"Snob" Effects and Upward Sloping Demand for Books

[Daniel Bowen]

By: Dan Bowen (2nd attempt)

This post will be a short economics lesson about books and "snob" effects.  So, economic theory says that as price increases, quantity demanded ought to decrease.  The world renown demand curve.  The one that slopes downward from left to right - with a D at the end.

So what are "snob effects"?  Well, what if price increases lead to increased (rather than decreased) demand?  ... and upward sloping demand curve.  This is contrary to the theory of demand.  Economics has named this phenomenon a "snob" effect.  It might be apparent why, but if it's not that clear, consider the market for fine art.  Art "quality" is difficult to understand, thus consumers might consider a higher price as an indication of increased quality.

My results show that "Classics" (genre) seem to have the expected economic response to price - price increases, quantity demanded decreases.  Snob effects are probably not expected from these books anyway... customers probably have a better idea regarding the quality of "Classic" books.  If that's the case, then snob effects might be less apparent (disregarding binding and such), and the slope of the demand curve might be expected to be less upward-sloping, or less "snobby," if you will.

I also considered books in 4 other genres: Science Fiction/Fantasy, Mystery/Thrillers, Biography/Memoirs, and Romance.  Mystery/Thrillers shows an effect similar to Classics, but it is not statistically significant.  However, books in the genres Science Fiction/Fantasy and Romance show evidence of these "snob effects".  Technicalities aside, this may be an indication that the quality uncertainty of books in these two genres is greater than Classics, for example.  Publishers have reported "snob effects" in the industry.  Previous research has not presented any estimates that follow publisher's reports and genre specific research is practically absent.  It's possible that Publishers are considering markets to be segmented by genre in their calculations - small publishers are generally "niched" - I've assumed that larger publishers are departmentalized by genre according to the most successful niches (Romance, YA fiction, etc.).  If so, then my findings may be similar to the snob effects that publishers are reporting.

So what does this mean for us?  Fair enough...  Could it be that consumers' lack of quality certainty results in this "snob" effect behavior.  Not because we're snobs, per se, we're just ill-informed.

Note: this post is a correction of a previous one.  If you read the first version about elasticity, I provide a table the elasticities here (pic).

An interesting economic side note: Generally, Qsupplied = Qdemanded, so price elasticity of demand should be proportional to price elasticity of supply.  But because return rates are quite high (~30%), Qs is an order of magnitude greater than Qd - namely, Qs = Qd + E[Returns].  The price elasticity of supply for books is not necessarily proportional to the price elasticity of demand, but rather, depends on expected return rates.

On a personal note, the next month will be a bit of an experience for me.  I'm moving my life to BookLamp HQ in Boise, ID, and if all goes as planned, I expect be set up in the office by the end of August - God willing.  It will be a very stressful month, but I trust it will be quite rewarding as well.  Wish me luck - I will need it.

PS  My regression output is given here.  If this is interesting like that, feel free to lend your comments.  Alternative perspectives and suggestions are appreciatively considered. My DP has an inverse relationship with sales, so estimated effects are opposite in their orientation.

regression results and price elasticities, here: http://www.cangooglehearme.com/permalink.php?id=294

[Stephen Rollins]

Another possibly occurrence of the "snob" effect might be found in online markets...  This only comes to mind since I recently did some textbook shopping for college.  I tried to buy as many used textbooks as I could.  However, when buying something like that, you don't necessarily want to buy the cheapest item listed.  It kind of makes you wonder why they'd be selling it for that low.

[Daniel Bowen]

Thanks for the comments Stephen.

I get your point, and I think you're correct.  Consider the quality levels for used books that Amazon provides: "Like New," "Good," and "Fair" (something like that)... given that information about each book do you still avoid the cheaper items?  Consider a calculus textbook - the core information you're paying for hasn't changed in decades (or more).  More "traditional" texts (like calculus) will probably have the expected economic relationship, but there are many texts that my need regular updating, covering new topics and these texts may experience the positive relationship discussed above.  Certainly though, if you are experiencing this kind of behavior, I don't doubt it.

So, for calculus books, the consumer has a good idea of what comes with the purchase - calculus hasn't substantially changed since I don't know when - a long time.  Books for entertainment have a much harder time conveying "quality" to the consumer.  I know what comes with a calculus text, but what can I expect from the next Iris Johansen release (Romance).  Well, I don't really know - especially because I haven't read anything she's written before.  So, in searching for a book in the Romance genre, the proportion of my total income that is spent on this next book purchase is so small that paying a higher price (as an indication of quality) my be a behavior I resort to.  Of course, this relationship only exists to a certain extent (i.e., $14.95 may indicate higher quality than $10.99, but I wouldn't necessarily consider a book for $49.99 to be that much higher in quality), so these effects are only considered at the margin - at single point.

An interesting note about textbooks.  As with most of the book industry, this segment is struggling as well, and they have changed their ways a bit.  Because students and teachers are getting more creative regarding purchasing textbooks, textbook manufacturers are selling fewer books.  To fight this, they have changed the rate at which they release new editions.  Before they would release a new edition of a text every 3 years, and now it's changed to 2 years.  They are competing with the used market for their own books!  Pricing is quite a bit different for textbooks, and I don't think that the 3year to 2year strategy will be that successful - sounds temporary to me.  With the dawn of e-books, why not strive (maybe they are) to license certain electronic versions to universities and let the university make those texts available to students who need it - just tack the added cost onto the price of the course.

Actually, it sounds like you're part of that consumer segment that textbook manufacturers have "lost" - keep up the good work.  The industry needs to change.

Thank you Stephen,
Dan

PS  Price as an indication of quality is not necessarily a "snob" effect, per se, but they have similar empirical properties.  A "snob" effect is actually when the consumer gets utility from paying a higher price - maybe a status - rather than using it as a quality judgment.  Both behaviors may be at play, but it's hard to tell.  I just feel that there's a better argument for price as an indication of quality.  Snob effects do exist in artistic consumption though.

PSS  I should have mentioned that the analysis that resulted in this thread was looking at Amazon prices, so yes, certainly apparent in online markets as you suggest.

[John Lavigne]

Another possibly occurrence of the "snob" effect might be found in online markets...  This only comes to mind since I recently did some textbook shopping for college.  I tried to buy as many used textbooks as I could.  However, when buying something like that, you don't necessarily want to buy the cheapest item listed.  It kind of makes you wonder why they'd be selling it for that low.

Having formerly worked for a college bookstore, I hope to give some insight on this issue.

Typically schools will have a time when you can sell back your books (at my school, it was offered year round and called the "buy back" program).  They offer 25% of the listed price (the pricing is a bit more complicated than this, but it's the general effect). 

The books are then used for the following semester.  Publishers sell new books to the bookstore for a given price, where the bookstore only uses a 5 to 10% markup for the price of the book (i.e., the store purchases them for $180, and sells them for $200... only $20 profit).  The used books, often in great condition, are sold back at 75% the new price.  The same book would cost $150 to the student, but instead the store makes a $100 profit. 

It's a win-win situation.  Cheaper books for the student, and greater profits for the store.


As a post-note: keep in mind that I made these numbers up.  The percentages are probably off, as are the exact amounts given in the profits/costs.

[Daniel Bowen]

Thanks John.  I always felt like I was getting had when it came to purchasing books for a semester.  E-books will eventually change that.  Aside from logistic and legal issues that might upset the big players, the only question is how and when.  I'd think (but really don't know) that the cost to students will drop somewhat.

Actually, the model I've imagined has universities acquiring licenses for the e-textbooks they require and incorporating the cost into a courses tuition.  I've also imagined quite a few problems with that path.  We'll see though... things are changing, and publishers and retailers will have to stay on their toes to survive/thrive.

BTW (generally, for this thread) - I've made some not so accurate statements in the initial postings, so... don't read too far into it.

Thank you John!  I really appreciate the input.

Keep in touch,
Dan