Measuring Demand and Supply: The Foundations for Pricing Strategies and Survival

It may be too facile a generalization to say that the early, "heroic" period of electronic library products was characterized by enormous enthusiasm on the part of their creators and not much concern about costs, usage, and business plans. But the early history of electronic publishing is filled with examples of devoted academics giving freely of their time and pursuing their dreams in "borrowed" physical space and with purloined machine cycles on computers that were originally obtained for other purposes. An instructive (and amusing) example of this phenomenon can be found in the papers by Richard Hamilton (chapter 12) and James J. O'Donnell (chapter 24), which describe the early days of the Bryn Mawr Reviews and how the editors improvised to provide space, hardware, and labor for this effort. Creating electronic library products seemed to be incredibly easy, and it was.

But as we gradually learned what was technically possible,^[5] started to learn what users might like or demand, and realized the scope of the efforts that might be involved in, say, digitizing large bodies of materials, it was unavoidable that sooner or later even not-for-profit efforts would be informed by the realities of the marketplace. For example, if we create an electronic counterpart to an existing print-based journal, should the electronic counterpart look identical to the original? What search capabilities should there be? Should the corpus of the electronic material be added to in the future? What are the staffing requirements of creating and maintaining an electronic publication? (See, for example, Willis G. Regier [chapter 9].) Marketplace realities were further compounded by the recognition that commercial publishers were looking to enter the field of electronic publication. In their case the question of pricing had to be explicitly considered, as is amply illustrated in the paper by Karen Hunter (chapter 8).

Of course, pricing cannot be considered in the abstract, and the "proper" pricing strategy will generally depend on (1) the objectives to be accomplished by a pricing policy, (2) costs, and (3) demand for the product. While it is much too early in the development of electronic information products to propose anything beyond casual answers, it is not too early to consider the dimensions of these problems. We shall briefly discuss each of three key elements on which pricing has to depend.

Objectives to Be Accomplished

The important fact is that there are numerous agents in the chain from the original creator of intellectual property to the ultimate user. And the creator-the author-may himself have divided interests. On the one hand, he may want to have the largest conceivable circulation of the work in question in order to spread his academic reputation. On the other hand-and this point is characteristically relevant only for books-he may want to maximize royalty income. Or, indeed, the

author may have a compromise solution in mind in which both royalty income and circulation get some weight.

Next in line comes the publisher who is well aware that he is selling a differentiated product that confers upon him some monopoly power: the demand curve for such products is downward sloping and raising the price will diminish the quantity demanded.^[6] The market motivations of commercial and not-for-profit publishers may not be very different, but in practice, commercial publishers appear to charge higher prices. Since print-based materials are difficult to resell (or copy in their entirety), publishers are able to practice price discrimination-that is, sell the identical product at different prices to different customers, as in the case of journal subscriptions, which are frequently priced at a higher level for libraries than for individuals.^[7] The naive view might be that a commercial publisher would charge a price to maximize short-term profit. But the example of Elsevier, particularly in its TULIP Project, suggests that the picture is much more complicated than that. While Elsevier's design of TULIP may not be compatible with long-run profit maximization, the correct interpretation of that project is still open to question.

Scholars and students want access to scholarly materials that is broad and inexpensive to them, although they do not much care whether their universities bear a large cost in acquiring these materials. On the other hand, academic administrators want to contain costs,^[8] perhaps even at the risk of reducing the flow of scholarly information, but also have a stake in preserving certain aspects of the journal and book production process (such as refereeing) as a way of maintaining their ability to judge academic excellence, even if this approach adds to the cost of library materials. The libraries, on the other hand, would like to provide as large a flow of information to their clients as possible and might seek the best combination of different library materials to accomplish this objective.

While none of us can clearly foresee how the actual prices for various types of electronic library products will evolve, there are two general ways in which electronic library products can be defined and two general ways in which they can be priced. Either the product itself can be an individual product (for example, a given journal, such as The Chicago Journal of Theoretical Computer Science, or a particular monograph, or even an individual paper or chapter), or it can be a bundle of journals or monographs with the understanding that the purchaser in this latter case buys the entire bundle or nothing. If the product is a bundle, a further question is whether the items bundled are essentially similar (that is, good substitutes for one another), as would be the case if one bundled into a single product 20 economics journals; whether the items bundled are sufficiently dissimilar so that they would not be good substitutes for one another, such as Project MUSE; or whether the bundle is a "cluster of clusters" in the sense that it contains several subsets that have the characteristic of high substitutability within but low substitutability across subsets, as is the case in JSTOR.^[9]

With regard to pricing, the vendor may offer site licenses for the product (how-

ever defined in light of the discussion above), which provide the purchaser with very substantial rights of downloading, printing, and so on, or charge the user each time the user accesses the product (known as "charging by the drink"). The principal difference here is not in who ultimately bears the cost, since even in the latter case universities may cover the tabs run up by their members. Two contrasting approaches, JSTOR and Project MUSE, are described in the papers by Kevin M. Guthrie (chapter 7) and Regier, respectively. In the case of JSTOR, both initial fees and annual maintenance charges vary by the size of the subscribing institution. Project MUSE, in addition, offers-not unproblematic-discounts for groups of institutions joined in consortia.

Costs

Several papers in this volume discuss the issue of costs. The complexity of the cost issues is staggering. Everybody agrees that journals as well as monographs have first-copy costs, which much resemble what the economist calls fixed costs, and variable costs. Printing, binding, and mailing are fairly sizable portions of total costs (23% for the American Economic Review if we ignore the fixed component and more like 36% if we include it), and it is tempting to hope that electronic publications will completely avoid these costs. (It is particularly bothersome that the marginal cost of producing an additional unit of an electronic product is [nearly] zero; hence a competitive pricing strategy would prescribe an optimal price of zero, at which, however, the vendor cannot make ends meet.) While it is true that publishers may avoid these particular costs, they clearly incur others, such as hardware, which periodically needs to be replaced, and digitizing or markup costs. Thus, estimates by Project MUSE, for example, are that to provide both the print-based and the electronic copies of journals costs 130% of the print-based publication by itself, whereas for Immunology Today, the combined price is set at 125% of the print version (see chapter 8). But these figures just underscore how much in the process is truly variable or adjustable: one could, presumably, save on editorial costs by requiring authors to submit papers ready to be placed on the Web (to be sure, with some risk of deteriorating visual quality).^[10]

Most important, the cost implications of electronic publication are not only those costs from actually producing the product. Suddenly, the costs incurred by other entities are also affected. First is the library. Traditionally the library has borne costs as a result of providing access to scholarly information: the book or journal has to be ordered, it has to be cataloged, sometimes bound (and even rebound), shelved and reshelved, circulated, and so on. But electronic products, while they may offer some savings, also bring new costs. Libraries, for example, now have to provide workstations at which users can access the relevant materials; they must devote resources to archiving electronic materials or to providing help desks for the uninitiated. The university's computer center may also get involved in the process. But equally important, the costs to a user may also depend on the

specific type of electronic product. Meanwhile, to the extent that a professor no longer has to walk to the library to consult a book, a benefit is conferred that has the effect of a de facto cost reduction. But let us agree that university administrators may not care much about costs that do not get translated into actual dollars and cents and that have to be actually disbursed (as Bennett points out). Nevertheless, there may well be actual costs that can be reduced. For example, a digital library of rare materials may obviate the need for a professor to undertake expensive research trips to distant libraries (which we may therefore call avoided costs). This factor may represent a saving to the university if it normally finances such trips or may be a saving to the National Science Foundation or the National Endowment for the Humanities if they were to end up paying the tab. The main point is that certain costs that used to be deemed external to the library now become internal to a broader system, and the costs of the provision of information resources must be regarded, as a minimum, on a university-wide basis. Hence these costs belong not only in the librarian's office (who would not normally care about the costs of professors' research trips) but in the provost's office as well.

Finally, we should note that many types of electronic products have up-front development costs that, given the current state of the market for such products, may not be recouped in the short run. (See, for example, Janet H. Fisher [chapter 5].) But to the extent that electronic library products will be more competitive at some future time, investing in current development efforts without the expectation of a payback may be analogous to the infant industry argument for tariff protection and may well have a lot of justification for it.

Usage and Demand

One area that we know even less about than costs is usage and demand. The traditional view has been that scientists will adapt rapidly to electronic publications, whatever they may be, and the humanists will adapt rather slowly, if at all. The picture is probably more complicated than that.

Some kinds of usage-for example, hits on the Web-may be easy to measure but tell us correspondingly little. Because hits may include aimless browsing or be only a few seconds in duration, the mere occurrence of a hit may not tell us a great deal. Nor are we able to generate in the short run the type of information from which the econometrician can easily estimate a demand function, because we do not have alternative prices at which alternative quantities demanded can be observed. But we can learn much from detailed surveys of users in which they describe what they like and what they do not like in the product and how the product makes their lives as researchers or students easier or harder (see the surveying described by Mary Summerfield and Carol A. Mandel in chapter 17). Thus, for example, it appears that critical mass is an important characteristic of certain types of electronic products, and the TULIP project may have been less than fully successful because it failed to reach the critical mass.

Electronic library products make access to information easier in some respects and certainly faster; but these benefits do not mean that the electronic information is always more convenient (reading the screen can be a nuisance in contrast to reading the printed page), nor is it clear that the more convenient access makes students learn better or faster. In fact, the acceptance of electronic products has been slower than anticipated in a number of instances. (See the papers about the Chicago Journal of Theoretical Computer Science [chapter 5], Project MUSE [chapters 9 and 15], JSTOR [chapters 7 and 11], and the Columbia On-line Books project [chapter 17].) But all the temporary setbacks and the numerous dimensions that the usage questions entail make it imperative that we track our experiences when we create an electronic or digital product; only in the light of such information will we be able to design products that are readily acceptable and marketable at prices that ensure the vendor's long-term survival.

A special aspect of usage is highlighted by the possibility that institutions may join forces for the common consortial exploitation of library resources, as in the case of the Associated Colleges of the South (Richard W. Meyer [chapter 14]) and Case Western Reserve/Akron Universities (Raymond K. Neff [chapter 16]). These approaches offer potentially large economies but may face new problems in technology, relations with vendors, and consortial governance (Andrew Lass [chapter 13]). When the consortium is concerned not only with shared usage, but also with publishing or compilation of research resources (as in the cases of Project MUSE and the Case Western/Akron project), the issues of consortial governance are even more complex.