Oligopoly and the Costs of Higher Education – Journals Edition

There are many reasons why costs in higher education have been rising faster than inflation for many decades.  A fundamental reason is because education is so labor-intensive and (so far) has been resistant to improved productivity via capital investment or technology.  This is called Baumol’s Cost Disease.

But there are other reasons too.  One is that historically higher education has been a non-profit industry but it is like healthcare in that much, if not all, of the costs are paid for by a third-party such as government instead of the consuming customer themselves.  There’s another similarity to healthcare in that in both it’s the seller, the doctor or the professor/university, that tells the consumer, the patient or student, what specifically they need to consume.  The consuming customer, the student or patient, doesn’t have all the information to know what they need.  This 3-way or 4-way transaction arrangement isn’t the standard buyer-seller arrangement of micro-economic texts about markets.  When a 3-way arrangement exists where there’s a seller, a consumer and a separate payor, conditions are ripe for abuse.  Basically, the seller tells the consumer to buy more at higher prices.  The consumer doesn’t object because somebody else is paying.

Historically, the arrangements never got out of hand because doctors in healthcare and universities in higher education were non-profit “professionals”.  But when for-profit entities entered, the dynamics shifted.  Higher education still consists of a a strong majority of non-profit institutions.  But they are surrounded by a several supplier industries that are very definitely profit-maximizers such as book publishers.  Publishers have long pursued a process of competing on features and making textbooks more expensive because the person who selected the book, the professor, didn’t have to pay.  Students paid through their student loans and they didn’t have much choice.

Eliminating choice is the key to higher profits.  That’s why monopolies and oligopolies make economic profits while firms in pure price competition don’t.

Now courtesy of a lecture by Hal Abelson at the Educause 2011 conference, passed our way by George Siemens at elearnspace.org, we see why prices of academic journals have risen so much that many libraries can’t afford them.  It’s the trend towards concentration and oligopoly.  The government could do something about it via antitrust enforcement, but for several decades antitrust enforcement has been weak except for blatant conspiratorial price-fixing.  This image below (from this article – .pdf) demonstrates:

Corporate Entitlements: Music Edition

Well sorry to all for the two-week absence, but I’m back from being on the road and all the end-of-semester stuff the school requires.

There’s a myth that’s pushed and carefully nurtured by corporate executives and conservatives.  It’s the image that “private enterprise” lives and dies by the market and that the profit motive is a powerful method of harnessing the enormous managerial energy and creativity to society’s benefit.  It’s an extended version of Adam Smith’s “invisible hand” metaphor which is often improperly joined with Smith’s quote about “It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.[4]”  The myth holds that privately-owned businesses, when seeking profits, are acting in the public’s interest.  Of course, the people who push this myth have never read Smith.  Smith did not hold that at all.  Instead they build their case on a simplistic understanding of neo-classical microeconomics.

But one of the problems with neo-classical microeconomics is that it assumes the rules are fixed. The myth assumes that business people don’t try to bend or change the rules to their favor (something Smith recognized back in 1776).  Under the neo-classical myth, businesses only make above average profits when they either produce more efficiently than competitors or create a better product than competitors.  The neo-classical theory we teach in Principles courses has no room for firms that bend the rules to favor themselves and disadvantage competitors.  In the theory, corporations behave like sports teams.  When a new technology or new product propels an upstart competitor to become dominant (“win in the market”), the established large firms simply take their lumps and like good sportsmen accept their losses and reduced size.

In the real world, a world that is increasingly oligopolistic, firms don’t behave like good sportsmen.  Instead they bribe the referee.  They cheat. They blame the fans (customers) and get the government to keep them in their former high-profit splendor.  It’s a lot easier and more profitable.  In the real world, being innovative, constantly striving to improve efficiency, or adapting to change is hard work.  Harder work than the executives of large corporations want to do.  It’s much cheaper, easier, and even fun (politicians throw parties!) to manipulate the government.

So what’s this have to do with music?  The music industry has a very long history of using government to manipulate the outcomes, stop competition, and keep them flush with unearned monopolistic profits.  The primary tool is copyright law.  Copyrights, like patents, are nothing more than a government-granted monopoly.  It’s protection from any competition.

The recorded music industry has become a tight oligopoly dominated by four firms.  Unlike the 1950’s and 1960’s when small independent labels could get distribution and grow if they found a “star”, the industry is largely in the hands of the big execs at these four firms.  First with vinyl, then cassettes, and then eventually CD’s,the industry grew fat, rich, and concentrated in the 1970’s through 2000. But technology moves on. People want it in digital form in MP3’s. They want to share it on the Web. But rather than adapting to the new technology, or rather than accepting their fate as a declining industry, the industry has fought back by pushing to change the rules.

The music industry has pushed the interesting concept that recorded music is simultaneously “property” (their “intellectual property”) but that when we buy a copy we aren’t getting any “property” at all.  We only get  a license to use it on one machine and we can’t re-sell it.   The industry has claimed that it’s the victim of theft and file-sharing, although their analyses are weak, flawed and wrong. They have claimed that file-sharing is “destroying” their business.  But it turns out that’s flat wrong too.  From Dwayne Winseck of the Toronto Globe and Mail we get the following (hat tip to Stephen Downes):

 But stop the music. What if this image of a beleaguered music industry is flawed?

In fact, the music business appears to be in peril only if we focus on just one element of the business, the “recorded music” segment. Doing that, however, ignores the three fastest growing segments of the business: concerts, Internet and mobile phones and publishing rights.

Include them and the portrait changes dramatically, as the figure below shows:

The music industry is not in decline. In fact, the “total” music industry has grown from roughly $1.26-billion in 1998 to just over $1.4-billion today. Worldwide, the growth has been even more impressive, especially in the fast-growing economies of Brazil, Russia, India, China and South Africa (the BRICS).

But the reshuffling of new and old elements in the industry has not been kind to the traditional big four global record labels, EMI, Universal, Warner Music and Sony. A few massive concert promoters – Live Nation (Ticketmaster), AEG, etc. – also threaten to usurp their place at the centre of the music universe. Bands such as Radiohead, the Arctic Monkeys and Pearl Jam now go straight to audiences with their music, while picking up whatever slack ensues through concerts.

The graph illustrates very clearly what’s happening.  People (customers) are shifting in their preferences due to changes in technology and lifestyles. People want more digital music on mobile devices and more live music.  The flexible, innovative upstarts are bands like small independents that record and sell their own music by pushing it at live performances. Or it’s established bands like Radiohead, Arctic Monkeys, and Pearl Jam that push the digital music out on the web, often free, in order to increase concert sales and related merchandise.  The total music industry (the orange line) is doing OK, particularly when we consider there was a nasty recession in 2007-09. But the model of recorded music sold by a tight oligopoly of music execs that are paid excessive compensation to tell us what to listen to is dying.  Unfortunately they are responding by pushing for more and more restrictive laws that protect their privilege, their monopoly.  The reality is that most so-called “piracy” is really the result of the recorded music industry failing to respond to genuine market opportunities.

I find it interesting that conservatives like to attack social insurance programs like Social Security and unemployment compensation by claiming they are “entitlements” that people don’t earn. Yet, they never seem to call copyright laws what they are: corporate entitlements.