Washington, D.C.
October 14-16, 1998

Confronting the Challenges of the Digital Era

The Impact of Publisher Mergers
Mark J. McCabe, Assistant Professor of Economics
Georgia Institute of Technology

Slide 1

The Impact of Publisher Mergers on Journal Prices: A Preliminary Report

Mark J. McCabe
Assistant Professor of Economics
Georgia Institute of Technology
October 1998

Slide 2

An Outline for Today’s Discussion

Antitrust and the publishing industry

• How did they meet?
  
• Terms of engagement?
  
• THE EVIDENCE (so far)
  
• Do they have a future together?
  

Slide 3

The Meeting

• Growth via merger generates automatic scrutiny.

• Alleged bad acts, esp. by very large firms, may prompt scrutiny.

• Mergers of Thomson/West, Reed-Elsevier/Wolters-Kluwer, etc. fall into the first category.

The Terms

• Investigations of mergers typically proceed along a fairly standard path, as described in the Merger Guidelines.1

• Four Steps:

• Market Definition
  

• Market Shares
  
• Competitive Effects
  
• Entry/Efficiencies
  

1. Go to http://www.usdoj.gov/atr/public/guidelines/horiz_book/hmg1.html

Slide 4

Slide 5

The Evidence (so far)

• Market Definition
  
• Titles or Portfolios?
  

• How do libraries make their acquisitions decisions?

• Market Shares for RE, WK, etc.

• Competitive Effects:
  

• A simple merger model, and its predictions
  
• The evolution of library holdings
  
• An analysis of firm size and pricing
  

• Entry and Efficiencies (is entry harmful?)

• Alternative Explanation for journal price inflation
  

• Cost increases
  
• Roger Noll's approach

Slide 6

Merger Simulation

Basic Assumptions

• Five Publishers, each sell one title.

• Fixed and marginal costs are identical across firms; to simplify the analysis, they are set equal to zero.

• The five journals vary in use or quality, qu, with values of 12, 10, 8, 6, and 4.

• Two types of library budgets, small and large, with values of 10 and 20, respectively.

• 125 libraries have small budgets, 75 have large budgets.

• Libraries’ purchase decisions are based on price and usage; they attempt to minimize the cost/use of their holdings.

• Publishers maximize profits, setting prices optimally given the strategies of competitors (no non-profits).

• Each year publishers choose whether to market their titles to large libraries, or both small and large libraries.

• Based on the marketing choice, a single price is chosen (no price discrimination is allowed).

• No entry or exit, No growth in budgets, No change in journal quality.

Slide 7

Merger Simulation, cont.

Given the libraries' objectives, how do publishers make their marketing and pricing decisions?

• Suppose the marketing decision has been made, and each publisher knows its set of competitors. Prices for each budget class will satisfy the following condition:
  p1 + p2 + p3 + ... = Bi (1)
  where Bi equals 10 for small libraries, and 10 (20-10) for large libraries as well (titles sold to large libraries only compete for budget dollars that remain after purchases of the more widely distributed journals).

• Furthermore, since cost/use determines title selection, publishers set prices so that
  p1/q1 = p2/q2 = p3/q3 = .... (2)

• These two equations can be used to solve for each price.

• The marketing decision, i.e. sell to everyone or just large libraries?, is determined by the relative profitability of the two choices, which in turn is a function of the assumed distribution of budgets and journals.

• Look for Nash equilibria, that is, situations where no publisher would choose to change its marketing and pricing decisions given those made by its competitors.

Slide 8

Results

• Given the assumptions, we can show that a Nash equilibrium exists. The three highest use titles are sold to all libraries; the two lowest use titles are sold to just the large-budget libraries.

• Prices, cost/use and profits are as follows:

Slide 9

Results, cont.

• Suppose now a merger occurs between the two firms that own titles with use values of 12 and 8. Can this merged firm increase its profits? If so, what are the consequences for holdings?

• If the merged firm raises prices, the small budget libraries will cancel the “8" journal, creating an opportunity for one of the lower use journals to expand its reach.

• If this occurs, the owner of the “6" journal will find it profitable to reduce its price and sell to all libraries.

• This strategy is profitable for the merged firm. Thus, the merger reduces the average quality of library holdings.

• Post-merger, prices, cost/use and profits are as follows:

Slide 10

ISI Medical Titles from Major Commercial Publishers

Notes:

• data based on holdings for 82 medical libraries, during 1988-98 period

• observed titles with < 100 cites in 1998 excluded

• major firms are those with at least 1% of held commercial subscriptions among the 82 libraries

• 1227 ISI medical titles published by ALL commercial publishers

• 1387 ISI medical titles published by ALL publishers, including non-profits

• underlined firms were acquired in mergers with other firms in the list during the past 12 months

Slide 11

Notes:

• shares based on holdings for 82 medical libraries, during 1988-98 period

• titles with < 100 cites in 1998 excluded

• major firms are those with at least 1% of held commercial subscriptions among the 82 libraries

• underlined firms were acquired in mergers with other firms in the list during the past 12 months

Slide 12

Price and Citation Data for Major Commercial Publishers

evaluated at 1998 values

Notes:

• data based on holdings for 82 medical libraries, during 1988-98 period

• observed titles with < 100 cites in 1998 excluded

• major firms are those with at least 1% of held commercial subscriptions among the 82 libraries

• underlined firms were acquired in mergers with other firms in the list during the past 12 months

Slide 13

ISI-Ranked Holdings at Medical Libraries, 1988-98

commercial titles, evaluated at 1998 values

Notes:

Cancelled and Added entries involve libraries that added AND cancelled titles in the same year

• based on data from 82 libraries

• 8173 subscriptions held, 1403 cancelled, 1783 added

• titles with citation levels < 100 excluded

Slide 14

The Future

• Antitrust policy is in a state of flux

• With respect to journal publishing, the Merger Guidelines have two significant shortcomings:
  

  1. Market Definition
     
  2. Market Shares

• What can be done?
  

  1. Formulation of industry-specific guidelines
     
  2. Initiate a non-merger “Bad Acts” investigation
     
  3. Some type of antitrust immunity for non-profit institutions

• Each proposal requires additional intellectual support, i.e. economic and legal research.