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Notes on Andrew Odlyzko’s “The Economics of Electronic Journals”

by Michael Nielsen on May 29, 2008

This is an excellent 1997 paper on the cost of electronic journals versus conventional journals (link to paper). Here’s a few of the takeaway points; italicised portions are direct quotes from the text.

  • “Most traditional print publishers still claim, just as they have claimed for years, that switching to an electronic format can save at most 30% of the costs, namely the expenses of printing and mailing. Prices of electronic versions of established print journals are little, if any, lower than those of the basic paper versions.”

    I wonder if this is still true?

  • “The direct costs of a journal article are dwarfed by various indirect costs and subsidies.”

    According to Odylyzko’s estimates the direct costs per article are (very roughly) about $4000, out of a total cost of $36,000. Thus, the indirect costs and subsidies are, economically, the main story. An obvious consequence is that making everything open access would do very little to perturb the macroeconomics (to abuse a term) of the whole system.

  • “among the mathematics journals considered in [Kirby], the price per page ranged from $0.07 to $1.53, and the price per 10,000 characters, which compensates for different formats, from under $0.30 to over $3.00.”

    I.e., conservatively that’s a ten-fold difference in price.

  • “The $4,000 revenue figure was the median of an extremely dispersed sample. Among the journals used in [Odlyzko1] to derive that estimate, the cost per article ranged from under $1,000 for some journals to over $8,000 for others. This disparity in costs brings out another of the most important features of scholarly publishing, namely lack of price competition. Could any airline survive with $8,000 fares if a competitor offered $1,000 fares?”

    Odylyzko goes on to note that such disparities don’t appear to be the consequence of a variation in quality. Many of the best journals are amongst the least expensive, and some of the most expensive journals are distinctly mediocre. It’s pretty obviously a market failure, a point he examines in fascinating detail later in the paper (see below).

  • “Many publishers argue that costs cannot be reduced much, even with electronic publishing, since most of the cost is the first-copy cost of preparing the manuscripts for publication. This argument is refuted by the widely differing costs among publishers. The great disparity in costs among journals is a sign of an industry that has not had to worry about efficiency.”
  • “Another sign of lack of effective price competition is the existence of large profits. The economic function of high profits is to attract competition and innovation, which then reduce those profits to average levels. However, as an example, Elsevier’s pretax margin exceeds 40% [Hayes], a level that is “phenomenally high, comparable as a fraction of revenues to the profits West Publishing derives from the Westlaw legal information service, and to those of Microsoft” [Odlyzko2].”

    Astounding. Apparently society journals are also often very profitable for the societies that run them.

  • Odlyzko does a wonderful calculation of the costs of the arXiv preprint server. After making very generous assumptions about the costs of operation, he comes up with a number: $75 per paper, or nearly two orders of magnitude cost reductions over ordinary journals.
  • Odlyzko estimates the cost of running a full-service electronic journal at about $300-$1000 per article, i.e., one order of magnitude cost reduction over ordinary journals.
  • Summing up to this point: journal publication is only a tiny part of the whole research economy; the cost of journal publication could be reduced by an order of magnitude or so by going electronic; going to a preprint system buys you another order of magnitude; there are many signs of market failures and inefficiences in the journal publishing industry.

Odlyzko’s analysis of the perverse economic incentives involved and the consequent market failure is excellent. The argument is sufficiently dense and informative that I’ll quote it. Note especially the first sentence:

Journals do not compete on price, since that is not what determines their success[!!]. There are four principal groups of players. The first one consists of scholars as producers of the information that makes journals valuable. The second consists of scholars as users of that information. However, as users, they gain access to journals primarily through the third group, the libraries. Libraries purchase journals from the fourth group, the publishers, usually in response to requests from scholars. These requests are based overwhelmingly on the perceived quality of the journals, and price seldom plays a role (although that is changing under the pressure to control growth of library costs). The budgets for libraries almost always come from different sources than the budgets for academic departments, so that scholars as users do not have to make an explicit tradeoff between graduate assistantships and libraries, for example.

Scholars as writers of papers determine what journals their work will appear in, and thus how much it will cost society to publish their work. However, scholars have no incentive to care about those costs. What matters the most to them is the prestige of the journals they publish in. Often the economic incentives are to publish in high-cost outlets. It has often been argued that page charges are a rational way to allocate costs of publishing, since they make the author (or the author’s institution or research grant) cover some of the costs of the publication, which, after all, is motivated by a desire to further the author’s career. However, page charges are less and less frequent. As an extreme example, in the late 1970s, Nuclear Physics B, published by Elsevier, took over as the “journal of choice” in particle physics and field theory from Physical Review D, even though the latter was much less expensive. This happened because Phys. Rev. D had page charges, and physicists decided they would rather use their grant money for travel, postdocs, and the like. Note that the physicists in this story behaved in a perfectly rational way. They did not have to use their grants to pay for the increase in library costs associated with the shift from an inexpensive journal to a much pricier one. Furthermore, even if they had to pay for that cost, they would have come out ahead; the increase in the costs of just their own library associated with an individual decision to publish in Nucl. Phys. B instead of the less expensive Phys. Rev. D (could such a small change have been quantified) would have been much smaller than the savings on page charges. Most of the extra cost would have been absorbed by other institutions.

Odlyzko continues with more in this vein, before summarizing:

The perverse incentives in scholarly publishing that are illustrated in the examples above have led to the current expensive system. They are also leading to its collapse. The central problem is that scholars have no incentive to maintain it. In book publishing, royalties align the authors’ interests with those of publishers, as both wish to maximize revenues. (This is most applicable in the trade press, or in textbooks. In scholarly monograph publishing, the decreasing sales combined with the typical royalty rate of at most 15% are reducing the financial payoff to authors, and appears to be leading to changes, with monographs becoming available electronically for free.) For the bulk of scholarly publishing, though, the market is too small to make provide a significant financial payoff to the authors.

How can this be changed? From the conclusion:

Although scholars have no incentive to maintain the current journal system, they currently also have no incentive to dismantle it. Even the physicists who rely on the Ginsparg preprint server continue to publish most of their papers in established print journals. The reason is that it costs them nothing to submit papers to such journals, and also costs them nothing to have their library buy the journals.

[…]

Until the academic library system is modified, with the costs and tradeoffs made clear to scholars and administrators, it is unlikely there will be any drastic changes. […] Electronic journals will become almost universal but most of them will be versions of established print journals, and will be equally expensive. Free or inexpensive electronic journals will grow, but probably not too rapidly. However, this situation is not likely to persist for long. I have been predicting [Odlyzko1, Odlyzko2] that change will come when administrators realize just how expensive the library system is, and that scholars can obtain most of the information they need from other sources, primarily preprints. Over the decade from 1982 to 1992, library expenditures have grown by over a third even after adjusting for general inflation [ARL]. However, they have fallen by about 10% as a share of total university spending. Apparently the pressure from scholars to maintain library collection has not been great enough, and other priorities have been winning. At some point in the future more drastic cuts are likely.

Mostly this is spot on, although I think the rate of change has been slower than Odlyzko might have predicted. Odlyzko concludes with:

To maintain their position, publishers will have to move to activities where they provide more value, instead of relying on scholars to do most of the work for them.

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