Textbook Mania / by Todd Yarbrough

One of the classic examples of extreme price inflation occurred during the so-called Tulip Mania era of the Dutch Golden Age. See below: 

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Over a three year period, the price of tulip bulbs skyrocketed extremely quickly and then crashed even faster. We use this to discuss issues like bubbles, price signaling, market panics, market power, conspicuous consumption, and so on. The basic story is that tulips became very popular very quickly, especially among the wealthy. The willingness to pay for bulb consumers rose very quickly, in part due to speculative buyers who purchased bulbs at ever increasing prices hoping to sell them at even higher prices. The Dutch in fact created trading markets for tulips. But demand for bulbs did not keep up with supply, in part because bulbs stopped being a status symbol. And since this supply was perishable, there was no durability to the value of bulbs. It is an interesting moment in economic history. 

A more pertinent issue of dramatic price inflation has happened on a much longer time scale, but has nonetheless been a popular source of derision. Some have even labeled it a bubble. See below:

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Now, the reasons for the price increases in textbooks and 17th century tulips are divergent and similar. First, there is no speculative market buying up new textbooks to then sell at a higher price later, in fact there is an extremely healthy secondary market (tulips die) for textbooks (textbooks depreciate) where real savings can occur. Second, while there has been an increase in the demand for textbooks, they have not become status symbols whose demand is arbitrarily and positively shocked very quickly. More students go to college, but this change has occurred very slowly and not to the extent that would explain the above shown inflation. 

Textbook prices are so high mainly because of a lack of competition in the textbook market and the low price elasticity of demand among textbook consumers. In the same way that the small geographic area from which Even though there are many authors of textbooks for the same subjects, the number of companies who sell the majority of textbooks is extremely small. Pearson, Cengage, McGraw-Hill have captured more than 74% of the top 100 best selling textbooks on amazon.com. See below: 

Textbooks are inelastic because students are compelled to purchase books by their professors, most often having required texts. Therefore, students often have no choice but to buy an expensive textbook, perhaps at best being able to purchase a cheap older edition on the secondary market. 

I've heard some folks call the college experience a bubble, and I think most of this misrepresentation comes from secondary costs, like textbooks. The per student cost of college will not crash any time soon, though I wouldn't be surprised if it begins to plateau. This is because of the still limited supply of higher education, despite online higher ed., and the still increasing demand for college. The recent failings of several small liberal arts colleges indicates not a crash, but a market equilibrating. But the textbook market's lack of competition will continue to squeeze students, as the big three are insulated from incentives to lower their prices. The innovation in etextbooks and online material has made a dent in the price inflation, but again most of this material is put out by the same three companies, so this temprering of textbook material prices is not likely to last.

I have an idea for one way that professors could make a more considerable dent. Professors who want to write text-books should publish them through peer review and offer them for modest (or free) to students. This way professors are still encouraged to write textbooks, but not simply into a market owned by three companies.  The growing open source textbook systems is promising, but I'd also like to see a lot more diversity across subjects. I understand that writing textbooks can be lucrative and also an otherwise rewarding experience (I have started my own). But I just don't see why we keep subjecting our students to what we know are inefficient markets producing sub-optimal social outcomes. How ironic for students to study the inefficiency of oligopolies from $250 textbooks. 

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More Info:

https://www.economist.com/news/united-states/21612200-its-economics-101-why-textbooks-cost-so-much

https://en.wikipedia.org/wiki/Tulip_mania

https://www.insidehighered.com/news/2016/07/13/meeting-discusses-challenges-facing-liberal-arts-colleges