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Re: Secret pricing (RE: Response from Ted Bergstrom to Ann Okerson)

Discriminatory pricing is a net positive for producers and consumers
alike, despite the emotionally laden term. It would be smarter to call it
progressive pricing, in the political sense of progressive, but that would
earn catcalls, too.

Here is an example (rendered hypothetical) that came up in a recent
project I was working on in the area of college textbooks. A textbook
publisher spends $1 million to develop a textbook. The estimated market
is for 100,000 copies, of which three-fourths are in the U.S. The
publisher could amortize all the development costs across all the copies
(that is, $10/copy), but since the copies sold outside the U.S. are likely
to go into weaker economies, the decision is made to amortize the
development costs over domestic sales only. Thus the U.S. copies have a
plant or development cost of roughly $13/copy, whereas the copies shipped
outside the U.S. have an imputed plant cost of $0.

The different plant costs are reflected in the prices--discriminatory
pricing: more in the U.S., less in China. The text sells for (say) $100
in the U.S., $50 in China. But then, using the Internet and the
attributes of a global economy, the copies in China are imported back into
the U.S. and sold for $75. This is actually going on right now at UCSD
(among other places). A friend's kid, who is is an undergraduate there,
set the whole thing up and is likely to pay for his tuition this way. This is arbitrage marketing.

So what will happen? The U.S. publisher will stop putting lower prices on
the export edition in order to maintain margins at home. Who wins? Nobody. The Chinese can't afford the book, and the U.S. publisher
effectively has lost a market.

Long live confidentiality agreements and discriminatory pricing. It
sounds horrible, but it makes for a better world.

Joe Esposito

----- Original Message ----- From: "Phil Davis" <pmd8@cornell.edu>
To: <liblicense-l@lists.yale.edu>
Sent: Friday, November 11, 2005 1:37 PM
Subject: Re: Secret pricing (RE: Response from Ted Bergstrom to Ann Okerson)

Rick Anderson wrote: "Which, if you think about it [confidential pricing],
is really pretty silly."

Not really.  Confidential pricing allows for price discrimination to take
place (the charging of different prices to different customers based on
their ability or willingness to pay).  Price discrimination is practiced
because it leads to a more efficient market and greater profits to the
producer than charging a uniform price to all customers.  It is normally
practiced in markets where the producer has some monopoly power, which
means that the customer cannot substitute one product or service for

To answer Rick's question, how would Library A be lead to believe that it
was getting a better deal than everyone else under the cloak of price
confidentiality?  The answer is *discounting*.  In most states, hotels are
required to post daily rate on the back of your hotel room door.  This is
"list price" and no one ever pays it.  Everyone always pays a much reduced
price, and because you don't know what the person in the next room paid,
you come to the conclusion that your bargain $99/night room was a great
deal, as long as you don't find out that the guy next door was charged

In the same way, most of the big publishers set "list prices" for their
journals, and almost no libraries ever pay that price.  Anyone who has
been involved in negotiating for serials packages also knows that the
first deal on the table proposed by publishers is never the one that is
accepted.  In sum, Rick's hypothetical scenario where everyone believes
they are getting a good deal in world of confidential pricing is achieved
by a combination of price discrimination and discounting.

--Phil Davis