Many European governments still advocate a so-called ‘cultural exception’, intended to protect consumers and smaller bookshops, to keep their book markets isolated from competition. Other countries, with similar aims in mind, have chosen liberalization schemes instead. To reconcile these opposing views, this paper provides a theoretical framework to study the textbook market, depicting it as dominated by two simultaneous forces: horizontal differentiation among booksellers and a vertical relationship between publishers and bookshops. Using this model, we analyse the effects of alternative price schemes on the market structure and how potential benefits from price liberalization are influenced by the number (and size of) booksellers.
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We explicitly drop some features such as dynamic policies (second hands) or online competitors that we consider are still of minor relevance in most countries’ (non-university) textbook markets.
For example, in 2005 the Law of the Fixed Book Price was passed in The Netherlands, but it does not cover schoolbooks. In Hungary and other Eastern countries, less than 10% of the textbook market turnover is realized in bookstores since books and related material are directly bought at schools. In Germany, there are fixed discounts by law (from 8 to 15%). In addition, VAT on books varies across countries ranging from 0% (Ireland, Estonia for textbooks, etc.) to 25% (Denmark).
See http://www.ebf-eu.org/ for details. In this paper, the term supermarket includes all types of larger shops whose main business is not selling books but they occasionally do (at the beginning of each academic year). We do not include internet retailers since in most countries their penetration rate on the (primary and secondary school) textbook segment is still limited.
To focus on the competition effects of the textbook market these cross-subsidization and bundling related policies are implicitly included in the model via the cost advantages enjoyed by larger retailers.
The assumption of non-intersecting circles is equivalent to consider that there are no clients in the areas outside the zones of attraction. Although this may sound as too restrictive, it precludes the existence of empty equilibria, which make no sense in this model, and avoids the need of modelling in more detail consumers’ preferences or the location of schools. In practice, as noted below, this approach converges to a simpler linear Hotelling model.
Strictly speaking, competition ‘one to one’ only takes place in linear city models à la Hotelling. In our case, each sales point would have to compete with all the surrounding rivals. This would yield an equilibrium condition like (2) for each pair of competitors. However, it can be shown that if the linear distance between any pair of retailers is exogenous and equal to 2r, these equilibria are symmetric and all the additional equilibrium conditions would be redundant.
We suppose a high reservation value, due to the fact that families have to buy the books. In fact, the real reservation value should be determined by the teacher´s council who chooses the books, but we have not modeled liberalizations effects on quality of textbooks.
Since we have considered the location of firm as exogenous, note that we may impose, without loss of generality, r = N/n, a simplification that solves the problem of endogeneity of r and simplifies later calculations.
Note that a larger travel cost implies a lower price. This counter-intuitive result is explained by the fact that the publisher reduces prices to attract more consumers (see Thisse and Vives 1998).
Note that if the bookshops were cost asymmetric, higher unit costs (b) would lead to higher equilibrium prices.
Any arbitrary distribution of the fixed costs would be valid, since they do not affect the marginal conditions of equilibrium.
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The authors acknowledge valuable comments and suggestions by Joan-Ramón Borrell, two anonymous referees and by Gustavo Nombela, on previous versions of this work.
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Jiménez, J.L., Campos, J. Modelling Competition in the Textbook Market: Some Lessons still to Learn. J Ind Compet Trade 10, 71–85 (2010). https://doi.org/10.1007/s10842-009-0054-5
- horizontal differentiation
- vertical integration
- retail competition
- JEL classification