Are College Textbooks Priced Fairly?

Are College Textbooks

Priced Fairly?
Robert Carbaugh and Koushik Ghosh

In recent years, college students, professors, and

legislators from around the country have increasingly
questioned the pricing practices of college textbook
publishers. Many college students today have yearly
textbook bills of $800$900. The college textbook
industry makes a good case study of economic
principles. But is there something that can be done?
Two economists present the problems and a few
solutions.

A
N ECONOMICS PROFESSOR TELLS HER STUDENTS WHAT TEXTBOOK TO PUR-
for her Principles of Economics course. They likely go
CHASE
to the local college bookstore and acquire the book, often at a
price of $100 or more. Are college publishers the reason for the high
prices of textbooks?
Increasingly, college students, professors, and legislators from
around the country have questioned whether publishers engage in
practices that drive up the cost of textbooks (Laband and Hudson
2003). With college students today having textbook bills of $800
$900 per year (College Board 2004), the pricing of textbooks has
become a sensitive issue. In Congress, Senator Charles Schumer (D-
NY) and Representative David Wu (D-OR) both introduced bills to

ROBERT CARBAUGH and KOUSHIK GHOSH are professors of economics at Central Washing-
ton University.

Challenge, vol. 48, no. 5, September/October 2005, pp. 95112.

2005 M.E. Sharpe, Inc. All rights reserved.
ISSN 05775132 / 2005 $9.50 + 0.00. Challenge/SeptemberOctober 2005 95
Carbaugh and Ghosh

address the pricing practices of publishers. As a result, in 2004, the

U.S. House of Representatives conducted hearings on college text-
book pricing (U.S. House of Representatives 2004). In addition, Gov-
ernor Arnold Schwarzenegger signed a California law challenging
textbook publishers to rethink their pricing policies, and the Govern-
ment Accountability Office has launched an investigation of college
textbook prices. Meanwhile, some faculty members have signed let-
ters to publishers asking them to relax their pricing strategies. In-
deed, college textbook publishers are facing intense public scrutiny
and are under great pressure to help make education more affordable
for lower- and middle-income college students.
This paper discusses the economics of college textbook publishing
and the factors contributing to the high cost of textbooks. It focuses
on the markets for new and used textbooks and the pricing strategies
of publishers. The paper also considers alternatives, such as textbook
rental systems and online textbooks, for holding down student costs.

The Market for College Textbooks

College textbook publishing has experienced increasing market con-
centration in recent years. In the 1980s, numerous publishers were
competing for textbook salesAddison Wesley, Irwin, Harper & Row,
Scott-Foresman, Houghton Mifflin, Prentice-Hall, Harcourt Brace, and
many others. The textbook industry approximated the market model
of monopolistic competition in which the three largest publishers
accounted for 35 percent of college textbook sales and the rest of large
number of competitors sells a small fraction of industry output.
By the early 2000s, the college textbook industry had evolved into
an oligopoly, dominated by Pearson Education, Thomson Learning,
and McGraw-Hill. Together, these companies now account for more
than 67 percent of all textbooks sold in the United States. The fourth-
largest company is Houghton-Mifflin, which accounts for about 5
percent of industry sales. The textbook industry has become
oligopolistic in terms of both total market share and the publishers
behavior aimed at realizing additional market share.

96 Challenge/SeptemberOctober 2005
 Are College Textbooks Priced Fairly?

How did the college textbook market become so concentrated?

Through mergers and acquisitions in the last decade, large textbook
companies absorbed dozens of smaller textbook and educational
media firms. While mergers may entail efficiencies for publishers,
critics maintain that they tend to result in decreased variety and choice,
as publishers selectively kill their internally competing titles and fo-
cus all their resources on blockbusters and sure things in the larg-
est markets.
But while college textbook publishers have become more
oligopolistic in recent years, they face considerable competition from
used-book dealers. Used books make up about a third of the textbook
market in dollar terms. In 2004 the average cost of a new college
textbook was about $102, while the average used book cost $65. The
industry rule of thumb is that in the second year of an edition, a
textbooks sales are about 50 percent of what they were in the first
year, and in the third year fall off an additional 50 percent compared
with the second year. By the third year, more copies are sold of the
used book than the new book. However, this rule may understate the
decline in new textbook sales, given the recent growth of the used-
book industry. Some publishers report sales declines of 75 percent or
more by the second year for some of their most popular textbooks.
Used books enter the market mainly when students sell them back
to college bookstores, which typically pay half the retail price for a
book that they can resell on their own campus. If the book is not
being used again on campus, it may be purchased by a used-book
company that will pay a third or less of the original retail price. These
books are then distributed to college bookstores on other campuses,
where they generally sell for 75 percent of the original price (Tregarthen
1987).
Another avenue through which books come into the used-book
market is the complimentary-copy market. To encourage sales, pub-
lishers often furnish faculty with free sample copies of their text-
books. If a professor has reviewed a book and decides not to adopt it,
the book has little further value to him or her. Thus professors often
sell their complimentary textbooks to purchasers who travel from

Challenge/SeptemberOctober 2005 97
Carbaugh and Ghosh

college to college. These individuals buy sample copies of texts from

faculty and sell them to used-book dealers such as the Nebraska Book
Company. However, attorneys general of some states, including Wash-
ington, have ruled that such sales are illegal because complimentary
textbooks are the property of a state college or university rather than
its faculty.
The markup on used books tends to be higher than for new books.
However, obtaining used books is more costly for college stores than
simply ordering new copies from the publisher. A college store gener-
ally purchases only about 50 percent of its used books from stu-
dents. The remaining used books must be acquired from used-book
dealers, and during the order cycle, a bookstore will often contact
dealers four or five times to find copies of the books that it wants.
Each inquiry takes time and costs money. Moreover, unsold books
purchased from students and dealers may have to be sold at a loss on
the used-book market or even destroyed, resulting in additional costs
for campus bookstores. In contrast, bookstores can return unsold
copies of new texts to publishers, bearing only shipping costs.
Therefore, the amount of money a college bookstore makes is about
the same for new books and used books since the retail price on used
books is 25 percent less than the retail price on new books. For ex-
ample, a new $80 textbook, on average, is sold to the bookstore by
the publisher for $60. The same book, in used condition, would be
bought either from a student or a used-book dealer for half of the
retail price, or $40. It is then resold for $60. In both cases, the book-
store makes $20 on the transaction.
It is not surprising that publishers and authors are concerned about
the used-book market. They maintain that used-book dealers make
money at the expense of publishers and authors in the short run and
students in the long run. Simply put, publishers argue that campus
bookstore efforts to increase the sale of used books cause increases in
the price of new textbooks. Because textbook publishing involves
high fixed costs, recouping these costs plus a reasonable return on
investment requires selling a high volume of new textbooks. How-
ever, competition from used books undercuts this objective. There-

98 Challenge/SeptemberOctober 2005
 Are College Textbooks Priced Fairly?

fore, the publisher must increase the price of new books to offset a
reduced sales volume. In turn, this results in higher prices for used
books because their prices are tied to the prices of new books. Al-
though the attempt to bring more used books to the market may be
good for students in the short run, in the long run it increases the
prices of both new and used books.
Publishers are reluctant to discuss costs of producing and market-
ing textbooks, but the National Association of College Stores has
made some estimates, as shown in Table 1. The major costs that
publishers face when producing a textbook are for paper, printing,
and editorial services. For a $100 book, these factors amount to about
$32.30. Marketing costs add another $15.40, and general and ad-
ministrative costs account for another $10. Thus the publishers in-
come after taxes equals $7.10. Authors generally receive about $11.60
on a $100 book. In addition, some authors are able to negotiate
substantial bonuses when signing a contract with a publisher. These
bonuses increase the publishers fixed cost of doing business. As is
common in oligopolies, textbook publishers gauge each others
prices, paying especially close attention to the firms regarded as the
market leaders. The college bookstore absorbs other costs such as
freight, personnel, insurance, and utilities, which amount to $19.10.
This leaves the bookstore a profit of about $4.50 per book, before
taxes. This profit margin is small compared with that of other busi-
nesses. At many colleges, the bookstore makes no profit on textbooks
at all, the textbook operation being subsidized by the sale of other
merchandise.

Should Textbooks Be Priced Differently Around the

World?
In addition to competing with used books provided by American stu-
dents and professors, U.S. publishers are increasingly competing with
used books sold by foreign sellers, the result of American publishers
adopting differential pricing strategies to penetrate foreign markets.
In 2003, students at Purdue University were surfing the Net for an

Challenge/SeptemberOctober 2005 99
Carbaugh and Ghosh

Table 1

Divvying Up a $100 Textbook

Publisher
Paper, printing, editorial cost $32.30
Marketing costs 15.40
General and administrative costs 10.00
Income, after tax 7.10

Author income 11.60

College store
Personnel 11.30
Insurance, utilities, etc. 6.60
Freight expense 1.20
Income, before tax 4.50

Total 100.0

Source: Where the New Textbook Dollar Goes, National Association of College Stores, Oberlin, OH
(2003). Available at www.nacs.org.
Note: This price breakdown is an average, based on information collected from college and
university bookstores and textbook publishers across the country, as compiled by the National
Association of College Stores.

inexpensive supplier of textbooks when they noticed that the very

same new college textbooks adopted in the United States were selling
for half the U.S. price, or less, in the United Kingdom. They also
discovered that textbook prices in Malaysia, Singapore, and Taiwan
were even lower than those in Europe. Like prescription drugs, text-
books typically cost far less overseas than they do in the United States.
The U.S. publishers were engaging in international dumping, also
known as international price discrimination: selling identical books
to foreign buyers at prices lower than those charged to domestic buy-
ers. A profit-maximizing publisher would benefit from dumping by
charging higher prices for books sold to richer American students
whose demand curves are relatively inelastic, and lower prices to
poorer foreign students with relatively elastic demand curves.
U.S. publishers justify their dumping policies by noting that for-
eign sales would not take place if book prices were not tied to local

100 Challenge/SeptemberOctober 2005

 Are College Textbooks Priced Fairly?

market conditions. Low per-capita income in many foreign countries

keeps buyers from being able to purchase high-priced textbooks. Pub-
lishers also note that foreign sales of high-quality books bolster
Americas prestige in the world because they help poor foreign stu-
dents receive a quality education. Moreover, American students ben-
efit from each copy sold abroad, even at a low price, because the high
costs of producing a textbook are spread over a larger volume of out-
put. For publishers, the fixed costs of producing a textbook are high,

The cost of transferring goods from the cheap foreign market

to the more expensive domestic market is usually prohibitive.

while the marginal costs of printing a small quantity of additional

copies and selling them abroad are very low. If publishers did not sell
textbooks internationally, the price of textbooks in the United States
would be higher because the fixed costs would be spread over a smaller
number of copies. Although printing some additional copies of a text-
book to be sold abroad at a lower price may be a rational business
strategy for publishers, it has triggered heated criticism from the Ameri-
can students who pay higher prices than foreign students do for an
identical textbook.
Yet simply charging lower prices to foreigners does not necessar-
ily make dumping profitable. Successful dumping requires that the
different markets have barriers between them. It should not be pos-
sible for customers to buy goods sold in the cheaper market and
then resell them in the more expensive market. Similarly, custom-
ers in the more expensive market should not be able to access the
cheaper market in order to benefit from the lower price. In interna-
tional trade, the domestic and foreign markets are separated geo-
graphically and by tariff or nontariff barriers. The cost of transferring
goods from the cheap foreign market to the more expensive domes-
tic market is usually prohibitive.
For textbook publishers, however, such market segmentation does
not exist. Because the Internet provides immediate access to low-priced

Challenge/SeptemberOctober 2005 101

Carbaugh and Ghosh

foreign books, more and more American students and college book-
stores have been able to order textbooks from abroad. To the dismay
of publishers, many students individually and in groups have begun
to compare the textbook prices posted on American Internet sites
like Amazon.com with the lower prices for the same books on for-
eign sites like Amazon.co.uk. The differences can be sizable. For ex-
ample, a leading Principles of Economics textbook was priced at $110
on the American Amazon site in 2004, but could be obtained for
$60, plus $8 shipping, from the British site.
U.S. publishers have reported that foreign wholesalers sometimes
purchase more new textbooks than can be sold to foreign students,
say at $20 each, and ship them back to the United States, where they
are sold to an American book dealer at a price of, say, $50. The for-
eign wholesaler thus makes a profit of $30 per text, minus shipping
costs. Reimportation of textbooks is encouraged by a 1998 Supreme
Court ruling that federal copyright law does not protect U.S. publish-
ers from the practice of shipping the books they sell abroad at a dis-
count back to the United States to be sold.
Reimported books have significantly hurt the sales of U.S. publish-
ers, as well as their authors, who sacrifice royalty income, which is a
percentage of net revenues received by the publisher. Publishers have
tried to prevent reimportation, mostly through contract language for-
bidding foreign wholesalers to sell to American distributors of used
textbooks. In addition, some publishers refuse to deal with foreign
wholesalers suspected of profiting from the price differential between
texts sold abroad and those sold in the United States. Some publish-
ers have even delayed the sale of a new book in foreign markets in
order to slow down its entry into the used-book market.
Modifying textbook appearance or content is another technique
used by publishers to discourage the reimportation of textbooks.
Publishers often place stickers on textbook covers stating Interna-
tional Edition Restricted: Not for Sale in North America. They also
modify the content of textbooks sold abroad by deleting sections of
chapters or entire chapters or not including important supplements
with the text. However, content modifications require additional ef-

102 Challenge/SeptemberOctober 2005

 Are College Textbooks Priced Fairly?

fort for the publishers editorial and production staff, thus increasing
unit production costs and reducing profit margins.
As more buyers turn to reimported textbooks, it is an open ques-
tion as to how long the overseas price differentials will last. With
cheap reimported textbooks increasingly competing for sales with
new books, U.S. publishers may be forced to abolish the practice of
dumping and charge uniform prices to domestic and foreign buyers.
By increasing prices on textbooks sold abroad, however, publishers
are likely to suffer losses in sales volume.

Do Mergers Contribute to Efficiencies for

Publishers?
Another factor that can affect the prices of college economics text-
books is horizontal mergers among competing publishers. Such merg-
ers can yield both welfare-increasing effects and welfare-decreasing
effects.1
A horizontal merger results in welfare gains when (1) the newly
established publisher adds to preexisting productive capacity and
fosters additional competition, (2) the newly established publisher is
able to enter markets that neither parent could have entered indi-
vidually, or (3) the publisher realizes cost reductions that would have
been unavailable if each parent performed the same function sepa-
rately. However, a merger would entail welfare losses if it generated
increased market power for the publisher, creating greater ability to
increase market price. In the jargon of economists, the result of this
market-power effect is a welfare loss for the economy. Whether over-
all domestic welfare rises or falls because of the merger depends on
the magnitude of these two opposing forces.2
When requesting permission from the U.S. government to merge,
textbook publishers justification has often been cost efficiencies.
Prior to a merger, publishers may have assigned sales representatives
and editorial groups to subjects ranging from principles of macro-
economics to political science to advanced physics. Mergers allow
publishers to create smaller groups of editors and sales representa-

Challenge/SeptemberOctober 2005 103

Carbaugh and Ghosh

tives that produce and sell, say, only economics and business text-
books. This specialization of responsibilities increases productivity,
leading to cost reductions. Moreover, mergers yield economies of scale
for new educational technologies such as PowerPoint presentations,
online tutorials, and online quizzes. The larger scale of operations
that mergers create allows publishers to reduce their per-unit costs of
producing these educational supplements. Simply put, publishers
envision rewards for getting bigger, as their fixed costs are large and
the cost of serving each additional customer is small.

Critics note that since the mid-1990s, the average price that
campus bookstores pay publishers for textbooks has risen by
about 50 percent.

Yet critics contend that mergers of formerly competing publishers

have resulted in higher prices for textbooks. Increased control of the
market allows a publisher to add bells and whistles (CD-ROMs and
workbooks) that drive up the price of textbooks, while many teachers
do not use these items. The publisher also can put new editions on
the market frequently, often with very few content changes, making
the less expensive, used textbooks obsolete and unavailable. Critics
also maintain that a textbook oligopoly, whose profits depend on the
sale of hardback books, would tend to stifle innovation such as the
development of less expensive online textbooks.
Critics note that since the mid-1990s, the average price that cam-
pus bookstores pay publishers for textbooks has risen by about 50
percent. However, overall producer prices in the United States have
increased by only 10 percent during this period (Fairchild 2004). In
turn, publishers contend that the amount of money that college stu-
dents spend on textbooks has remained stable. For the academic pe-
riod 19992003, the average annual increase in student spending for
new and used textbooks purchased at campus bookstores was 3.5
percent, and textbooks account for less than 6 cents of the education

104 Challenge/SeptemberOctober 2005

 Are College Textbooks Priced Fairly?

Table 2

College Learning Materials: More Than a Textbook

Todays economics textbook is not the textbook of a generation ago. During the last
decade, publishers have added many instructional resources for students and professors,
which increase the cost of producing the textbook.

Principles of Economics Textbook, 1993 edition

For the instructor: For the student:

Instructor solutions manual Student study guide

Instructor resource manual
Test bank
Computerized test bank
Instructor presentation transparencies

Principles of Economics Textbook, 2004 edition

For the instructor: For the student:

Instructor solutions manual Student study guide

Instructor resource manual Student solutions manual
Test bank Student Web site
Computerized test bank Interactive learning materials
Instructor presentation transparencies Simulations CD
Instructor resource CD Online homework
Course management tools

Source: Based on Association of American Publishers, College Learning Materials: More Than a Textbook
(Washington, DC, 2004).

dollar spent each year at public four-year colleges (College Board 2004).
Publishers also point out that many college professors are now
insisting that a greater number of supplements and services be in-
cluded with textbooks, and that they often desire books that are
printed in a multi-color format with fancy graphics and pictures,
making the content more user-friendly for students. Indeed, the
number of ancillaries supporting an economics textbook has in-
creased in recent years, as seen in Table 2. These factors have added
to the costs of new textbooks.
The concern over horizontal mergers among publishers is illustrated

Challenge/SeptemberOctober 2005 105

Carbaugh and Ghosh

in the case of Thomson and Harcourt, two leading publishers of col-

lege textbooks (U.S. District Court for the District of Columbia 2001).
In 2001, the companies requested the governments approval to merge,
citing gains in efficiencies as a major justification. However, the gov-
ernment initially objected, warning that competition in certain prod-
ucts would be substantially decreased, which could result in students
paying higher prices. Thomson and Harcourt were two of the worlds
largest publishers of textbooks and other educational materials and
were direct competitors in the development, marketing, and sale of
these items. For thirty-eight college courses, they published textbooks
that were close substitutes. The government noted that a merger could
substantially reduce competition in certain markets for college textbooks
and ancillary educational materials and would probably lead to higher
textbook prices and a reduction in the number and quality of ancillary
educational materials provided to teachers and students. However, the
government allowed the merger after Thomson agreed to sell sixty-eight
college textbooks and related ancillary educational materials, ranging
from intermediate Spanish to psychology, to other publishers.
Given the complex nature of the textbook production and market-
ing, assigning blame for rising textbook prices is difficult. Neverthe-
less, the publishing industry has acquired a reputation as the big bad
wolf, and the industry is perceived to benefit from a climate of weak-
ened antitrust oversight, which tends to push industries toward oli-
gopoly and higher prices (Friend 2003).

Can a Publisher Price Textbooks to Please Everyone?

Indeed, the pricing of college textbooks is a complicated issue, in-
volving considerations of students, publishing company stockhold-
ers, authors, sales representatives, and the like. Can a publisher price
textbooks to please everyone?
One view on the high cost of textbooks is that prices matter a lot to
students, suggesting that demand is elastic. High prices may discour-
age poorer students from purchasing a required textbook or may re-
sult in several students sharing the cost of a text. If professors see

106 Challenge/SeptemberOctober 2005

 Are College Textbooks Priced Fairly?

that a publishers prices are out of line with the rest of the industry,
they may become less enthusiastic about requiring students to pur-
chase that publishers textbooks.
However, others argue that student demand is inelastic with re-
spect to price and that many professors do not know the price of a
text when they choose it. The professor is similar to a medical doctor
who makes health-care selections for her patients. The professor (doc-
tor) selects the best textbook (treatment) available without con-
sidering price, and the student (patient) is more or less forced to
purchase it. Thus, students will purchase a textbook if it is required
by the professor.
Moreover, there may be conflicting price preferences between pub-
lishing companies and authors. Because the royalties of an author are
a fixed percentage of the total revenue realized from the sale of a
textbook, the author would desire the publisher to charge a relatively
low price, sell as many textbooks as possible, and thus maximize
total revenue. However, the top management of a publishing com-
pany is also concerned about stockholders who place a higher prior-
ity on the expansion of profit (total revenue minus total cost) over
revenue. Fear of a dissident stockholders suit may encourage man-
agement to pursue profit maximization as the top goal, which im-
plies charging a higher price than that which maximizes the royalties
of its author.3
However, one can argue that the author will prefer neither the profit-
maximizing price nor the revenue-maximizing price. Rather, the au-
thor will want the publisher to expand sales to an intermediate point,
where any further increase in sales will decrease profits below a mini-
mum acceptable level. Indeed, it is not in the authors interest for the
publisher, when attempting to maximize total revenue, to realize losses
or profits that are less than satisfactory. The publisher might go out
of business, thus forcing the author to go through the inconvenience
of finding another publisher that is willing to publish his textbook.
The concept of satisfactory profits is discussed in Simon (1957).
The sales representatives of a publishing firm concur with the authors
preference that publishers maximize revenues subject to a minimum

Challenge/SeptemberOctober 2005 107

Carbaugh and Ghosh

profit constraint. While sales representatives earn a fixed salary, they

receive commissions from the number of books they sell. This arrange-
ment leads to pressure at a publishing company to keep the price of
textbooks down, to help increase the quantity sold.
The potential for disagreement becomes even more apparent when
a publisher has both domestic and international sales divisions. If
the international sales division markets a textbook to low-income
students in a developing country, its staff will be motivated to charge
a relatively low price to meet regional economic conditions. But the
staff of the domestic division, which sells an identical textbook in
the high-income country, will not want the low-priced textbook to
be reimported and thus reduce their commission. To discourage
reimportation, it will argue for a higher price policy on the publishers
international sales. Indeed, the publishers executives can be caught
in the uncomfortable situation of having to balance the differing
pricing motivations of the two corporate divisions.

Conclusion
College textbooks and supplements that accompany them are impor-
tant learning tools for economics students. Aside from the professor in
the classroom, a textbook and its supplements are often the most valu-
able learning resource that students use for gaining proficiency in eco-
nomics. Publishers update textbooks and ancillaries to keep pace with
new findings, pedagogy, and perspectives. They know from personal
experience that when a title is not revised, it will not continue to be
adopted. Moreover, the price of college textbooks is affected by many
factors, such as the quality of new books, authors royalties, commis-
sions of sales representatives, complimentary books given to faculty
members, production costs such as editing, paper, and ink, the fre-
quency of new editions, the bundling of other products with the text-
books, and the margins obtained by the collegiate retailers. If publishing
companies cannot generate sufficient revenue to cover these costs, they
cannot continue to stay in business. Yet the publishing industry is not
enormously profitable in comparison to other industries.

108 Challenge/SeptemberOctober 2005

 Are College Textbooks Priced Fairly?

Producing a comprehensive college economics textbook and in-

structional program can take many years, at a cost of hundreds of
thousands of dollars. Many economics textbooks are used in highly
specialized, upper-level courses, such as those on the history of eco-
nomic thought or econometrics, that have significant educational
value but small enrollments. This means that development expenses,
author royalties, and production and distribution costs are spread
across a modest student market. Moreover, textbooks and ancillaries
need to be revised periodically. Thus it is not surprising that college
economics textbooks cost more than novels. Nevertheless, there is
mounting criticism that the cost of new textbooks is too high. Pub-
lishers are under intense pressure to produce textbooks with lower
costs and pass these savings to students in the form of lower prices.
One way of decreasing production costs is to reduce the number of
bells and whistles attached to hardback textbooks, such as four-color
pages loaded up with related CD-ROMs and other supplementary ma-
terials. However, many professors and students demand these features,
so publishers may seek to meet the needs of the market by providing
them.
Nevertheless, in 2004 Thomson Learning launched initiatives that
could reduce the price of books for students by as much as 25 per-
cent. One of the initiatives offers stripped-down version of books
with fewer colors or photos. The other sends Thomson representa-
tives to classrooms to supply technology-based course materials. How-
ever, these techniques have limited potential in reducing textbook
costs, because paper, printing, and editorial costs account for an av-
erage of 32.3 cents of every dollar of textbook costs, the largest cost
component, as seen in Table 1.
Another possibility for holding down textbook costs is for colleges
to adopt a campus rental system by which students pay a fee to check
out books for the semester. If the textbooks are returned undamaged,
and by the due date, no further charges are levied. If students wish to
purchase texts, they may buy any text in the rental inventory at a
discount off the retail price. The University of Wisconsin has been a
pioneer in instituting rental systems for its campuses, and other col-

Challenge/SeptemberOctober 2005 109

Carbaugh and Ghosh

leges are showing interest in this possibility as textbook prices con-

tinue to increase. However, the startup costs of implementing a rental
system are very high, and there is very little return on investment. It
is possible that Congress could allocate funds to help schools offset
the startup costs so that they do not prohibit schools from imple-
menting a rental system.
Perhaps the greatest promise for lowering textbook costs comes
from online textbooks (Goldsmith and Trachtenberg 2004). Several
publishers, such as Pearson Education, Aplia, and Thomson, are cur-
rently experimenting with this technology. If these publishers suc-
ceed in producing and selling online textbooks, great pressure will
be placed on other publishers to move into this market.
For example, in 2004 Pearson Education announced that it was
making 300 of its most popular U.S. college textbooks available in a
Web-based format for half the price of the hard-copy versions. Al-
though the prospect of online textbooks might engender predictions
of online theft, Pearson is confident that its system is secure from file
sharing or access by unauthorized subscribers. The reason is that its
online texts are not downloadable. A student can print an online text-
book only section by section, but not in its entirety. Pearson envi-
sions that students will print out only the portions of the chapter
they need that day. It also maintains that a hard-copy textbook could
be duplicated much more easily. However, time will tell if Pearsons
online publishing is as secure as the company claims.
Online books may provide some relief for students concerned about
the high cost of textbooks. By shifting content to the Internet, pub-
lishers will be able to reduce paper and printing costs, decrease in-
ventory expenses, eliminate returns, slash shipping costs, and perhaps
put a significant dent in the used-textbook business. However, online
textbooks provide competition for college bookstores that sell hard
copies of new and used books. Pearson Education has offered cam-
pus bookstores a portion of the revenue from online sales if they
direct students to the publishers Web site.
If publishers are able to pass along those savings, they may be able
to lure back frugal students who often refrain from purchasing ex-

110 Challenge/SeptemberOctober 2005

 Are College Textbooks Priced Fairly?

pensive hard-copy textbooks. However, online books are not expected

to rapidly displace print editions. Publishers predict that most stu-
dents in higher education will continue to prefer a physical textbook,
since they grew up on such texts. The question economically is whether
textbook publishers can sustain two competing business modelsone
based on the Web, another that relies on printing presses, warehouses,
and a national distribution system. It is still early to fully comprehend
how the Web will change the delivery of instruction in higher edu-
cation. Despite the publicity given to online books, customers are
still heavily favoring print content in their purchasing. It appears
that the migration to digital delivery will be very gradual and that
the need to maintain and increase investment in both print and
online delivery will be a part of the publishing business for some
time to come.
In 1965, Congress enacted the Higher Education Act to ensure that
every American student striving for a college education is able to pur-
sue his or her educational goals. Congress made a commitment that
education would be affordable for Americans. The recent hearings of
the U.S. House of Representatives regarding the pricing of college text-
books and California governor Schwarzeneggers signing a law chal-
lenging publishers to reduce textbook prices are signs of governments
willingness to become involved in this pricing issue. Perhaps the de-
bate about college textbooks will resolve itself in the marketplace, as it
has done in the past, and will involve all members of the academic
community working together to improve on producing textbooks at a
reasonable price. However, if publishers are unable to demonstrate tan-
gible evidence to justify the high prices of textbooks, additional gov-
ernment involvement may be on the horizon.

Notes
1. Since 1997, antitrust authorities have accepted cost efficiencies as a defense
for horizontal mergers, as seen in Federal Trade Commission (1997).
2. This analysis is drawn from Williamson (1968).
3. In economics jargon, a publisher maximizes total revenue by selling text-
books at the point where marginal revenue equals zero. The publisher maximizes
total profit when it sells textbooks at the point where marginal revenue equals mar-

Challenge/SeptemberOctober 2005 111

Carbaugh and Ghosh

ginal cost. The revenue-maximizing price is lower than the profit-maximizing price
(Hall and Lieberman 2003).

For Further Reading

College Board. 2004. Trends in College Pricing. New York.
Fairchild, M. 2004. Ripoff 101: How the Current Practices of the Textbook Industry
Drive Up the Costs of College Textbooks. Los Angeles: California Student Public
Interest Research Group.
Federal Trade Commission. 1997. Revision to the Horizontal Merger Guidelines. Wash-
ington, DC.
Friend, F. 2003. Whos Afraid of the Big Bad Wolf? SCONUL Newsletter (Spring):
5861.
Goldsmith, C., and J.A. Trachtenberg. 2004. College Books Move Online. Wall
Street Journal (April 23): B-3.
Hall, R., and M. Lieberman. 2003. Economics. Mason, OH: Thomson Learning/South-
Western.
Laband, D., and J. Hudson. 2003. The Pricing of Economics Textbooks. Journal of
Economic Education 34 (Fall): 36067.
Simon, H. A. 1957. Models of Man. New York: John Wiley.
Tregarthen, T. 1987. The Market for Principles of Economics Texts. The Margin 2
(March): 34.
U.S. District Court for the District of Columbia. 2001. United States of America Ver-
sus the Thomson Corporation, Harcourt General Inc., and Reed Elsevier Inc. June
27. Available at www.usdoj.gov/atr/cases/f8800/8899.pdf.
U.S. House of Representatives. 2004. Are College Textbooks Priced Fairly? Subcommit-
tee on 21st Century Competitiveness of the Committee on Education and the
Workforce, 108th Congress, 2d sess. (July 20).
Williamson, O.E. 1968. Economies as an Antitrust Defense: The Welfare Tradeoffs.
American Economic Review 59 (March): 1836.

To order reprints, call 1-800-352-2210; outside the United States, call 717-632-3535.

112 Challenge/SeptemberOctober 2005