J 1988 Apr 15;113(7):35-41. 3. HOLDEN C. Libraries stunned by journal price increases. Science 1987 May 22;236(4804):908-9. 4. PROCEEDINGS OF THE HOUSE OF DELEGATES, 1988. Chicago: American Medical Association, 1988:406, 491. 5. Cox B. Scholarly journal prices. Ser Libr 1987 Oct/Nov; 13(2/3):135-8. 6. HOLDEN, Op. cit., 909.
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7. HAMAKER C. Serials costs and the carrying ability of serials budgets 1987. Ser Libr 1987 Oct/Nov;13(2/3):129-34. 8. WHITE HS. Scholarly publishers and libraries: a strained marriage. Schol Publ 1988 Apr;19(3):125-9. 9. THOMPSON JC. Journal costs: perception and reality in the dialogue. Coll Res Libr 1988 Nov;49(6):481-2. 10. GREENE PEN, III. Serials prices: an historical perspective. Ser Libr 1986/87 Dec/Jan;11(3/4):19-29. 11. HOLDEN, Op. cit., 909. 12. ABELSON PH. Combating high journal costs. Science 1989 Jun 9;244(4909):1125. 13. Cox, op. cit., 135-6. 14. KARGER T. Personal communication, May 3, 1989. 15. WHITE HS. The journal that ate the library. Libr J 1988 May 15;113(9):62-3. 16. DOUGHERTY RM, JOHNSON BL. Periodical price escalation: a library response. Libr J 1988 May 15;113(9):27-9. 17. DYL EA. A note on price discrimination by academic journals. Libr Q 1983 Apr;53(2):161-8. 18. KARGER T. Personal communication, May 3, 1989. 19. PASCARELLI AM. Will libraries exist in the year 2000? The effect of prices on collections [guest editorial]. Bull NY Acad Med 1989 Oct;65(8):859-65. 20. STANGL P. Letter to the editor. Bull Med Libr Assoc 1989
Jan;77(1):80-4. 21. HOUBECK RL, JR. If present trends continue: forecasting and responding to journal price increases. Ser Libr 1987 Oct/Nov;13(2/3):113-27. 22. HOUBECK RL, JR. If present trends continue: responding to journal price increases. J Acad Libr 1987 Sep;13(4):21420. 23. CARROLL TJ. Personal communication, Apr 10, 1989. 24. JOYCE P, MERz TE. Price discrimination in academic journals. Libr Q 1985 Jul;55(3):273-83. 25. FARNSWORTH PB. The elimination of the requirement for medical libraries in hospitals. NY State J Med 1989 Nov; 89(11):601-2. 26. HAFNER AW, FILIPowIcz AB, WHITELY WP. Computers in medicine: liability issues for physicians. Int j Clin Monit Comput 1989;6:185-94. 27. HAFNER AW. Computers and the legal standard of care. Arch Ophthalmol 1989 Jul;107(7):966. 28. KIBBLE-SMITH BG, HAFNER AW. The effect of the information age on physicians' professional liability. DePaul Law R 1986 Fall;36(1):69-94. 29. PAUL H. Serials: higher prices vs. shrinking budgets. Ser Libr 1984 Winter;9(2):3-12. 30. HOUBECK RL, JR. British journal pricing: enigma variations, or what will the U.S. market bear? Libr Acq: Pract Theor 1986;10(3):183-97.
Received June 1989; accepted July 1989
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