Man Without Qualities

Monday, April 15, 2002

Further Update: That “Notorious” Amazon Used Book Resale Service

Steven E. Landsburg has discussed the issue of whether publishers reduce the durability of textbooks in an interesting 1999 Slate article, where he says:

“The naive answer to why publishers might want to discourage the used book market is that they prefer to get paid every time a student buys a book. But by that logic, you should never sell your house when you can rent it: Why get paid only once when you could get paid every month? The logic is wrong because the sale price is likely to be far higher than the monthly rent. And the logic is still wrong when applied to textbooks, because the sale price for a book that can be resold is likely to be far higher than the price of a book designed to lose its value.”

“If a student is willing to pay, say, $30 for a textbook, that same student will be willing to pay $60 for the use of a textbook that can be resold for $30 at the end of the semester. (For the sake of simplicity, let's ignore the fact that the $30 delivered a few months from now is worth a little less than $30 delivered immediately.) And for a book that can be resold twice, the second owner's willingness to pay $60 means that the first owner is willing to pay $90.”

Mr. Landsburg is suggesting that the publisher can “capture” the resale value of its book – and therefore doesn’t care about competition from recycled durable books. If that is true generally, then an aluminum monopolist would not care about competition from recycled aluminum for the same reasons. So if Mr. Landsburg’s argument were universally correct (which, of course, he is not asserting in this example), then the government was right to prosecute its 1940’s aluminum monopoly case – and most knowledgeable people now don’t think that is right, based on Ronald Coase’s original insights. Indeed, Mr. Landsburg's argument seems to be essentially that of Learned Hand - the judge who wrote the aluminum case decision - modified to fit the textbook particularities.

In Mr. Landsburg’s approach the resale book price is a lot lower that the new book price. Why? Well, even in his example, it seems that the book has durability problems. Otherwise, why would a perfectly preserved used book clear the market at only half the price of an identical new book? Obviously, the books aren’t identical. The used one is, well, “used:” A little torn up, with some notes in the margin and the occasional tomato seeds squished between the pages. Mr. Landsburg’s argument seems to suggest that if the resale price of the book is always greater than some constant and the book could be sold any number of times (that is, the book is truly durable), then the original price will be very, very large indeed, limited only by the prevailing interest rate! In fact, if we do as he does and ignore the fact that a sale or resale price delivered in the future is worth less (by the interest rate) than the sale or resale price delivered immediately, then the original price of a completely durable book that could be sold any number of times at full price (or any constant price) would be arbitrarily large. So his example really does seem to depend seriously on books not being very durable.

But how much durability will the publisher sacrifice? That’s the tough question. The point of the fancy economic articles linked below is that if there is a really good resale market, then the publisher will make its books less durable than is economically optimal for the society as a whole. But to get to that point, one needs to consider the market power created by the copyright laws - which does not figure in Mr. Landsburg’s approach.

Mr. Landsburg makes another interesting point: “[P]lanned obsolescence occurs only under special conditions. Mistrust, for example, is a special condition. If a publisher says, ‘Buy this book for $90, and you'll be able to resell it next year for $60,’ a student might well respond, ‘How do I know you won't bring out a new edition next year and undercut my resale market?’ Unless the publisher can quell such doubts, students won't pay premium prices for books with lasting value, so publishers won't provide them.”

I’m not sure what “special conditions” are (perhaps the existence of market power is a "special condition," for example), which is no criticism of Mr. Landsburg’s informal article, but he certainly does seem correct that “distrust” will aggravate the publisher’s durability decision with respect to certain types of books.

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