COMING AROUND AGAIN
PRICES FOR NEW RELEASES OF DURABLE GOODS, LIKE TEXTBOOKS, GO UP WHEN THERE IS A ROBUST EBAY-LIKE MARKET FOR USED VERSIONS.
BY ERIC SCHOENIGER

PRESSURES ON BOOK PRICES:

  • Used sales through retail channels — new book prices fall
  • Direct, person-to-person used sales — new book prices rise

With college textbooks costing some $1,000 a year, it’s no wonder many students buy their books used and resell them at the end of the semester.

But how do used-product markets for durable goods like textbooks affect the product-upgrade strategies of manufacturers and the pricing strategies of retailers? That’s what Haresh Gurnani, professor of management and Leslie O. Barnes Scholar, wanted to find out.

“Customers blame bookstores, in this case, for raising prices,” Gurnani says. “The bookstores, in turn, point a finger at the publishers. We wanted to determine what the true causes were of frequent product upgrades and increasing prices.”

Gurnani worked with other researchers to evaluate 17 years of sales data for the multibillion-dollar college-textbook industry. Their findings appeared in the May 2010 issue of Marketing Science. They found that the price of textbooks nearly tripled between 1987 and 2004, rising 6 percent a year — twice the rate of inflation. At the same time, the frequency of new releases accelerated, from a new edition every four or five years to a new edition every three or four years.

Two different kinds of used textbook sales drove those changes: the retail market and peer-to-peer markets such as eBay. There has long been a retail used-product market for textbooks. At the end of the semester, students can sell their books back to the college bookstore, which will resell them at discounted prices. (The average textbook is sold 2.3 times.) Because the retailer sells the used books at a discount, the publisher must keep prices for new books as low as possible to compete. What’s more, the publisher won’t want to incur the cost of producing a new edition, because it will be difficult to pass that cost on to consumers.

But the peer-to-peer market, where students sell their old books directly through eBay, Amazon and similar channels, has a different effect. With the emergence of that market, the supply of used products became higher and their prices consequently lower. Now, the only way the publisher can compete is to release new editions more frequently, differentiating the new product and, in many cases, essentially forcing students to buy the latest edition. And because it’s costly for publishers to produce new editions, that cost is passed on to consumers.

The upshot is that “a retail used-product market discourages frequent new-product upgrades and curbs price increases for new products,” Gurnani explains. “But a peer-to-peer used-product market does the opposite, driving more frequent new-product releases as well as higher prices.”

Gurnani notes that textbooks are different from many durable goods in that they have what he calls “a renewable set of customers.” Students will buy a book for a course, but after the course is over, they won’t buy the new edition. Come next semester, however, there’s a whole new set of students who repeat the process. That’s different from the market for, say, refrigerators, in which consumers are continually replacing old products with new ones.

Determining whether the findings apply to other durable goods will require further research. In the meantime, we have a better understanding of the impact of certain used-products markets — and insight into why you spent so much on your college textbooks.

Gurnani’s co-researchers were Animesh Animesh, assistant professor of information systems, and Saibal Ray, associate professor of operations management, both of the Desautels Faculty of Management at McGill University; and Shuya Yin, assistant professor of operations and decision technologies at the Paul Merage School of Business at the University of California, Irvine. 


Fall 2011
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