Overview of Pricing Relevant to Electronic Journals

The industry of scholarly print publishing falls into the category of monopolistic competition, which is characterized by the presence of many firms with differentiated products and by no barriers to entry of new firms.^[16] As a result of product

differentiation, scholarly publishers do not encounter elastic aggregate demand typically associated with competitive markets. Rather, each publisher perceives a negatively sloped individual demand curve. Therefore, each supplier has the opportunity to partially control the price of its product, even though barriers to entry of new, competing periodical titles may be quite low. Given this control, publishers have raised their prices to libraries with some loss of sales but with consequent increases in profits that overwhelm those losses. They segment their market between individuals and libraries and charge higher prices to the latter in order to extract consumer surplus.

As publishers lose sales to individuals, scholars increase their dependency on libraries, which then increases interlibrary borrowing to secure the needed articles. Photocopies supplied via library collections constitute revenue lost to publishers, but is recaptured in the price differential. Additional revenue might accrue if publishers could offer their products in electronic databases where they could monitor all duplication. This potential may rest on the ability of publishers to retain control in the electronic domain of the values they have traditionally added to scholarship.

Scholars need two services from scholarly literature: (1) input in the form of documentation of the latest knowledge and/or information on scholarly subjects and (2) outlets for their contributions to this pool of scholarship. Partly in exchange for their trade of copyright, scholars receive value in four areas. First, scholars secure value in communication when every individual's contribution to knowledge is conveyed to others, thus impacting the reputation of each author. Second, although not provided by publishers directly, archiving provides value by preserving historically relevant scholarship and fixing it in time. Third, value accrues from filtering of articles into levels of quality, which improves search costs allocation and establishes or enhances reputation. Fourth, segmenting of scholarship into disciplines reduces input search costs to scholars. The exchange of copyright ownership for value could be affected with the emergence of electronic journals.

Electronic journals emerge as either new titles exclusively in electronic form or existing print titles transformed to electronic counterparts. Some new journals have begun exclusively as electronic publications with mixed success. The directory published by the Association of Research Libraries listed approximately 27 new electronic journals in 1991. By 1995 that figure had risen to over 300, of which some 200 claim to be peer reviewed.^[17] Since then hundreds more electronic journals have been added, but the bulk of these additions appear to be electronic counterparts of previously existing print journals.^[18] In fact, empirical work indicates that exclusively electronic publications have had little impact on scholarship.^[19]

The infrastructure of scholarly print publishing evolved over a long time. In order for a parallel structure to emerge in the electronic domain, publishers have to add as much value to electronic journals as they do print. Value must be added

in archiving, filtering, and segmenting in addition to communication. Establishing brand quality requires tremendous energy and commitment. Some electronic titles are sponsored by individuals who are fervent in their efforts to demonstrate that the scholarly community can control the process of communicating scholarship. However, it is unrealistic to expect an instantaneous, successful emergence of a full-blown infrastructure in the electronic domain that overcomes the obstacles to providing the values required by scholars. The advantage of higher communication speed is insufficient to drive the transformation of scholarship; thus traditional publishing retains an edge in the electronic domain.

A transformation is being achieved effectively by duplicating existing print journals in the electronic sphere, where publishers face less imposing investments to provide electronic counterparts to their product lines. For example, the Adonis collection on CD-ROM contains over 600 long-standing journals in medicine, biology, and related areas covering about seven years.^[20] Furthermore, EBSCO, University Microfilms (UMI), Information Access Company (IAC), Johns Hopkins University Press, OCLC, and other companies are implementing similar products. OCLC now offers libraries access to the full text of journal collections of more than 24 publishers. Johns Hopkins University Press has made all 46 plus titles that it publishes available on-line through Project MUSE.

During the past 15 years, libraries have experienced a remarkable shift from acquiring secondary sources in print to accessing them through a variety of electronic venues, which suggests that many scholarly periodicals will become available electronically as an automatic response to the economies available there. However, some monopoly power of publishers could be lost if barriers to the entry of new journals are lower in the electronic domain than in the print domain. With full text on-line, libraries may take advantage of the economies of sharing access when a group of libraries contracts for shared access to a core collection. Sharing a given number of access ports allows economies of scale to take effect. Were one access port provided to each member of a consortium of 15 libraries, the vendor would tie up a total of 15 ports, but any given library in the group would have difficulty servicing a user population with one port. Whereas by combining access, 15 libraries together might get by with as few as 10 ports collectively. The statistical likelihood is small that all 10 ports would be needed collectively by the consortium at any given moment. This saves the vendor some computer resources that can then lead to a discount for the consortium that nets out less cost to the libraries.

Numerous models for marketing exist, but publishers can price their products in the electronic domain fundamentally only two ways. Either they will offer their products on subscription to each title or group of titles, or they will price the content on an article-by-article transaction basis. Vendor collections of journals for one flat fee based on the size of the user population represents a variant on the subscription fee approach. Commercial publishers, who are profit maximizers, will choose the method with the higher potential to increase their profit. Transaction-based

pricing offers the possibility of capturing revenue lost to interlibrary lending. Also, demand for content could increase because of the ease of access afforded on-line. On the risk side, print subscription losses would occur where the cumulative expenditure for transactions from a given title is less than its subscription price.

Potentially, two mechanisms could flatten demand functions in the electronic domain. First, by making articles available individually to consumers, the separation of items of specific interest to given scholars creates quality competition that increases the elasticity of demand, because quality varies from article to article. Presumably, like individual grocery items, the elasticity of demand for particular articles is more elastic than that of periodical titles. Economists argue that the demand for tortillas is more elastic than for groceries in general because other bakery goods can be substituted, whereas there is no substitute for groceries in general except higher priced restaurant eating. Similarly, when faced with buying individual articles, price increases will dampen demand more quickly than would be the case for a bundle of articles that are of interest to a group of consumers.

Second, by offering articles in an environment where the consuming scholar is required to pay directly (or at least observe the cost to the library), the effect of separation of payer and demander common with library collections resulting in high inelasticity will be diminished. This mechanism will increase elasticity because scholars will no longer be faced with a zero price. Even if the scholar is not required to pay directly for the article, increased awareness of price will have a dampening effect on inelasticity. However, publishers may find it possible to price individual articles so that the sum of individual article fees paid by consumers exceeds the bundled subscription price experienced by libraries formerly forced to purchase a whole title to get articles in print.

For a product like Adonis, which is a sizable collection of periodicals in the narrow area of biomedicine, transaction-based pricing works out in favor of the consumer versus the provider, since there will likely be only a small number of articles of interest to consumers from each periodical title. This result makes purchasing one article at a time more attractive than buying a subscription, because less total expenditure will normally result. In the case of a product composed of a cross section of general purpose periodicals, such as the UMI Periodical Abstracts, the opposite will be true. The probability is higher that a user population at a college may collectively be interested in every single article in general purpose journals. This probability makes subscription-based pricing more favorable for libraries, since the cumulative cost of numerous transactions could easily exceed the subscription price. Publishers will seek to offer journals in accordance with whichever of these two scenarios results in the higher profit. Scientific publishers will tend to bundle their articles together and make products available as subscriptions to either individual journals or groups. Scholarly publishers with titles of general interest will be drawn toward article-by-article marketing.

An Elsevier effort to make 1,100 scientific titles available electronically will be

priced on a title-by-title subscription basis and at prices higher than the print version when only the electronic version is purchased.^[21] On the other hand, the general purpose titles included in UMI's Periodical Abstracts full text (or in the similar products of EBSCO and IAC), as an alternative interface to their periodicals, are available on a transaction basis by article. These two approaches seek to maximize profit in accordance with the nature of the products.

Currently, UMI, EBSCO, and IAC, which function as the aggregators, have negotiated arrangements that allow site licenses for unlimited purchasing. These companies are operating as vendors who make collections of general purpose titles available under arrangements that pay the publishers royalties for each copy of their articles printed by library users. UMI, IAC, and EBSCO have established license arrangements with libraries for unlimited printing with license fees based on expected printing activity, thus offering some libraries a solution to the fundamental pricing problem created by the monopoly power of publishers.

New research could test whether publishers are able to retain monopoly power with electronic counterparts to their journals. Theory predicts that in a competitive market, even when it is characterized as monopolistic competition, the price offered to individuals will tend to remain elastic. Faced with a change in price of the subscriptions purchased from their own pockets, scholars will act discriminately. Raise the price to individuals and some will cancel their subscriptions in favor of access to a library. In other words, the price of periodicals to individuals is a determinant of demand for library access. By exercising a measure of monopoly power in place of price, publishers have some ability to influence their earnings through price discrimination.^[22]

In contrast, publishers can set prices to libraries higher than the price to individuals as a means to extract consumer surplus. The difference in prices provides a reasonable measure of the extent of monopoly power, assuming that the individual subscription price is an acceptable proxy for the marginal cost of production.^[23] Even if not perfect, the difference in prices represents some measure of monopoly power. Extending this line of research may show that monopoly power is affected by the medium.

In monopolistic competition, anything that differentiates a product may increase monopoly power. Historically, tremendous amounts of advertising money are expended to create the impression that one product is qualitatively distinguishable from others. It may be that electronic availability of specific titles will create an impression of superior quality that could lead to higher prices. However, the prices of journals across disciplines also may be driven by different factors. In general, prices are higher in the sciences and technical areas and lower in the humanities. This price differential is understandable considering that there is essentially no market for scholarly publications in the humanities outside of academe, whereas scientific publications are used heavily in corporate research. As a result, monopoly power will likely be stronger in the sciences than in other areas. This

power would reflect additional price discrimination in the electronic environment by publishers who are able to capture revenue lost to photocopying.