Textbook market

Part 1-

a)   Our market is the textbook market in the United States. The producers are primarily a few large firms who control most of the market share, but students selling their used books are also a part of the supply. The consumers are mainly in two parts: the professors who decide which books to get, and the students who must buy the books to pass the course. The market is a global market but for this example we are focusing on just the textbook market of the United States, as other areas in the world are not experiencing the same kind of problem with highly increasing prices. The textbook market is differentiated, where all the books have different content, and can come in multiple forms. E-books have grown in popularity and in use as they are easy to use and are very accessible, as well as digital learned guides such as TopHat, McGraw-Hill Connect, and Pearson Online. The size of the U.S. textbook market is roughly 19.2 billion, this is according to the U.S. Census Bureau. There are a few interesting things about this market, there recently has been some legislation to subsidize the cost of these books, as price is often a deterrent to college. Higher levels of education has several positive externalities such as higher economic productivity, increased voter participation, and reduced crime.

b) The X is a new, current edition textbook that provides 1 util and the Y is an older textbook, that provides exactly half the utility of a new textbook( 0.5 utils). This is because it will not have the relevant examples and questions, but the content is similar enough that the student can still learn the material from it. The cost of the older textbook is exactly half that of the new textbook. This is a fairly captive market, having only the one substitute and the utility the textbook provides to the student makes it necessary to succeed in his/her class(es). The professors who also act as a consumer do not affect the market very much as price usually is not their main concern. The content in the textbook, the credibility of the author, the date (edition recency) it was published, and, unfortunately, in some cases, the relationship between the author and professor; these all play parts in the way the professor selects the textbook so for this example we model their preferences on content, which is the main driver of the level utility in our model.

Consumption Function-

U_(x,y)= X + ½ Y

Production Function-

Q_(a,m) = 2A + 4M

In this production function, A = acquisition cost and M = material cost. Acquisition cost is the cost to license the content that is in the textbook, and to pay the creators for their work. We read that the licensing cost for the textbook is usually about ⅓ the cost of producing the textbooks.

Material cost is from the cost of paper, glue, ink, distribution costs and overhead cost of the machinery used to mass produce textbooks.

Although there are older students who sell their used books, they do not represent a large enough part of the market to make a huge difference in this analysis. As their books are more likely than not going to be the older edition (less utility) and the number of students who rent their books now increasing, their effect on the market is dampened.

c) The market structure for this market is differentiated