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NUMBER OF TITLES USED (IN THOUSANDS)
Source: M. B. Line and D. N. Wood, "The Effect of
a Large-Scale Photocopying Service on
a North American edition. Source:
Source: M.B. Line and D.N. Wood, "The Effect of a Large-Scale
Documentation, 31:241 (1975). bBritish edition.
1. Compare A. A. Alchian and H. Demsetz, "Production, Information
Costs, and Economic Organization," Añerican Economic Review 62 (December 1972), 777-795 and 0. E. Williamson, Markets and Hierarchies: Analysis and Antitrust Implications (New York: The Free Press, 1975), on the desirability of user fees in profit and nonprofit organizations.
2. The desirability of two-part tariffs from the standpoint of both
profits and consumers' welfare is demonstrated in R. D. Willig, "The Pareto Domination of a Uniform Price by a Non-linear Outlay Schedule," mimeo, Bell Laboratories, Holmdel, New Jersey (1976).
3. All are taken from N. L. Henry, "Copyright, Public Policy and
Information Technology," Science 183 (1974), 384-391.
4. One can also examine the income distribution effects, if any, of
the alternative means of distribution.
Presentation of David Catterns to the National Commission on New Technological Uses of Copyrighted Works, Washington, D. C., December 19, 1975. Currently the rate of exchange is A$1.00 = U.S. $1.24 (September 1976).
6. New York Times (November 5, 1975), p. 54.
7. M. B. Line and D. N. Wood, "The Effects of a Large-Scale Photo
copying Service on Journal Sales," Journal of Documentation 31:241 (1975).
8. Ibid., 239.
*The views presented in this paper are solely those of the authors and
do not necessarily represent those of New York University or Bell Laboratories.
In this paper we provide the theoretical model of a firm which produces a commodity that is sold both to individuals and to institutions. The latter extend the services of the commodity to a large collection of
The focus of the paper is on the pricing rules that the firm should follow in calculating the prices for individual users and for institutional users. As the by-product of the analysis, we provide strong arguments for levying user charges on those who avail themselves of the institutionally-held unit of the commodity.
In the paper we use journal publishing as a perfect example of the industry which serves both individual and multi-user (institutional) markets. As we shall see, the analysis presented here can be extended rather easily to advanced computerized scientific and technological information systems.
The major problem raised in the paper is how the fixed cost component of the total produetion costs should be spread among the two classes of buyers. There already exists a well-established theory which bears directly on that issue. In brief, the theory prescribes that in the market in which demand is not very responsive to price changes, the price should be higher than the one charged to the buyers in the market in which the demand is highly responsive to price variations. This is known in the literature as the inverse elasticity rule, since demand elasticities are precisely the measures of responsiveness of demand to price changes. The implication of this inverse elasticity formula is that a proportionally larger share of the fixed cost should be shifted onto those buyers who do not substantially reduce their purchases when price is raised above some initial level.
This rule is, however, applicable only if there are no crossmarket effects. But those effects are present whenever a change in the price charged in one of the markets affects the demand in the other market. If, for example, an increase in the institutional price leads some of the institutional buyers to discontinue their purchases, one would expect an increase in the demand by individuals. Our task in the paper is, therefore, to provide workable rules which would be applicable in the case of cross-market price effects since we believe that such effects are present in the industries which provide scientific and technical information.
The value of workable pricing rules or formulas, like the inverse elasticity rule, is two-fold. First, they enable the decisionmaker to ascertain what variables in the model are of particular importance in the process of price setting. Second, they enable the decision-maker to conduct a rough test on how the current prices compare to those at which profits would be maximized.
It is, of course, unrealistic that the firm could ever hope to exactly set optimal (i.e., profit-maximizing) prices.
prices. Nevertheless, using the optimal price formulae as a guide, the management can concentrate on collecting that data which will be most useful in the process of setting prices. For example, as the name suggests, the inverse