Principles of Microeconomics Scarcity and Social Provisioning Chapter 16 The Megacorp

CHAPTER 16 . THE INTRODUCTION TO THE Figure . The power of the Standard Oil trust . Udo political cartoon depicting the corporation which , circa 1900 , had effectively monopolized petroleum distribution . The tentacles of this gargantuan octopus represented the power Standard Oil exercised over other industries ( copper , steel , and shipping ) as well as politics . Public Domain ) TER OB Introduction In this chapter , you will learn about The imperatives of technology Business models , plural Aims and methods of the Stabilizing unstable markets

PRINCIPLES or 437 A case in point The high prices of college textbooks local barber shops and factories , as well as the multinational oil giants and online retail . We do business with them when we purchase nearly everything we buy as well as when we set out to earn a living . While economists prefer simply to say firm , everyday conversations will often include terms like big business , corporations , entrepreneurs , and job creators . They may particular firms , known by name to everyone , or commonly understood terms for whole instance , the media or Wall Street . Certainly , businesses are an important and plex part of the modern just the economy , but society more broadly . They have been applauded and derided , praised and demonized since before the Sons of Liberty cast crates of tea belonging to the East India Company , a large British corporation , into Boston Harbor in 1773 . he importance of businesses in modern capitalist economies can not be overstated . They are the . into ' at ' Figure . Boston Tea Party , by . Cooper , The History of North America . London , 1789 . Engraving . Plate opposite 58 . Rare Book and Special Collections Division , Library of Congress ( 40 ) Public Domain ) Yet , neoclassical economics treats the firm with typical abstraction it is simply a production tion , translated into a set of cost curves , with a singular objective to maximize profits . That model of the firm , almost regardless of the actual business or businesses it might represent , has a average total cost curve , and increasing marginal costs due to diminishing marginal returns ( see ter Cost and Industry Structure ) It pursues , always and everywhere , the greatest possible profits by deciding what , how , and how much to produce , taking technological possibilities as given . As you

433 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER have seen in previous chapters , the market therefore the differ from industry to industry , location to location , and so forth , but the firm remains essentially the same . Many heterodox economists will note that abstraction is not , in itself , a bad thing . A complex reality has to be simplified in our understanding of it , if we have any hope of understanding it at all . But , it is important to get it simplify reality without departing too far from it . The neoclassical depiction of the firm is not only fundamentally problematic , heterodox economists would argue ( see chapter Costs and Prices The Evidence ) it is part of a View of capitalism that may no longer be appropriate to our modern economy . Specifically , the plot of the mainstream economics narrative casts the market as the star of the , at least where that market is competitive , really play the roles of king and queen . In contrast , heterodox economists tell a story in which capitalist economies have largely replaced consumer sovereignty with producer sovereignty . In this alternative story , the true importance of the the large , economically , politically , and culturally acknowledged . The business enterprise ( a term many heterodox economists prefer to firm ) is a socially recognized , legitimate organization . It has certain requirements if it is to be maintained as a coherent organization . And , especially in its big business Post economist Alfred termed the take priority in the way modern capitalist economies are structured . DOES MONOPOLY POWER CAPTURE THE REAL BREADTH OF CORPORATE POWER ?

The starting point and focus of most of neoclassical theory has traditionally been voluntary exchange in a competitive is , individuals choosing to trade one good for another , and in doing so making each other better off . This has colored the notion of power within this paradigm , limiting it somewhat to a failure to meet the standards of the ideal . Such a narrow treatment of power , in the realm of big business , is evident in the monopoly model presented in a previous chapter . There , the reader will notice , the notion of power is explicitly treated but the focus is on the ity to raise prices and restrict output compared to the outcome that would exist under perfect competition . Treatment of barriers to entry is secondary , showing the practical means by which business enterprises may achieve higher prices through lower competition . Likewise , monopolistic competition and oligopoly are typically defined as some mix of the two extremes of perfect competition and monopoly , rather than fundamentally different situations . The quantity , over , is still determined by a comparison of marginal costs and revenues , and price is still set with reference to same basic tenets of the model of perfect competition remain in tact . Yet , consider the forms of power which the neoclassical abstraction sets aside . The power to dictate both prices and , for instance through the billions of dollars of advertising spent each year in the US , is , at best , treated as a special case . So , too , is the power to create new technologies , as well as to limit access to those technologies through things like digital rights management . Likewise , the political and cultural of business are almost completely neglected in an analysis that focuses only on prices and quantities . If the reader is willing to accept this alternative story , setting big business at the center of the nomic landscape , as a plausible way to look at how our economy works , a host of new new open up . The following sections will explore some of those questions while a number of important concepts and theories from heterodox economics . To illustrate these ideas , the chapter will conclude with a look at the college textbook industry and a question you ve probably asked yourself why do textbooks costs so much ?

THE IMPERATIVES OF TECHNOLOGY LEARNING OBJECTIVES By the end of this section , you will be able to Identify the important consequences of technological change for the organization of business Explain the implications for the relationship between business enterprises and market structure 11 chapter Costs and Prices you learned ( or will learn ) that modern businesses are treated as going is , organizations which are expected to continue to exist into the foreseeable future . This idea , in accounting practices developed in the second half of the century , is central to how heterodox economists understand the nature of the modern business enterprise . Its historical roots are explored in more detail in chapter The Rise of the Big Business , but here we want to focus on a particular cause , technological advance , and its implications . In his classic , The New Industrial State ( 1967 ) Kenneth compared the Ford Motor Company in the year of its founding , 1903 , to the same business at the introduction of the first Mustang in 1964 . In 1903 the company employed around 125 people , worked with approximately in capital , and required only months of negotiations , preparation , and production to bring an automobile to the market . It would be an understatement to say that , six decades later , the process was more involved . The Mustang was the result of several years of preparation , millions of dollars on engineering and styling , and tens of millions on tooling for production . At the time , Ford employed over people . argued that the essential cause of this massive increase in preparation , capital , and labor was the tremendous advance in technology ( which he defined as the application of scientific or other organized knowledge to practical tasks ) Increasingly sophisticated technology requires machinery and the materials it will work on , as well as of workers . All of which , of course , requires more capital ( that is , money ) It also means that increasingly specialized workers , machines , and so on must be more carefully managed and that a commitment to produce something must be made much further in advance of actually having something to sell . As explained , the Dodge brothers machine shop , responsible for machining the engine and chassis of the original Ford automobiles , could have hypothetically been asked to accommodate significant changes in the cars design with only a few hours delay . The factories which built the Mustang , on the other hand , were effectively locked into making Mustangs for well over a year . Finally , and most importantly , there is the technological imperative of planning . As argued , the large financial and material commitments necessary to design a product and prepare for its

440 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER Figure . A 1964 Ford Mustang in Wimbledon White , photographed at the anniversary of the Mustang at the Charlotte Motor Speedway . Source , duction require that each part of the process works today so that , in the distant future , when all the parts are brought together , the job is done correctly . This means that the business enterprise will require specialists in predicting ( and shaping ) future market conditions , specialists in materials , specialists in education to ensure a competent workforce , and so to ensure that what the organization set out to do some months or years or decades earlier actually gets done and , with some luck , proves successful . Without that capacity , the confidence to set out on such a sophisticated enterprise would never have existed in the first place . What bearing , then , does this have on our theories of how businesses behave and how markets ate ?

We start with the general points first , the small firm of the perfect competition model will not do in an age of increasingly sophisticated technology . Both the complexity of specialized edge and its management through a large organization suggest that a large business enterprise will be the norm . Second , that complexity of knowledge and organization suggests that the modern ness enterprise ought to be considered in more dimensions that simply its cost curves and a goal of maximizing profits . The politics and culture of organization become relevant to understanding what called the is , the whole of those people who participate in the group that directs the business enterprise through time . viewpoint .

PRINCIPLES or ECONOMICS 441 DOES THE INTERNET MOVE US CLOSER TO PERFECT COMPETITION ?

A common refrain in recent years argues that information particular , the the tendency toward big business . Recall that the model of perfect competition does suggest that firms must be absolutely , having no more than a handful of employees . Rather , it simply considers situations in which firms are small relative to the size of the market . Many have argued that the internet has made global markets out of local markets and , as a result , firms that used to be considered large are now small relative to the whole world of competitors . Yet , within the tech sector , as in most other industries , concentration and big business appear to be the norm . Large ness like IBM have long dominated traditional computing , before the World Wide Web , and relatively newer firms like Google and Facebook continue to expand control over much of the newer , markets . Of course , Amazon , pal , eBay , and Uber have allowed for a proliferation of small merchants , taxi drivers , and hotels but with these large corporations looming over the markets they Ve created , have we really returned to the traditional competitive markets of past are we looking at the competitive ( one might say , divide and conquer ) labor markets that characterized the rise of big business in the late 1800 ?

Third , if planning is the central concern of the modern business enterprise , then we have to sider how we see firms relating to their markets . In previous chapters , you have studied the basic neoclassical models of market structure and how firms respond to particular market conditions . The implicit assumption in these models is that firms react to markets . Yet , if long term planning is to be done effectively it would seem obvious that businesses can not take the markets as given and respond accordingly . Instead , they will have to actively shape those markets to ensure stable , predictable into the future . This third point has a particular bearing on our theories of prices and competition . History shows that businesses often try to avoid competition in terms of price . You can probably imagine why this is , given the complexity of modern technologies and the magnitude of investments necessary to get a business off the ground . Where starting a new business or a new product line for an existing ness requires huge sums of money and years of planning , it is simply a must that the investors and management are reasonably sure that it will be able to sell the product profitably in the relatively tant future . The business enterprises problem in this scenario is that competitors may be making the same investments and , in an attempt to make sure those investments dont go to waste due to weak sales , they may try to grab market share by lowering their prices . If everyone in the market pursues the same strategy , what do you think the result would be ?

Stiff competition based on prices is relatively rare in established markets for a simple reason it tends to be mutually destructive to most or all competitors who engage in it . In fact , when prominent engage in that sort of , for instance , the fast food giants occasionally have in recent is often considered newsworthy , usually showing up in the headlines of the business press as a price war . A century ago , the term cut throat competition , which includes aggressive price cuts and other efforts to drive competitors out of the market , was common . Clearly , both of the terms suggest that price competition can be a violent , one would hope at least , that should be avoided if at all possible . In summary , then , heterodox economists typically see the modern business enterprise as a going cern , engaged in long term planning which includes managing and shaping both technological and market conditions . In this View firms don maximize profits so much as they seek to survive through time . If it is appropriate to say that businesses tend to maximize anything , it would be growth through

442 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER time rather than profits specifically . Likewise , outright price competition is a relatively rare in mature markets today . Though most businesses will take competition into consideration when setting their prices , it would be a better description of the real world to say that tion occurs mainly through other practices , like advertising and branding , product innovations , or more production practices . That is to say that businesses compete through their investments , not their prices .

BUSINESS MODELS , PLURAL AIMS AND METHODS OF THE LEARNING By the end of this section , you will be able to Identify different general methods by which businesses can pursue profits Analyze the nature and significance of Apply heterodox concepts to the analysis of the pharmaceutical industry As a professor of mine , James Sturgeon , is fond of saying , theres more than one way to make money You could Steal Extort Accept a bribe Speculate on the financial or real estate markets Inherit Con Or , perhaps failing all of the above , you could earn it For our purposes here , this can be interpreted as a rather cheeky way of saying that different have different business is , different ways of making money in a market ( or eral markets ) And , while they might all be treated with the utmost abstraction as combining inputs to produce outputs of greater value , heterodox economists are inclined to believe that not every way of making money is the same . Breaking down all of the means by which modern businesses make money is far beyond the scope of this chapter ( though the odds are good that the reader is taking this course to fulfill a requirement for a business degree for which she or he will be spending plenty of time doing just that ) Instead , we borrow from Karl Marx extensive work on how capitalist economies function to create a simplified picture , Figure , of what a business enterprise does . And from there , well look to institutional to understand qualitative difference in how businesses generate their earnings .

444 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER ! Figure . The Business Enterprise in a Monetary Production Economy . In Figure , represents an amount of money and represents a commodity ( for instance the ber and other building materials a construction company may use to build a house ) represents the production process that converts the commodity ( building materials ) into some other commodity ( for instance , a house ) to be sold for some amount of money . This process can be treated as a shorthand depiction of what any business does , with the requirement that if the business is to remain in business must be greater than Take a moment to review the chapter Cost and Industry Structure , specifically the definitions of firm and production therein . How does Figure differ ?

The difference may not be obvious , but it is important . In the neoclassical tradition in , in the classical tradition which Marx was by businesses is treated as a process . That is , all business activity is part of converting commodity inputs into outputs which are of greater value , ultimately , to consumers . Clearly , Figure is more than that it treats money and commodities as distinct things . This allows us to look at the process by which money is converted into commodities , production creates new commodities , and money is created by sale of those new commodities . The whole process of turning money into inputs and ultimately selling commodity outputs for money well call monetary production . The full implications of these distinctions for ( or radical political ) economics would require its own course . For now , we can use this shorthand description of how a business enterprise works to think about different types of business models . The three numbered arrows in Figure represent three different ways that managers , engineers , markers , and others within a business enterprise can the process of monetary production . The first arrow , following to , indicates something close to the traditional way of thinking of a business money is invested into a production process that turns inputs into outputs for sale . This could include building a new factory or setting up a research and development ( team to design new products and more efficient production practices . What is significant here is that the focus is on producing stuff into stuff , presumably with the hope that people will be ing to pay more for than was paid for the necessary to produce it . The second arrow indicates a different business is , another way the monetary production process could be to make money . Here , you will notice , the initial money invested is going not to production , but to the produced commodity , This is meant to indicate investments made to change the perceived value of the product the business sells . Of course , one way to do this is to improve the product itself , which would be indicated by the first arrow . With arrow , however , were

PRINCIPLES or ECONOMICS 445 dealing with changing the perceived value of the product without actually changing the product itself and you ve probably already guessed the most salient way this can be done advertising . Here , the founder of institutional economics , is worth quoting at length The end sought by the systematic advertising of the larger business concerns is . monopoly of custom and prestige . The great end of consistent advertising is to establish such monopolies resting on popular conviction The cost , as well as the pecuniary value and the magnitude , of this organized fabrication of popular convictions is indicated by such as that the proprietors of a certain household remedy , reputed among medical authorities to be of entirely dubious value , have for a series of years found their its in spending several million dollars annually in advertisements . This case is by no means unique . It has been said , no doubt in good faith and certainly with some reason , that advertising as currently carried on gives the body of consumers valuable information and guidance as to the ways and means whereby their wants can be satisfied and their purchasing power can be best utilized . To the extent to which this holds true , advertising is a service to the . But there is a large reservation to be made on this head . Advertising is competitive the greater part of it aims to divert purchases , from one channel to another channel of the same general class . And to the extent to which the efforts of advertising in all its branches are spent on this competitive disturbance of trade , they are , on the whole , of slight any ate service to the community . 1904 , Public Domain , emphasis added ) inimitable prose may be a bit irksome to read , but reference to the bits above should be enough to understand the argument . Custom and prestige , and the fabrication of popular suggest that businesses are competing through persuasion rather than production of thing of value . The second paragraph , then , considers whether these activities are actually of value to society ( or perhaps , in neoclassical terms , whether or not they re welfare enhancing ) For the most part , they are decidedly not . They may create a pecuniary ( that is , money ) value for the perception of is improved and increases as a result . But , to society in general they amount to little more than a needless shifting of buying habits and consumption patterns . As Professor Sturgeon notes , theres more than one way to make money . We should pause to consider the usefulness of this model . Separating money from commodities in the monetary production process has allowed us to consider different business activities as essentially different things . The abstract firm in standard neoclassical theory might lead us to treat anything that makes a business more money as part of the production process ( suggesting that ing was just another commodity in the production process improving the value of the product to be sold . By implication , then , the advertising added value to society . Yet , treating production and as two different activities allowed room for the argument that , in fact , the advertising was wasteful . DISTINGUISHING ARROW FROM ARROW THE PHARMACEUTICAL INDUSTRY A contemporary example should indicate the importance of distinguishing between arrows and . The price of drugs continues to be a controversial topic in the United States , and it no surprise why according to the ,

446 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER pharmaceutical spending has risen from an average of 159 per person ( or of all spending in the US ) in 1985 to per person ( or of total spending ) in 2014 . Moreover , a 2016 Reuters article found that the prices of of the top 10 most widely used drugs more than doubled in just the previous years . A number of factors are important to explaining these rapid price increases , including an aging population in the US and an exceedingly complex distribution and insurance system for pharmaceuticals . But , let focus on the common explanation given by the producers themselves high prices are necessary to recover the high costs of research and development ( much of which leads to investments that do produce effective drugs that can be brought to market ) and the clinical trials necessary for regulatory approval . Clearly , this is in line with the general framework of heterodox economic theory . Pharmaceutical companies are engaging in planning , including significant investments into better products ( that is , investments into in Figure ) and prices are a of those investments . But , what more , our monetary production model can help us find a fuller explanation of the nature and extent of those investments . Consider estimates from and ( 2008 ) on promotional expenditures by the industry . The authors found that , for 2004 , the industry devoted about 24 of its sales revenue to promotion , versus about 13 to research and development . Looking specifically to promotion directed at physicians , the authors estimate that mately was spent per physician in the US . To be sure , there are other estimates lower than those made by and . just the same , it is clear that pharmaceutical enterprises are investing heavily not only in developing new drugs , but in promoting their use as well . Moreover , the pharmaceutical industry provides us with a somewhat unique opportunity to clearly distinguish investments in ( arrow in figure ) from investments in ( arrow ) Because these drugs are systematically evaluated for their in treating specific illnesses , data exist to indicate how well investments are improving the product . On this matter , 2013 ) finds that fewer and fewer new molecular entities ( truly new drugs , without dent in drugs already in use ) are being developed , and only a small minority of new drugs represent substantial therapeutic advances over existing treatments . The proliferation of ' drugs , which are new products to be marketed if not ally better treatments for illnesses , suggests that the business model in this industry is focused less on improvements in and more on . That is , arrow appears to dominate , with arrow a secondary concern , in the normal business models of this industry . Sources , and . 2008 ) The Cost of Pushing Pills A New Estimate of Pharmaceutical Promotion in the United States , A . 2013 ) Corruption of pharmaceutical markets Addressing the misalignment of financial incentives and public health . Medicine Ethics , 41 ( Finally , there is arrow , a direct line from an initial sum of money to a greater amount of money , bypassing all the troublesome steps of producing and selling a good or service . This sort of business model takes many forms and is becoming increasingly popular in the capitalism of today . The traditional exemplar is the financial , say , the stock has no direct ties to actually producing something , but rather only to trading in the ownership rights of those producers . The full role and consequences of financial firms and markets can not be covered here . What of interest presently is business activity that can turn a profit without being concerned with producing something for sale , or even simply with persuading people to buy a product . You may have heard

PRINCIPLES or ECONOMICS 447 about the causes of the Great Recession of being linked to business models in finance , insurance , and real estate ( the FIRE sector ) The problem , many believe , is in the ity and complexity of a system in which mortgage contracts representing an agreement to pay for a house over time were packaged together into derivative contracts to be sold to investors , then resold , repackaged , and so on . Indeed to make a system even more complex , many financial firms were ing side bets that the contracts they themselves were selling would in fact not pay out . Many articles , books , and documentaries have been produced retelling that story , and The Big Short is an effective and accurate dramatization of some of those events . For now , it is enough to say that the businesses engaged in those activities were largely concerned with turning money into more money by ing others that these contracts built on contracts ( built on contracts ) were worth more than they were . These were arrow business activities , having little to do with the actual business of housing people . A century earlier , had described similar practices in the stock markets , where the goal is to , induce a discrepancy between the putative and the actual , by well known and approved for the purpose . Partial information , as well as misinformation , sagaciously given out at a critical juncture , will go far toward producing a favorable discrepancy of this kind . 1904 , 156 , Public Domain ) It was , more recently , precisely this type of behavior which ultimately caused the deepest recession since the Great Depression ( which , incidentally , had also been caused by this type of behavior ) As a result , many of the largest banks and other financial institutions in the US and abroad have been made to pay fines in the 105 of billions of dollars . Whether these fines will be enough to make this business model unattractive in the future is it seems unlikely .

STABILIZING UNSTABLE MARKETS LEARNING By the end of this section , you will be able to Situate businesses and their business models within their market governance structures Define infrastructure , corporate governance , and market governance The previous sections dealt mainly with the nature of the modern business enterprise as an individual organization . But , of course , no business is created in a vacuum , and no business can operate in isolation . This section will look at the economic , social , and political nature of markets to better understand how real businesses fit into a heterodox understanding of the economy . Any business those discussed above and a plan for how to successfully operate a business within one or more markets . A good business plan will have to consider , among other things , the competition , the potential customer base , rules and regulations , and the necessary infrastructure to produce and distribute the product , whatever it may be . Established businesses will have worked out their business models over time , will have built ( or had built for them ) the infrastructure ( for instance , roads or communications protocols ) and will typically have helped define the rules and regulations that dictate which individual and competitive activities are and which are not . This is to say that markets themselves are defined by ( and the way business enterprises behave in these markets is guided by ) their infrastructure and their corporate and market governance structures . DEFINITIONS Infrastructure the common structures , facilities , and systems necessary for organizations to operate . These may include physical infrastructure like highways , bridges , electrical grids , and sewage systems as well as systems like the complex works of computers tied together through communications lines and protocols we know as the internet . Corporate governance the rules and practices defining how and by whom a business is directed as well as how members of the business will interact with each other and those outside of the business . These are both formal rules like accounting practices or the corporate hierarchy of who reports to whom , as well as informal norms , traditions , and relationships . Market governance the rules and practices defining how business enterprises will behave in a market , including especially

PRINCIPLES or ECONOMICS 449 how they will interact with their competitors . These may include formal instance , a consent decree by which a business agrees not to engage in an activity the government considers , or a joint venture operation between two energy companies to explore a potential source of crude oil . Probably more important , though , are the ious informal arrangements by which certain types of competition and cooperation between businesses are allowed While others are not . A side note these shared rules and infrastructure are not fixed in evolve , whether by unintended consequence or intentional change . Moreover , they are socially constructed , which means there is a political element to all of them . Although we focusing for now on the private , business side of the matter , it should be remembered that there is almost always a government role in the development , regulation , and sometimes prohibition of these structures . Finally , a fourth component , property rights , is worth adding . Property rights are legal norms defining who can own what , What can be done with that property , and therefore how businesses can generate earnings and who has claims on those earnings . While property is often considered simply a natural right , the actual content of property rights is a complex , perpetually evolving , and highly contested subject . These attributes of the organization of businesses and the markets in which they operate are all geared toward essentially the same thing stability . As an earlier section explained , most parts of the modern economy involve sophisticated and usually technologies . For this and other reasons long term planning is necessary for production to go forward and long term planning requires predictable outcomes . Hence , markets and businesses must be organized to promote stability . In particular , as a previous section explains , businesses require predictability in prices . Now , consider the neoclassical models of previous chapters . In each of these some , perhaps natural , equilibration process is is , a process by which firms , consumers , and ultimately markets move toward an equilibrium , toward stability . The utility maximizing consumer seeks an optimal combination of consumers goods , the profit maximizing firm seeks an optimal level of production , and the market , through competition and price bidding , moves toward the equilibrium price and put . Many heterodox economists reject each of these models , in part because of the unrealistic by which equilibrium is reached . For instance , as chapter Costs and Prices demonstrates , few markets in the modern US economy are characterized by the sort of price adjustments that the market model relies on to reach a stable equilibrium . Moreover , considerable evidence suggests that price promotes instability . And it is for this reason that the concept of market governance is so important . Without a workable set of norms ing acceptable and unacceptable forms of competition and cooperation , most markets would never reach equilibrium . Instead , price competition and chicanery would wreak havoc on businesses and consumers alike .

THE HIGH PRICE OF COLLEGE TEXTBOOKS this concluding section of the chapter well look at a question you ve probably asked yourself why do college textbooks cost so much ?

The question is particularly interesting for economic ory . Nationally , textbooks prices have risen more than three times the prices of other goods and services in the increase from the 1977 to 2015 of , reports ABC News . As of 2016 , the average undergraduate student will be spending just shy of a year on books and supplies . That no small sum . Standard analysis would look for low of demand and lack of competition to explain high prices . Question as a student , is your demand for college textbooks elastic or inelastic ?

Why ?

Likely , you answered very inelastic since you have little choice in buying a textbook that is required for a course . In fact a 2014 Student survey found that two thirds of students had foregone buying at least one textbook due to cost . Not surprisingly , almost all of those students indicated concern that the decision would impact their grades negatively . As for competition in the textbook publishing business , it may not surprise you to learn that , like in most other markets , there are only a handful of large corporations controlling the bulk of the college textbook supply . International corporations , which in many cases have existed for over a century , dominate the global market for these products , bringing in billions of dollars in revenue each year . While not a pure monopoly , it would seem that this industry is closer to our neoclassical monopoly model than to perfect competition . The outcome of this situation , as you ve seen in a previous chapter , is clear fewer students purchase textbooks than would like , and they pay higher prices than would exist under more competitive conditions . But , then , is competition the solution ?

Certainly , the industry meets the definition of high tion , suggesting that textbook publishing is far from the ideal model of perfect competition . ers appear to enjoy significant market power , especially in setting their own prices , rather than taking the competitive market price as given . But , if we accept that these large corporations are not price takers in the markets for their books , we still have to answer is , for what they determine the prices they will charge ?

And this is where the business model becomes important . The mainstream assumption that firms , always and everywhere , maximize profits suggests that put is being set according to marginal costs and marginal revenues , and that the high inelasticity of demand allows publishers to raise prices well above the actual costs of production . Firms produce to maximize profits , and a lack of competition allows them to take monopoly rents through higher prices . But , consider the heterodox business enterprises generally want to survive and grow , and that competition occurs through investments , not prices . This View suggests that it not so much that publishers wish to get every last dollar of profit to be had ( that is , to maximize profits )

PRINCIPLES or ECONOMICS 451 nor that they will raise prices to whatever the students ( that is , are willing to pay . Rather , these producers are seeking to make the investments necessary to survive ( to make a profit ) in their markets . The prices they charge , then , may seem like price gouging , but may really just be the results of the necessary to cover the costs of those investments . However , the more recent focus among publicly traded companies on keeping stock prices up may drive them toward price gouging over simply pricing to cover full costs . And this is where we come back to the original question is competition the solution ?

From the of heterodox economics , the high price of college textbooks the high cost of investing in new textbook computer software tools to complement the text ( and ensure the student pays for the online access ) in test banks and to aid the instructor using the text , and so on . And what compels publishers to make these investments ?

Largely , competition . If a publisher neglected to develop new editions , it could not compete with the used textbook markets . If a fell behind in developing software and supplements for instructors , the other publishers would have a competitive advantage in pitching their texts to instructors . Perhaps surprisingly , the sion is that prices are high , not so much from a lack of price competition , but because of a lar dynamic in investment competition . It so one could lack of appropriate planning across the industry as a whole that keeps publishers grasping at market share by investing in anything and everything that might help sell their textbooks . the student pays the price . THE COURTS AND PROPERTY RIGHTS In a previous breakout box it was mentioned that a proper understanding of market structure would require , among other things , an understanding of the specific property rights relevant to production , exchange , and consumption processes of the market . A recent US Supreme Court case offers a good illustration of that very point . john Wiley Sons , is a global publishing company with thousands of employees and a market cap ( total value of standing shares ) in the billions of dollars . In 2008 Wiley sued for copyright infringement . a Thailand native who had studied in the US , had discovered that foreign edition textbooks could be imported into the US to be sold at lower prices than the texts prices . Wiley believed that this was a violation of their property rights which included the right to prevent importation of their copyrighted works . While two lower courts sided with the publishers position on the control that copyright afforded them , the US Supreme Court did not . They argued in their ruling that the doctrine , allowing those who obtained a textbook legally to it , limited Wiley right to control the importation of their books . As an , how do you think things would be different if the Supreme Court had ruled in favor of Wiley ?

Would prices continue to rise , plateau , or come down ?

Would this change the direction of investment in the publishing industry ?

How would students , faculties , and higher education more generally be affected ?