Monopolies that advertise with recyclable free samples: beware of professors selling gifts? Reply.

• Author: Bremmer, Dale S.
• Position: Response to article by F.K. Cheung and X. Wang in this issue, p. 778

Conclusions generated by any economic theory depend on the underlying assumptions. The growth in the economic literature documents the pursuit of determining how robust a result is with different assumptions. For example, in a note recently published in this Journal, Michael Mazur and I [1] show that a monopolistic publisher reduces the price of its textbook if a larger percentage of the examination copies given to professors are recycled as used books. This result depends on the assumption that examination copies act as advertising which shifts the demand curve for new textbooks out parallel to the right.

The previous comment regarding our model makes two important points. First, it confirms our result. Second, the comment shows that a different assumption may result in a different conclusion. The comment assumes that, rather than shifting the demand curve outward in a parallel fashion, an increase in examination copies causes the demand curve to rotate outward from the same vertical intercept. With this assumption, which the comment claims is more plausible than our assumption of a parallel shift, an increase in the percentage of examination copies recycled as used books has an indeterminate effect on the price of new textbooks. The comment agrees with our caveat that the effect of recycling examination copies on the price of new textbooks needs the harsh scrutiny of empirical investigation.

Given its assumptions, the comment's analysis is correct. After several pages of algebraic manipulation and substitutions, I could not derive an unambiguous result using the information contained in the first-order and second-order conditions of the profit-maximization problem. Therefore, the impact of recycling examination copies on the price of new textbooks is sensitive to how advertising affects the demand for textbooks. If an increase in examination copies causes the demand curve to shift outward, parallel to the right, an increase in the percentage of examination copies resold as used books always causes the publisher to lower the price of its new textbooks. On the other hand, if advertising causes the demand curve to rotate outward from the same vertical intercept, an increase in the percentage of examination copies recycled as secondhand books could cause the publisher to raise prices.

However, with the addition of another equally plausible assumption, I show that a publisher always lowers its price in response to a larger percentage of...