Monday, January 09, 2006

Textbooks and Theory!

The year was 1998. I had embarked on my engineering course. Incidentally, it was the first year for my newly instituted university as well. We had a mint-fresh syllabus. As a result, there were no textbooks in the market according to the syllabus specifications. For a year we struggled without any textbooks. What followed subsequently is what makes it an interesting economic phenomenon.

One textbook manufacturer finally phased in textbooks in the second year. Needless to say they were highly priced. Given the lack of choices most of us did end up buying them. But the very next year something surprising happened. The same textbooks were sold at lower prices by the textbook manufacturer. For example, the same book which sold for Rs 250 now sold at Rs 175. We were jealous at our juniors. But why did it happen? Did the textbook makers discover that the worth of the books is about 175 bucks and not 200? (My guess is no. I would be glad if any of my readers told me how are newly introduced textbooks priced, especially when there are no other options to compare.)

A little info about Bangalore may help us understand the situation better. Bangalore is a place with a zillion photocopy shops and zilch copyright observance. Or atleast was. You could buy copies of books for the photocopy price. And it also has students selling their textbooks to junior students or second-hand bookshops on Avenue Road. It is a formidable market, indeed, for any textbook entrepreneur.

My guess is that the characteristics of this situation made the textbook maker introduce the books at a high price initially, where there are few sellers. Now that the number of sellers has increased (previous owners of books, the possible photocopies from them and second-hand bookshops) he substantially lowered the price of the subsequent editions of the textbooks so as to make them competitive with the earlier versions available in the market. My bet is that he recovered his initial investments with a generous profit, in a situation where the copyright regulations are largely not obeyed!

But economic theory tells us this: without property rights, there won't be protection and hence entrepreneurial ventures or innovation. But do intellectual property rights differ from our basic understanding of property rights? It does, if you care to read How Competition Works by Michele Boldrin (Professor of Economics at the University of Minnesota) and David K. Levine (Armen Alchian Professor of Economics at UCLA and co-editor of Econometrica). Mercatus is interested in sound counterintuitive reasoning. The pharmaceuticals industry is supposed to be the best case for protection of intellectual property rights in the form of patents. According to them, it does not stand upto empirical evidence.
Among the examples they give, they point to Italy. In Italy there were no patents on pharmaceuticals until 1978. Bear in mind that countries like India and even African nations are told they need patent protection in order to develop economically. Yet between 1961 and 1980, 9.28% of the world's new molecular entities (NMEs) came from Italy. NMEs are the most important advances in pharmaceuticals as they represent leaps rather than just gradual progression. The authors suggest that after patents were introduced, Italy actually became less innovative, not more. The example of Italy will be puzzling to many because it is totally contrary to everything the pharmaceutical industry says. Interestingly, before Italy introduced patents, its pharmaceutical industry contained lots of players: patents quickly reduced the number of companies involved.
The source of the blog thought (and the above paragraph) is from Can pharmaceuticals be developed without patents?

If you want to read more about patents and its tenuous relation to pharmaceutical innovation, read The Pharmaceutical Industry.

I am still keeping my fingers crossed on the implications of this!

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