Monday, January 16, 2006

Governments should regulate monopolies, even when they aren't called monopolies.

This has been a very long, and busy weekend. Not all bad (though some of it was), mind you, but long, absolutely. Over the past three days, I have been to Flagstaff, to a night visit with my wife to an emergency room in Winslow, to a chapter house meeting on the Navajo reservation (where I believe that two of us who attended on behalf of the Democratic party got to get some good work done), and today, to Albuquerque. Now, my mother lives in Albuquerque (a three and a half hour drive for us) so frequently I go there with the kids, and we did surprise her and have dinner with her tonight. However, this was a completely unplanned and unscheduled trip. It was necessitated by a search for a textbook, for a class that my wife is taking online from Northern Arizona University.

On Saturday, we checked their bookstore. It was not in. We also checked the other bookstores near the campus in Flagstaff (Barnes and Nobles, and a used book store) and neither of them had it. The class officially starts tomorrow, and my wife is supposed to take a quiz on Friday. Living in a very rural area (it takes us an hour and a half just to drive to Flagstaff), ordering it from was not realistic since our experience is that everything takes a day or two longer to get delivered here than it takes in other places. So, when we found the book in Albuquerque, I piled the kids into the car and off we went.

Now, this got me thinking about textbooks. As a community college professor, I deal with textbooks, and their selection, all the time. I get lots of free copies, many of which I have never even requested and which we are not even considering for adoption. I've been treated to dinner at a very fine restaurant (quite a few years ago, when I didn't yet realize how this contributes to the cost of a book-- see below) by a textbook representative (and I know a lot of very good, hardworking textbook reps who try to make their case on the merits of the books, but clearly they have generous expense accounts, or at least that one did). And I know why. They work on commission, and they want us to choose their textbook. Now, we always choose the texbooks that will work the best with our courses, but it doesn't stop textbook reps from pulling out all the stops anyway.

Now, on the other end, I look at the prices that publishers charge for textbooks. For a hardcover textbook at a university, prices are generally above a hundred dollars a copy (or a bit less, say anywhere from $50-$90 for paperback). This represents a degree of inflation, though when I went to school, they were still quite expensive.

And why is this? It isn't the cost to the publisher, because if you walk into any regular bookstore in America, you can find books of similar quality, typeset and intracacy as any textbook, selling for under $20 (hardcover) or $7 (paperback). The book I bought my wife today is paperback, is about the size of a Schaum's outline (which usually costs about $7.95) and if new retails for $83.25 (I found a used one for about sixty dollars). So they are certainly raking in far more than it costs them to publish the book. Now, some of it certainly goes to pay for all those free textbooks and other expenses, but even beyond that they are clearly seeing some huge profits.

And it hurts the students the most. They have no choice-- they have to buy the textbook for the course. At the institution where I work, we try to keep our tuition affordable, but often students end up spending more on books than they do on tuition anyway. About the only thing that holds down prices is competition with other textbook publishers, but only competition for the decisions of professors, not competition from the actual consumers. And I can tell you that most of the time, cost to the student is not a factor that is strongly considered when making textbook decisions (although we are starting to think more about it).

Now what other industry does this remind you of? The prescription drug industry, of course. People have to have the particular drug that will help their condition, and they often (unless there is a generic available) have no choice except to pay for it or not. And like the textbook industry, drug prices are not regulated (as they are in other countries where the government actucally negotiates drug prices).

So, what should we do for both industries? Regulation. Conservatives would say, 'choice,' but this is not realistic when textbook publishers are protected by copywrite laws (just as pharmaceutical companies are protected by patents). Now, I do want to be very clear about one thing-- I support patent and copywrite laws as necessary to protect artistic and creative freedom, and am in favor of enforcing patent and copywrite laws to the nth degree. And while the high prices of textbooks does lead to some pirating and unauthorized copying, I oppose this and support intellectual property rights. However, regulation does not in any way infringe upon copywrite. What regulation would do, is limit the prices that people who in effect have a monopoly can charge for their product. We already do that with utility bills. So why can't we do the same for books and drugs? Don't tell anyone that they can't make a profit, but decide (with their input, as well as consumer input) what a reasonable profit is, the price which produces that profit, and then set that price.

If it is a good thing for your electric company, then why is it a bad thing for your prescription drugs, your college textbook or for that matter air travel (remember they deregulated the airline industry during the Reagan era, and if you've been watching airline after airline go under or reorganize under bankruptcy since then, you can see how well that has worked.)

Regulation-- it works, and sometimes it is necessary.


Anonymous said...

The Solution?


Anonymous said...

I do not think that regulation has been good for the electric company. Look what happened with phone service. Deregulate and allow competition.

Deregulation did help the consumer with the airline industry. The "big, major" airlines had a monopoly. Deregulation brought in small regional competitors. The big guys did not adapt and that is why they are in trouble. Small companies are making tons of money and will continue to do so. At the same time, fares for flights are lower than they have ever been.

shrimplate said...

Very interesting insight which I myself had never considered before. Thanks!

Neat thing about electric companies- the ones that are most efficiently run and provide the best/cheapest product to their consumers are municipally owned.

Yes, that's called "socialism."

But if you live in a municipality featuring this, you may still opt to run your own wires and pay higher prices for power from a private company, though that would be very difficult indeed. But it's a free country.

Eli Blake said...

Guerrilla News:

Depends on how you define, 'socialism.'

I've been an advocate of a European type of Democratic Socialism, but I don't think that pure socialism works because people need some sort of incentive to work, which can be money (carrots) or punishment (sticks). I still prefer carrots. In truth, all governments are somewhere between pure capitalist and pure socialist, I just question whether we have struck the right balance.


It has worked out fine for most electric companies (with the exception of those like Montana Power that made foolish investments in areas not related to energy.) I live in a town where probably at least a third (maybe even half) of the people with full time jobs work in an electric plant just outside of town. The utility makes good enough money, and the people who work there do alright. At the same time, electric rates aren't through the roof, which would be the case if they were allowed to charge what they wanted. And proof that they are making money is this: Look at what utility company stocks pay in dividends: Typically around 5-6% (very good by stock dividend standards). So who is losing in that matchup?

Airlines? First, airline tickets are not cheap. Second, if you live and fly out of smaller airports, they are very expensive. People in cities don't realize it, but what deregulating airlines did was effectively finish the job that the interstate highway system started: cut rural America out of the loop. So, at best, it was a divisive 'break even' proposition. And maybe Southwest is a little cheaper than Pan Am or TWA used to be (not that much though) but they also don't pay their employees what those two airlines did.

Anonymous said...

You've presented a text book case for regulation, Eli (sorry - couldn't resist). Well, almost. There are a number of firms who provide textbooks, so it's not a true monopoly.

I'm not a fan of regulation simply for regulation's sake, and I don't think you've made the case here for regulating textbook manufacturers. For starters, it's not a monopoly (dominated by one), it's an oligopoly (dominated by a few). To reference an example already brought up, the extensive regulation of the airline oligopoly in the long run helped neither travelers (who paid high prices under regulation) or the airlines (who are *still* trying to retool their businesses thirty years after deregulation).

What happens under regulation is that, sooner or later (and usually sooner) those who are regulated come to dominate the regulators, setting regulations which ensure their own profits and/or minimize their own exposure to risk. In your textbook case, what would regulation achieve? Perhaps, initially, in a zeal of regulatory fervor, textbook prices would be reduced significantly, say by 25% across the board; publishers would likely react to this by not putting out new editions as frequently (perhaps not a problem for junior high math texts, but potentially a big problem for upperclassmen and graduate students in engineering, computer science, and other technical fields). Eventually, teachers and students make enough noise about the lack of new texts, and the regulatory commission grants the publishers larger profits if they'll only keep producing new textbooks. And, from that point, the regulated publishers have the upper hand with the commission.

If you want to make a case for regulating this industry, you need to make a stronger case. For starters, what is the problem which requires regulation? Is it that prices are too high for students, or is it that the publishers are making too much profit? You've suggested both in your post. Additionally, what form would regulation take? If it's price controls, how do you ensure that new editions get published in a timely manner? If, on the other hand, you're suggesting something more radical - such as regulation of production of new texts - how do you ensure that textbook content doesn't become hostage to the whims of the regulators, who will either be appointed by elected officials or elected in their own right? Until those types of issues are addressed I, for one, would be very leery of supporting any regulation of the textbook industry.

Eli Blake said...

Indy Voter:

Good points, all.

However, they have an effective monopoly, because of students in a university are required to purchase a particular textbook, then that is the one they have to buy. No choice there (other than to not take the class, which may be required, or to transfer to another university-- likely a move costing hundreds of dollars in itself and where they would still end up paying a lot for their books).

And the problem with regulators can be solved by electing them. It is true that in the Vioxx scandal, it turned out that the panel of nine that approved it when Merck originally wanted it approved were all unelected and eight of the nine had a financial tie of some sort to the pharmaceutical industry (who they were tasked with overseeing). On the other hand, this state and others elect a public utilities commission. Since the voters are the rate payers, the industries have relatively little say in who the commissioners are and can only influence them so far. For example, our local utility has asked for a 20% rate hike next year because of higher fuel costs. Kris Mayes, a Republican on the commission, asked them why they pay their CEO $3,000,000 per year and other officers quite well, and then claim they don't have money. Doesn't sound to me like they have her in their pocket, does it to you?

Anonymous said...

Eli, the fact that a university (or high school, junior high school, etc.) mandates a particular text does not a monopoly make. If university A (or professor A) gets too much flack about the price of a text book there usually are other textbooks which could also suffice.

We also have elected regulators here in New Mexico, and I'm not very impressed with them. The utilities, for instance, still pretty much get what they ask for each year. The utilities KNOW they're going to get their request knocked back, so they ask for more than they really need, and still get a healthy profit. And the regulators, if they're smart, know the game too and make a few public comments to score political points with their constituents.

It would seem to me that, if textbook prices are a real hardship for a few (or even many) then the place to look for remedy would be in subsidizing the purchase of textbooks for the needy rather than regulating the textbook publishers.

Anonymous said...

Eli, first of all, I hope that all is well for you and yours.

This issue over the costs of text books, and these other things here, could also come under the heading of accountability. In the pharmaecutical industry, for instance, most people are unaware that a lot the high costs are also due to the "perks" these companies give out in order to push their products. (On a personal note, I have, and am embassassed to even admit, taken advantage of the use of 150-200 a seat "free" show tickets given to a friend by a drug company salesman in the promoting his client's products, at her medical office. Add also the costs of having lobbyists representing their interests to politiciians to push their own agendas on governmental policies. It almost reminds me of the old payola days where people were paid to promote things.

Another thing that irritates me, too, is that lobbyist funding and political contributions by these companies are also part of these hidden costs that the consumer ends up paying for.

The amounts of money spent on advertising medicines, especially the prescription ones, boggles the mind and further adds to the consumer cost. To walk into our doctors's office and see racks of pamphlets for prescription drugs, flashing signs promoting drugs, drug company names on pens and pads of paper, and then see ing the ads on TV and in the paper and magazines also add into the market costs in the long run.

As to electric company regulation, I am well acquainted with what a mess that issue has turned out to be; and also because my hub worked for one, I've seen first hand how a company will take from the worker to give more to the exec suits and the stockholders, even with union representation. Same for the other utility companies. (Remembering Enron.)

We have yet to strike a proper balance. These things will not police themselves, because if they are not made to be accountable they will not act with responsibility.

(Aha, it isn't me! The is actinig quirky and the identity button is jumping around!