McCabe worked as an economist in the U.S. Department of Justice's (DOJ)
Antitrust Division for 7 years. Now an assistant professor at the Georgia
Institute of Technology, he specializes in mergers and anticompetitive
practices. McCabe believes the STM publishing market is broken. Here's
Q What's your interest in scholarly publishing?
A In 1998, while I was at the DOJ, I was
assigned to look at the proposed merger between Wolters Kluwer and Reed
Elsevier. I was immediately struck that while traditional models suggested
that the merger wasn't particularly troubling from an antitrust perspective,
we were receiving a lot of vociferous feedback from users, and journal
prices had been increasing rapidly. Something seemed to be wrong, so I
began thinking about it and developed a new model for assessing the STM
publishing market—a portfolio model.
Q You concluded that even where traditional analysis
demonstrated no antitrust impact, mergers in this market nevertheless create
anticompetitive effects and that this could explain some of the price inflation
afflicting scholarly journals?
A Right. Unlike the conventional approach
to this problem--which assumes that an individual user's preferences
for journal content define the market and thus limit its scope to a handful
of titles—the portfolio model is based on library behavior and permits
a broader antitrust market definition. Once this step is taken, the basis
for the anticompetitive effects is familiar to any economics undergraduate:
When the price of one journal increases, owners of other titles have an
incentive to increase their prices too. Moreover, since larger portfolio
firms can better internalize these "pricing externalities," they find it
profitable to set their prices higher than would be observed in a market
populated by smaller firms.
Q So what's different about the scholarly publishing
A One distinctive aspect of this market
is that end users do not pay for the material they use since the actual
purchases are mediated by the libraries. This means that the principals
(the professors, the scientists, the researchers of a particular institution)
ask their agent (the library) to buy whatever they need, and the agent
has no way of enforcing price discipline on the users. So there is a disconnect.
Q Nevertheless, libraries do have budgetary restraints?
A Since librarians have no ability to control
the purchasing preferences of their users vis-à-vis journals, they
gut their budgets of things that they have more control over: the purchase
of monographs and other areas of enquiry, etc. This explains why over the
past 10 years we have seen around a 200-percent price increase, but only
a 5- to 10-percent cut in titles. This is remarkable. However, it is not
unique to STM journals.
Q It's the serial publications market at large?
A It is. Consider, for instance, the legal
market. When West and Thomson merged in 1996, the U.S. Department of Justice
reviewed the companies' legal serials—e.g., reporters and treatises—and
in order to avoid any anticompetitive effect told them to divest all overlapping
titles. Yet if you look at that merger in terms of its subsequent price
impact, you see a 30-percent price jump. The only explanation of this can
be the portfolio effect, since the content overlap had been eliminated.
Q What is this portfolio effect?
A In the typical product market, a buyer
will choose one of several choices available. With journals, however, users
are not normally happy having just one or two of the items on offer. They
want everything. This is because, in the course of their work or research,
users will want to have access to as many articles as possible since each
article (let alone journal) is unique and there are thousands of new articles
being published all the time. The analogy is like a consumer going into
a grocery store and making buying decisions based on a portfolio of desired
items. But while there are often substitutes for say, cereals, individual
journals cannot be substituted.
Q So the aim is not so much to choose the most
suitable product available but to buy as much as possible?
A Right. Unlike the purchaser of an automobile,
who generally wants just one item, users of scholarly journals want access
to everything. So where traditional antitrust analysis would adopt a "content"
approach to assessing the likely impact of a proposed merger or acquisition
in the scholarly journal market (treating one or perhaps a few similar
titles as a single market and assuming that a journal in one field of economics
is not a substitute for a journal in another field), I believe it is more
appropriate to use a "portfolio" approach—one that takes a much broader
view of users' buying decisions.
Q You also believe the situation will deteriorate
as we move to electronic delivery?
A As we make the transition to an all-digital
environment, users are increasingly being offered not individual print
titles but large bundles of electronic titles in the shape of digital portfolios
like Elsevier's ScienceDirect. While at first sight that is a good thing
for users—e.g., scientists at smaller institutions are likely to gain access
to more stuff—it means that the few control mechanisms that did exist on
the demand and supply side now disappear.
Q Such as?
A One thing [that is] disciplining publishers
in the print world, for instance, is the ability of libraries to cut individual
titles. But when these titles are all part of one large digital product,
libraries are not able to simply cut individual titles in the way they
can with print. On the supply side, new (print) titles can enter fairly
easily in the unbundled environment and over time impose some limited price
discipline on existing high-priced titles. However, once the transition
to large digital bundles is complete, the chance of effective entry is
going to be low.
Q And this bundling effect increases the antitrust
implications of mergers?
A Absolutely. As individual print journals
are bundled into their respective electronic bundles, you end up with a
bundle for Elsevier, a bundle for Wolters Kluwer, a bundle for Wiley, and
so forth. Then, when you have a merger, instead of thousands of titles
you have a handful of bundles. And if a publisher's merged bundle managed
to reach above 50 percent it would have what I might describe as super
market power. At this point it would be able to make a "take it or leave
it" offer to users.
Q How so?
A Effectively the publisher could say: "Either
spend all of the budget that you normally allocate to STM on my 60 percent
of STM content, or you can go and spend your entire STM budget on the 40
percent of stuff out there that is not in my bundle." Given that generally
users want access to as much as possible, this would be an offer they couldn't
refuse. Remember, such an offer would not be possible in the world of print
titles, since no individual title has more than 50 percent of the entire
content. Furthermore, even short of a super merger, the shift to digital
bundles is likely to precipitate the exit of the smallest publishers.
Q Bad news for users then?
A Let's be clear: We are talking about a
true market failure. This is a market in which the creation of the information
that publishers sell in their journals is not typically funded by them
but by subsidies from someone else—be it governments, research foundations,
or whatever. The publishers get that information for free and then rely
on scholars to provide refereeing services, essentially for free. In the
digital environment, the only thing publishers need to provide is the infrastructure
for providing the material online, a few account managers, and advertising.
They make a relatively small investment and then (rationally) charge a
high price for the end product.
Q So what should governments do?
A Well, antitrust enforcement alone is not
going to fix this market. However, given that governments fund much of
this research in the first place--and then pay the publishers to get it
back in journal form—I think organizations like the National Science Foundation
ought to invest some of their funds in a new journal initiative. This could
be designed to provide money for people to start dozens, if not hundreds,
of competitive nonprofit journals.
Q Like SPARC?
A Like SPARC, but on a much larger scale.
The savings could be tremendous. Billions of dollars are spent on these
journals, most of which is going into shareholders' pockets. While this
is a good thing for the shareholders, it is a bad thing for society because
there is no reason why research—whether it is funded by European or American
governments—should not be at the fingertips of every individual who has
access to the Internet. Bear in mind also that in this market—unlike most
markets—the nonprofit sector does a better job than commercial publishers
in almost all dimensions of performance.
Q So nonprofits are more efficient at this?
A They are better in terms of quality, they
are better in terms of the number of papers published, and, since their
prices are lower and [therefore] attract many more readers, they are more
efficient. The only area where commercial publishers do better is in introducing
many more titles. Whether that is good or bad is open to question.
Q There are those who argue that since the digital
environment allows academics to bypass traditional publishers by self-archiving
their articles on the Internet, the situation can be remedied by researchers
themselves. Do you think the so-called open access movement might discipline
A If the institutions that employ these
researchers ceased to care about the quality of the journals they published
in and the citations they received, then the whole game would be up and
Elsevier would be as well packing up its bags. But I see no evidence of
that change in academia, so the peer-review process remains a bottleneck
for entry into this market, and a bottleneck for pricing. Consequently
I don't think the open archiving effort will succeed in that respect.
Q So what are your predictions for the future?
A I don't see anything dramatic happening
while we still have print journals and [while] libraries feel that they
have some ability to get rid of individual titles. However, once publishers
eliminate the print option, the temptation to pursue a super merger strategy
may be hard to resist. On the one hand, this strategy promises extraordinary
profits, but on the other hand, its pursuit would probably invite government
intervention of some sort. If the strategy were successful, we would be
looking at another Microsoft.
Q A gloomy picture then?
A Well, the other point to make is that
unlike most markets where mergers are often opposed by a competitor, in
this market until now, everybody in the business has shared in the benefits,
no matter how big some publishers have become. This will change.
A Currently, when a firm such as Elsevier
becomes bigger and raises its prices, everyone is able to do the same.
This is because buyers want to buy everything, and so long as your cost-per-use
continues to be lower than somebody else's, you can raise your price a
lot and still get purchased. But in a world of digital bundles, new mergers
will threaten to force competitors out of the market. Consequently they
may start to be opposed by competitors, and you will see the lobbying efforts
by Elsevier opposed by those of other publishers. That's when the situation
Richard Poynder writes for a number of information publications and
contributes regularly to the London Financial Times. His e-mail
address is email@example.com.