Greg Mankiw has an interesting article that discusses the teaching of basic economics. This caught my eye:

A common argument used to explain the high price of textbooks involves the principal agent problem between student and instructor. The instructor chooses the book, often oblivious to its price. The student has little choice but to buy the book. As a result, the publisher has substantial market power and sets the price much above cost, resulting in exorbitant profits. Or so the argument goes. I am skeptical of this story.

To be sure, there is a principal-agent problem between instructor and student, and price is much above marginal cost. But there are large fixed costs associated with publishing, so I am not convinced that price is much above average total costs. Indeed, textbook publishing has not been all that profitable in recent years.

Mankiw’s probably right about the profitability of publishing textbooks.  Most older industries are competitive enough where market power doesn’t explain very much of the price.  If there is a problem of excessively high textbook prices, it’s likely associated with excess costs, not excess profits.

Before regulation Q was repealed in the early 1980s, banks were not allowed to pay interest on ordinary bank accounts, and therefore engaged in “non-price competition.”  Something similar happened in the airline industry before the deregulation of the late 1970s.  When forced to charge higher that free market prices, airlines had competed for customers by offering better service.  In neither case did the price controls lead to the excess profits one might have expected.  In both cases, non-price competition raised costs.

If there is a market failure in the textbook industry (due to the principal-agent problem), it probably shows up in the form of too many textbooks to choose from, with too high a quality level.  Publishers compete vigorously for choosy profs to adopt their book, by offering many options that fill a variety of market niches, and also produce books of very high quality for the same reason. I’m not sure how many principles of economics textbooks there are to choose from, but it’s more than you’d think.

Steve Rubb and I just wrote a principles of economics textbook.  Our intention was to offer many of the features that people like about Mankiw (being clear and concise and not too long) while also competing in the “business examples” segment of the market, against other business-oriented books that lack those qualities.

I suspect that in a perfect world there’d be a bit fewer principles texts to choose from, and prices would be a tad lower.  (Full disclosure: I’d prefer that not happen until I’m dead!)  But I doubt this is a serious market failure.  Mankiw observes that quality has improved dramatically in this industry.  His textbook is vastly better than Samuelson’s famous 1948 intro text, which was the first in the modern style.  Mankiw also points out that modern textbooks come with many digital supplements, which allow students to test themselves and learn more effectively.  In addition, students can now buy electronic versions that are far cheaper than the paper versions (which often cost $200 or more.)

Markets almost never work perfectly.  The key questions is, as always, what’s the alternative?