The economics of “Big Deals”: Pricing bundles

This is the first of what may become a longer series of blog posts addressing some of the economic issues surrounding Big Deals.

The so-called “Big Deal” is a whole collection subscription package offered by journal publishers to libraries whereby libraries can purchase a publisher’s entire collection of journals at a significant discount over the sum of individual journal subscriptions. These arrangements are frequently welcomed by libraries because of the subscription discount provided, while publishers identify these same discounts as a demonstration of their overall concern for the financial welfare of the scholarly communities they serve.

In a recent article, Liam Earney from JISC Collections summarised recent negotiations with publishers over Big Deal contracts, and observed:

“Some publishers who are approached by consortia for offsetting agreements express the view that they have to offer three levels of discount. First is the ‘discount’ they already offer on the collective price of journals as part of the big deal, second is the global price reduction on subscription costs they implement in order to fulfil their anti-double-dipping policies and, finally, they are now asked to implement a third local offset for those research-producing institutions faced with increased APC costs. Withdrawing any one of these will lead to protests from at least one segment of their customer base depending on that particular segment’s attitude or policies around gold OA, thus placing them between a rock and a hard place.” [1]

Given the prevalence of these types of arguments I thought it may be worth reiterating the basic economics of the pricing of bundles. The key message: by apparently providing discounts on the individual journal prices within a bundle of journals (or Big Deal) a publisher is able to increase the overall expenditure incurred by the library, tie the library into the Big Deal contract, and increase publisher profits.

This is most easily explained with a very simple example:

Let us consider a publisher with two journals – which I shall generically call Science and Arts.  

Similarly, let’s divide Universities into those that concentrate in STEM disciplines, and those that concentrate in HSS disciplines.

STEM universities have more researchers interested in the journal Science than Arts, and so are prepared to pay $7500 to purchase a subscription to the journal Science but only $2500 to purchase a subscription to the journal Arts. Conversely, the HSS universities are prepared to pay $7500 for the journal Arts and only $2500 for the journal Science.

Question: What is the optimal (profit maximising) pricing policy for the publisher to adopt?

Clearly if the publisher prices each journal above $7500 – then they will make no sales at all. But if the subscription fee is above $2500 and not more that $7500, then all the STEM universities will purchase Science (but not Arts) and all the HSS universities will purchase Arts (but not Science) – so the publisher will sell a subscription for one journal to each university. In this situation the best the publisher can do is set the subscription price for both journals at $7500, and will thus achieve a total revenue of $7500 from each university.

Alternatively, charging a subscription price of $2500 for each journal will encourage all libraries to purchase both journals. But in this case the publisher will only realise a total revenue of $5000 from each library, and so will prefer to set the higher subscription charge.

If, however, the publisher – while maintaining the single journal subscription fee of $7500 – offers a special Big Deal rate of ‘only’ $10000 for BOTH journals, then all universities will opt to purchase the Big Deal (as this is the total amount they are prepared to pay for both journals). The publisher now achieves revenue of $10000 from each library.

Thus by offering libraries the Big Deal with a discount of 33⅓ % on the individual journal subscription charges the publisher has very effectively increased the revenue earned from each university from $7500 to $10000.

Of course – once all the libraries have opted for the Big Deal (and so none is purchasing an individual journal subscription) the publisher could increase the subscription price of individual journals above $7500 – so making them individually too expensive for libraries and effectively tying libraries into the Big Deal package – while simultaneously appearing to be even more magnanimous to the scholarly community with their discount, and without it having any impact whatsoever on overall publisher revenue.

So, let’s be a little wary of thanking publisher too heartily for the discounted prices they provide via their Big Deals, or of thinking that it is a particularly sharp rock or hard place between which they find themselves feathering their nest.

 


1. Earney, L., (2017). Offsetting and its discontents: challenges and opportunities of open access offsetting agreements. Insights. 30(1), pp.11–24. DOI:http://doi.org/10.1629/uksg.3454

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About rupertgatti

Dr. Rupert Gatti is a co-founder and co-director of Open Book Publishers. He is a Fellow of Trinity College, Cambridge, where he is a Director of Studies in Economics. His published academic work includes microeconomic analysis of competition in online markets, game theory and search theory. He has held visiting positions at MIT and University of Florence, acted as an Economic Advisor on several EU competition studies, is on the advisory board of a range of Open Access initiatives and is a frequently invited speaker on the OA movement. Email r.gatti@openbookpublishers.com
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3 Responses to The economics of “Big Deals”: Pricing bundles

  1. Hi Rupert

    In your example, you say: “STEM universities have more researchers interested in the journal Science than Arts, and so are prepared to pay $7500 to purchase a subscription to the journal Science but only $2500 to purchase a subscription to the journal Arts.”

    So the university is willing to pay £10,000 to get the content that it wants. The publisher sells the university the content the university wants at a cost that the university is willing to pay. The university gets the content that was unaffordable if it had had to pay on a title-by-title basis. I’m afraid that this does not look to me like a compelling financial argument against big deals – if anything you’re making the case for them!

    David

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    • rupertgatti says:

      Hi David
      Thanks for this comment – you raise a very good point. Let me elaborate a little …
      The two main lessons I was wanting to convey in this example were:
      1. That the ‘discounts’ on subscriptions offered with the Big Deal is a profit maximising strategy for publishers. Thus there is no need to be grateful to them for this action.
      2. That the size of the discount offered can be made to appear arbitrarily large or small. Thus there is no information value to be obtained from the size of the discount offered.
      The point you accurately note is that the final outcome in the situation described is ‘economically efficient’ – all universities get both journals and the publisher receives the maximum profits available. Of course another economically efficient outcome is the situation where the subscription price for both journals is £2500. In this situation both universities receive both journals – but the ‘surplus’ is now divided equally between the publisher and the library – the publisher receives $5000 and the university receives a ‘consumer surplus’ of $5000, being the difference between what they are willing to pay and what they actually pay for the subscription. And if the journal markets were ‘competitive’ then the price paid for the journals would be even lower that $2500. From a social perspective, and clearly from the perspective of the universities themselves, the later outcomes are preferable to the former.
      The situation you have described is precisely equivalent to First Degree Price Discrimination (FDPD) – the holy grail for monopolistic activity. With FDPD a monopolist is able to charge every consumer precisely their willingness to pay for an object. Implementing FDPD is ‘economically efficient’ in that all those willing to pay more than the marginal cost for an object receive the object – but the entire economic surplus from these transactions goes to the monopolist. Anti-trust agencies typically frown on firms practicing FDPD – preferring competitive outcomes, which are also allocatively ‘efficient’ but with the surplus allocated in favour of the consumers (in this case the universities) rather than the monopolist (publisher). There are also concerns over dynamic efficiency and strategic market manipulation by monopolists in this situation to consider – but maybe that is a good topic a new post!
      But there is another quick point to make. In this example ANY price (between the cost of production and the willingness to pay) for the Big Deal is ‘efficient’ – the only difference between alternative prices is the allocation of surplus between the publisher and the library. Thus in determining the actual price paid we have a natural bargaining problem – and one might expect the final price to be determined by the relative bargaining strength of the two sides. The $10000 outcome from the example is the situation when all the surplus has gone to the publisher and the library effectively has no bargaining power whatsoever. In this situation the actual costs incurred by the publisher in supplying the journals have no impact on the price paid by the library, and so nobody should try to infer any information about costs from the price charged. Of course, in a dynamic setting, using that price (or, for that matter, the individual journal subscription prices) as a basis for any subsequent price ‘negotiations’ will only perpetuate the ‘bad’ outcome, rather than strengthening the library’s underlying bargaining position in any way.

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  2. Thanks Rupert

    I’d certainly agree that a) list prices are increasingly arbitrary and b) it is difficult to assign true meaning to the value of the ‘discounts’ on those list prices. And there is little true competition in this market – either in terms of big deals or even on a title-by-title basis. But as you show, big deals do bring some financial benefits – if they didn’t then moving from them would be easier!

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