Monopolists that advertise with recyclable free samples: beware of professors selling gifts?

• Author: Bremmer, Dale
• Position: Communications

1. Introduction

   Publishers of college textbooks face an interesting dilemma. To increase sales, publishers give professors free examination copies of textbooks, but many of these books will be sold to secondhand book buyers. These former examination copies compete against the publishers' product.

   Claiming the sale of examination copies forces them to charge higher prices, several companies print warnings on their examination copies urging professors not to sell their free books. For example, McGraw-Hill examination copies state "the selling of free textbooks contributes to higher book prices to students and denies authors their royalties."

   The model presented in this paper shows publishers reduce prices if a larger percentage of examination copies are resold as used books. Used books are substitutes for new textbooks, and if the supply of used books increases, a publisher must lower its price to meet the competition. Attempts by colleges, academic departments, or faculty to reduce the number of examination copies recycled as used books leads to higher, not lower, textbook prices for students.

2. The Economic Intuition Behind the Model

   Free examination copies act like advertising. Publishers recognize complementary copies increases demand, and makes demand less elastic. Using Nelson's jargon |7~, textbooks have search and experience characteristics. By providing free examination copies, publishers reduce the search cost in selecting a book, and increase the probability their text will be chosen. Brand loyalty to a given text is established after the book has been successfully used in class. Publishers combat brand loyalty with free examination copies.

   While free examination copies advertise the publisher's product, they can be recycled as used books which directly compete against the publisher's output. Friedman |3~, Gaskins |4~, Swan |9~, and Martin |5~ have analyzed the effect of recycling on a monopolist that produces a durable, recyclable product. Friedman |3, 278-79~ argues the presence of a competitive recycling industry forces the monopolist to behave like a perfectly competitive firm, and the monopolist charges a price equal to the marginal cost of its output. Gaskins reaches the opposite conclusion as he shows a competitive second-hand market does not lower the monopolist's long-run price and "it makes things worse in the short-run |4, 255~." Swan offers some support for Friedman's views as he finds conditions where a competitive second-hand market results in the monopolist charging a price equal to its marginal cost. Martin analyzes five different cases, and although he finds consumers always benefit from the existence of an independent recycling sector, he also concludes the monopolist always earns economic profits. He finds "monopoly rents are reduced by technological improvement in scrap recovery and scrap conversion |5, 412~."

   If a greater percentage of free examination copies are sold to second-hand book buyers, the supply of used textbooks increases. This is similar to an improvement in scrap recovery. As more professors sell their examination copies, publisher's profits decline; it is not surprising...