(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 501
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476 PART 3 • Market Structure and Competitive Strategy
E XA MPLE 12.5
THE PRICES OF COLLEGE TEXTBOOKS
If you bought this book new at a college bookstore in the United States,
you probably paid something close
to $200 for it. Now, there’s no doubt
about it—this is a fantastic book! But
$200? Why so much?11
A quick visit to the bookstore will
prove that the price of this book is not
at all unusual. Most textbooks sold in
the United States have retail prices
in the $200 range. In fact even other
microeconomics textbooks—which
are clearly inferior to this one—sell
for around $200. Publishing companies set the prices of their textbooks, so should
we expect competition among publishers to drive
down prices?
Partly because of mergers and acquisitions over
the last decade or so, college textbook publishing is an oligopoly. (Pearson, the publisher of this
book, is the largest college textbook publisher,
followed by Cengage Learning and McGraw-Hill.)
These publishers have an incentive
to avoid a price war that could drive
prices down. The best way to avoid a
price war is to avoid discounting and
to increase prices in lockstep on a
regular basis.
The retail bookstore industry is
also highly concentrated, and the
retail markup on textbooks is around
30 percent. Thus a $200 retail price
implies that the publisher is receiving a net (wholesale) price of about
$150. The elasticity of demand is low,
because the instructor chooses the
textbook, often disregarding the price. On the other
hand, if the price is too high, some students will buy
a used book or decide not to buy the book at all.
In fact, it might be the case that publishers could
earn more money by lowering textbook prices. So
why don’t they do that? First, that might lead to a
dreaded price war. Second, publishers might not
have read this book!
The Dominant Firm Model
• dominant firm Firm with a
large share of total sales that sets
price to maximize profits, taking
into account the supply response
of smaller firms.
In some oligopolistic markets, one large firm has a major share of total sales
while a group of smaller firms supplies the remainder of the market. The large
firm might then act as a dominant firm, setting a price that maximizes its
own profits. The other firms, which individually could have little influence
over price, would then act as perfect competitors: They take the price set by
the dominant firm as given and produce accordingly. But what price should
the dominant firm set? To maximize profit, it must take into account how the
output of the other firms depends on the price it sets.
Figure 12.9 shows how a dominant firm sets its price. Here, D is the market demand curve, and SF is the supply curve (i.e., the aggregate marginal
cost curve) of the smaller fringe firms. The dominant firm must determine its
demand curve DD. As the figure shows, this curve is just the difference between
market demand and the supply of fringe firms. For example, at price P1, the
supply of fringe firms is just equal to market demand; thus the dominant firm
can sell nothing at this price. At a price P2 or less, fringe firms will not supply
any of the good, so the dominant firm faces the market demand curve. At prices
between P1 and P2, the dominant firm faces the demand curve DD.
11
You might have saved some money by buying the book via the Internet. If you bought the book
used, or if you rented an electronic edition, you probably paid about half the U.S. retail price. And if
you bought the International Student Edition of the book, which is paperback and only sold outside
the U.S., you probably paid much less. For an updated list of the prices of intermediate microeconomics textbooks, go to />
