The Indian Economy Blog

May 8, 2007

The Micro-market For Textbooks … thinking aloud!

Incentives are greatly aligned when the Beneficiary is also the Payer and the Chooser of a product. The greater the social distance between the three entities of the P-C-B, the weaker is the alignment of incentives to have effective markets. The best case is that of private spending for a car where the P-C-B entities are vested in one. The worst case is that of public spending where the entities are extremely disparate.

Take a slightly complicated case of the textbook market that I have been observing over here, for primary schooling in parts of Andhra Pradesh. Please add on to it if my hypothesis or conclusions are incorrectly framed. Each class has, say, 7 subjects. Each subject probably has 5-15 companies vying to have their brand of textbook chosen. I have included workbooks under the genre of textbooks here. The school decides the list of textbooks to be bought by parents. However, in most cases, the school also supplies the particular set of textbooks. The incentives of the school (the Chooser in this case) are necessarily not that of the parents. Textbook suppliers compete to be on the textbook list.

However the schools have competition in the area of distribution from other textbook shops and second-hand book suppliers. Schools get around the second-hand book suppliers by not repeating the book chosen, maybe for atleast 2-3 years. The textbooks chosen by a school are often not found in the open market (especially in small towns) for two possible reasons, none of which are yet generalisable. Distributors dont supply to textbook shops in the area based on an “understanding” with the school or probably the shop doesnt keep those textbooks because they hold limited sale value. In sum, this hugely raises the search cost for parents in towns and villages. Of course, the textbook manufacturer may be passing on a bulk discount to the school, but whether the school passes it on to the parent (the final Beneficiary) is anybody’s guess. Another interesting hypothesis that I have come across here is that schools compete to have their textbooks different from other schools so that the switching costs to another school are effectively raised.

What this may imply is the prices of textbooks in this case is much higher because of lack of competition/ choice at the Payer/ Beneficiary level. The incentives for price-competition are much weaker for the school but only the school has the information/ decision power to make the textbook list.

I wonder to what extent is it mandatory to buy textbooks from the schools itself.

This situation is worse in the US. The profs there (the Chooser) have every incentive to focus on the quality of the textbook. But the burden of price falls on the student (the Payer and the Beneficiary). That coupled with lack of arbitrage opportunities (importing textbooks from other countries) and copyright issues (xerox ;-) has led to huge prices.

I remember one very smart textbook manufacturer in Bangalore who exploited a situation in this micro-market quite well. We had a new syllabus for all the engineering students that year. He was the one of the only two suppliers fast enough to come up with textbooks for the course. But the second-hand book market in Bangalore is huge. If you buy a brand new textbook in Bangalore, you are assured 40% of the book’s sale price in cash if you sell it. Buying second hand books is usually 70% of the sale price. So in the first year, the prices of the textbooks had a huge premium due to relatively near-monopoly status. In the second year, facing competition from the second hand book market he crashed the prices of his textbooks, to around 50% of their price in the first year which is probably closer to the real price). This virtually assured him of little competition from the second-hand book market. I am sure he must have made quite a killing. Given the non-perishability and replicability of the product, it is understandable why textbook manufacturers have utilised the decision-making power of schools at the primary school level. And joined hands with them.

This implies relatively little price competition at the final beneficiary’s end. And consequently higher prices. However the counter-argument may be that he is extracting the true rent in a situation of weak intellectual property rights and the entrepreneurial costs of providing such a non-perishable and replicable product in the first place.

9 Comments »

  1. As a student in NY, I can tell text books here cost a fortune. Though in India, they are soo cheap. I dont know what factors decide the price of the textbook.

    Comment by Red Soul — May 9, 2007 @ 3:11 am

  2. As your posts go, Naveen, this too stays on the message and gets into specifics. Thanks for the post.

    This implies relatively little price competition at the final beneficiary’s end. And consequently higher prices. However the counter-argument may be that he is extracting the true rent in a situation of weak intellectual property rights and the entrepreneurial costs of providing such a non-perishable and replicable product in the first place.

    I don’t think my comment addresses your post directly. But just so a bit of a feel for the underlying economics of book publishing may add to the discussion, I am writing this comment.

    I would like to look at this matter from, “If you were tasked to identify a money-making opportunity here, what would be your business case?” point of view. Let’s just try to guestimate the economics of this text book publishing. All guess work, I am not a publisher. Reasonable estimates I think.

    Regardless of how it is either in U.S. or whatever (because they are all screwy), if we ask ourselves a question: “How would you address this text book problem from a business point of view, so that you are both solving a real problem and making money by doing that?” we should at least see one aspect rightaway: that the printing costs are not really a big issue here. The distribution costs are, on the other hand, a big problem (as expected).

    Let’s say the book store charges Rs 50/- for an average new text book. What happens to these 50 rupees? Where does this money go? Let’s say this is a 200 page book; printing+binding costs say 5 paise per page, so the manufacturing costs of each book is Rs 10/-. This is the cost to the publisher per book.

    The publisher in turn sells this book to disti, say for Rs 25/- per book. For each book that fetches 25 rupees, the publisher gives the author a royalty of, say, 3 rupees, may be 5 rupees at the most (10%). Remaining are publisher’s profit and marketing costs.

    Disti in turn charges the bookstore Rs 30/-. The bookstore pays 30 rupees for the book and displays it with an an “MSRP” tag of Rs 50/-. So even if the bookstore offers a 25% discount, they still make about 8.50 per book. Not a bad margin.

    0) Consumer paid Rs 50/-
    1) Bookstore price to consumer (per book): 50/- (or less with discounts)
    2) Disti price to bookstore (per book): 30/-
    3) Publisher price to disti (per book): 25/-
    4) Printing costs (per book): 10/-
    5) Author royalties (per book): 5/-
    6) Book cover design, artwork, layout, graphics, etc. (one time cost): upfront investment from publisher.

    These above 6 elements of the supply chain, we cannot avoid. They are essential. If the text book market were to be a “free market” system, this is how it all pans out. But as it is now, it looks more like a pharmaceutical market.

    On the business/market sizing, text book market is more or less constant, with only small rate of growth. Number of schools aren’t growing like cell phone adopters, nor are children entering the school system. It appears to me more and more like a sustainable commodities market.

    Let’s say a startup, IEB Inc., comes along and says: “No school has to ever again worry about how to provide text books to its students in time. We will take care of that problem. This is how.” What would this message be like, in specific terms?

    I think it should like what Teaching Company (www.teach12.com) is today. Something along the lines of: “Each year we pre-select a group of a 1000 or a 2000 (or whatever) respected text book authors (how they are measured is a different issue) and every school season we are ready to ship out all the books for all the courses by each participating school. Oh by the way, if you are school, this is how you participate in this program – no cost to you. If you don’t have a local bookstore, or a distributor willing to stock your text books, just place a bulk order at our website and we’ll ship these books out to your school directly.”

    Will something like this work? If yes, then why isn’t there already a company doing it? Alternately, why would something like the above not work?

    Regards, Crazyfinger

    Comment by Crazyfinger — May 9, 2007 @ 9:35 am

  3. Are you talking about government schools in India or private schools? I thought that in most govt schools, the textbooks are chosen by the govt.

    There is an interesting project being done by Manish Kumar at Stanford University called “E-books: Books for all” that “will enable the online sharing and transmission of books to schools. He will also partner with the government and non profit organizations to develop a revenue sharing model for textbook printing services in more technologically advanced schools.”
    http://rdvp.org/fellows/2006-2007/manish-kumar/

    I am also doing a slightly different project – SocialWay http://www.socialway.com – to enable people to share books online. It does not solve the school textbook problem except perhaps to create a more efficient used book market. It does help to create a larger pool of available books for everyone to read. SocialWay enables people to lend, borrow, give things for free in their community and thus create virtual library of real books.
    http://rdvp.org/fellows/2005-2006/nita-goyal/

    Comment by Nita — May 9, 2007 @ 10:53 am

  4. In Karnataka’s State syllabus, the Govt. prescribes textbooks still Standard X. In my days the Govt. used to publish too, which often led to delays in printing and distribution. I don’t know if they now outsource publishing. The textbooks continue to be manadated by the Govt. though.

    Things are totally different after Standard X. The Govt. is only in charge of syllabus, question papers and evaluation. There is an open market and good competition from different textbook publishers with different authors.

    Comment by Pramod Biligiri — May 9, 2007 @ 8:16 pm

  5. Removing the requirement to use a specific textbook would improve market efficiencies. This model is used in England where students can choose from a list of books.

    Comment by Chris — May 9, 2007 @ 9:58 pm

  6. From the link to Manish Kumar’s page (Nita’s post above) it seems like there may be a case for the government to mandate that all text books in all schools, inlcuding private schools, be based on the government textbook material. Next the government makes the digital content available for free. Market competition should be able to take care of the rest to bring the prices of text books down drastically.

    Comment by Basab — May 11, 2007 @ 6:23 am

  7. For the students preparing for the Medical/engineering entrance exams the cost of books is exorbitant. The Price of a single book for a subject costs top the tune of Rs 500-800. Any student from the economically weaker section or even the middle class can hardly sustain such huge costs. Even if the education is subsidized, if the prices of books are not capped there will be a serious handicap for the students who are unable to afford these books.

    I believe the Government needs to be proactive in keeping a sealing for the price of reference book especially after the 10th standard. Although i understand the perils of Government diktats but this step is pertinent in order to prepare a level playing field for the dissemination of education.

    Comment by Gaurav Hazrati — May 11, 2007 @ 1:25 pm

  8. [...] P-C-B. Not the Physics-Chemistry-Biology ( as I would said 9 years back ) or Printed Circuit board ( 5 years back ). True to the economist in us, its more like Payer/Chooser/Beneficiary. Incentives are greatly aligned when the Beneficiary is also the Payer and the Chooser of a product. The greater the social distance between the three entities of the P-C-B, the weaker is the alignment of incentives to have effective markets. The best case is that of private spending for a car where the P-C-B entities are vested in one. The worst case is that of public spending where the entities are extremely disparate. [...]

    Pingback by The P-C-B theory and intolerance « Epistles — May 19, 2007 @ 8:57 pm

  9. Text books in India are sold to Book stores Normally at a discount of 15%-35% depending on the publisher.
    The Book sellers bears the Cost of freight which is normally 3%-5%, handling & Over heads is 8%,normally discount offered on books varies from 10%-20% depending on the book.He makes a margin of 5-10%.private colleges & lecturers do sell books for profit with out infrastructure.

    Distributors takes a margin of 5-8% after handling & distribution expenses .

    major chunk of money Goes to the ware housing, Marketing, promotion & distribution expenses for the Publisher

    the major threats are Old books are normally offered @ 50%-70%,recently developed of the concept “Book Banks” which rent the Book for Six Moths & normally 10%-15% of the cost of the book.photocopying which a major threat for Publishers is not tackled effectively, hence the Publishers,Book Distributors & Book sellers, Are facing a Declining trend in sale of Text Books in last 10 years in India.

    Comment by vikram — July 3, 2008 @ 3:27 am

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