The college textbook market is complex, comprised of many publishers, retailers, and used book wholesalers. Textbooks include new and used books and can be combined with supplemental learning materials. Figure 1 illustrates the typical life cycle of a textbook and the roles of publishers, instructors, bookstores, wholesalers, and students. Publishers develop and produce textbooks and accompanying materials for instructors and students. While there are hundreds of college textbook publishers, there has been substantial industry consolidation in recent years, with sales at five of the largest publishers representing over 80 percent of the market in 2004. Because developing a textbook involves a significant investment of time and resources, publishers carefully consider the potential risks and rewards before publishing a new textbook. Publishers consider market needs, including the size of the market and competing products. They also consider how the textbook would fit into their existing portfolios because they are more likely to publish in subject areas that complement successful existing textbooks. For example, a publisher that has successful textbooks for calculus might want to develop a textbook in an adjacent area like statistics. Publishers may also consider what value they can add by publishing a given textbook to move beyond reproducing what is already available in the market. Publishers direct their marketing efforts at instructors, and sometimes academic departments that make the decision about the course materials they will use and ultimately require their students to purchase. Publishers employ sales representatives who often call on instructors in person to discuss product options and provide instructors with free sample textbooks and instructional materials for consideration. Publishers also market their products at professional conferences and meetings, as well as through targeted mailings. Sales representatives typically receive a base salary and have the opportunity to earn commissions based on the volume of new course materials that are sold. They receive no compensation for materials that students purchase used. College textbook retailers collect information about the materials instructors have selected for their courses and stock them for student purchases. Located both on and off campus, college textbook retailers are made up of a diverse group of businesses including independent booksellers, campus cooperatives, and large retail chains. The National Association of College Stores reports that about half of college textbook stores are owned by the postsecondary institution they serve and one-third are operated through lease agreements by outside companies. The companies that operate stores on college and university campuses through lease agreements typically pay a commission based on the total volume of sales to the postsecondary institutions in lieu of rent. It is not uncommon for the colleges and universities that contract with them to limit the margin on textbooks. As bookstores receive information from instructors on the books required for the upcoming term, they determine the number of textbooks to order based on factors such as estimated enrollment and previous sales. Even with information on the number of students enrolled in the class, it can be difficult to estimate the number of books students will buy because many colleges and universities are served by more than one bookstore and students may also obtain textbooks from a variety of other sources. According to the National Association of College Stores, over 900 postsecondary institutions are served by multiple bookstores, with over 70 bookstores serving the 10 largest colleges and universities. Additionally, because students now have the opportunity to purchase their textbooks via the Internet from online retailers, no bookstore is without competition. Retailers also attempt to make used books available to students, recognizing that many students prefer to purchase used books because they are generally less expensive. Bookstores generally buy as many used textbooks from their students as possible and then turn to used textbook wholesalers to obtain additional copies. However, the demand for used textbooks is much greater than the available supply, which is estimated to be between 25 and 30 percent of all textbooks in the market. The ability of bookstores to make used books available depends, in part, on how early they are aware an instructor will use a certain title. Receiving an order for a textbook by the end of a term increases the ability bookstores have to purchase used textbooks, particularly if the book is currently being used and they can buy back the book directly from students who have finished using it. Once the supply of used books has been exhausted, bookstores complete their orders with new textbooks from publishers. When instructors require new editions or materials that publishers have customized specifically for their course, bookstores must rely exclusively on publishers to fulfill their orders. Wholesale companies facilitate the circulation of used textbooks by purchasing used books from retailers and directly from students to distribute to other retailers in need of used textbooks. Three major wholesale companies distribute textbooks nationally, and several smaller wholesalers distribute textbooks in specific regions of the country. Two of the national wholesalers also operate retail bookstores, and the other is tied to a retail chain through common ownership. Wholesalers have developed a complex model for determining the wholesale value of any given textbook based on factors such as demand, the available supply, and when a new edition is likely to be released. Because the supply of used books is limited and demand is high, wholesalers rank retailers in order to determine which will get first priority in receiving the used books they desire. Generally, national wholesalers give first priority to retailers that supply them with the most used books and do not return many of the books they purchase. To encourage bookstores to supply used books, wholesalers pay a commission and cover the cost of shipping the books to their warehouses. While students have little choice over which textbooks they must purchase, they have some choice in where they buy their textbooks. Many campuses are served by multiple bookstores, and students may also be able to obtain their books through book exchanges on their campus. Advances in technology have allowed students to bypass traditional textbook outlets with expanded purchasing options online. A local bookstore may provide convenience, speed, and return options, while online retailers and student-to-student exchanges may offer lower prices. In some cases, textbooks meant to be sold in international markets at lower prices are also available to U.S. students through online retailers. In addition, students can sometimes offset their costs by selling back their books at the end of the term. Generally, if a book is in good condition and will be used on the campus again, bookstores will pay students 50 percent of the original price paid. If the bookstore has not received a faculty order for the book at the end of the term and the edition is still current, bookstores may offer students the wholesale price of the book, which could range from 5 to 35 percent of the new retail price. This practice allows bookstores to provide an added service to students while supporting the national availability of used books. Students can also sell their books online to a wholesaler or to an individual. However, if a new edition of the book is forthcoming, students would not generally be able to sell back the book. College textbook prices have risen at double the rate of inflation for the last two decades but have followed the trend of tuition increases at postsecondary institutions. The average growth in college textbook prices has been 6 percent per year since academic year 1987-1988, ranging from 4 percent in 1993-1994 to 9 percent in 1989-1990. Meanwhile, tuition and fees have increased at an average of 7 percent per academic year during the same period, while overall price increases averaged 3 percent per academic year. Not only have textbook prices steadily increased each year, but the overall change in textbook prices has been substantial. According to a BLS research series on the CPI for college textbooks shown in figure 2, prices in December of 2004 were 186 percent higher than they were in December of 1986, the first month in which data were available, compared with a 240 percent increase in the cost of tuition and fees at colleges, universities, and professional schools. Overall price inflation was 72 percent during the same time period. With certain publisher packaging practices, supplementary products may sometimes be included in the price of the textbook for this index, but it is not possible with available data to determine the extent to which these practices may have contributed to price increases. The prices collected for BLS’s textbook index represent new college textbook prices at colleges, universities, and professional schools at which textbooks are required. Because only the price of the textbook is collected, the prices of any supplementary materials that may be available are typically not reflected in the index. However, if the textbook is only available at the bookstore in combination with some other course material—a practice commonly referred to as bundling—then the price of the entire bundle is collected. Officials at the Bureau of Labor Statistics told us that the practice of bundling has become increasingly prevalent in recent years. However, they told us it is not possible to determine with the information available the extent to which bundling may have contributed to increases in college textbook prices. For more information about the methodology used for constructing this index, please refer to appendix I. Increases in college textbook prices were particularly high for the academic years 1989-1990 and 2001-2002, at 9 percent and 8 percent respectively. Since 2001-2002, the growth in textbook prices has been slowed, increasing by 5 percent in 2003-2004. Appendix II contains more details on average annual changes in textbook prices. While increases in textbook prices have not followed far behind hikes in college tuition and fees, the cost of textbooks and supplies as a percentage of tuition and fees varies for degree-seeking students attending different types of institutions. According to data from Education’s Integrated Postsecondary Education Data System, first-time, full-time students attending 4-year private, nonprofit colleges were estimated to spend $850 for books and supplies in their first year, or 8 percent of the cost of tuition and fees during academic year 2003-2004, as shown in figure 3. In contrast, first-time, full-time students paying in-state tuition at 4-year public colleges or universities were estimated to spend 26 percent of the cost of tuition and fees on books and supplies, or $898, during the same period. At 2-year public colleges, where low-income students are more likely to begin their studies and tuition and fees are lower, first-time, full- time students are estimated to spend 72 percent of the cost of tuition and fees on books and supplies. Specifically, 2-year public colleges estimated that their first-time, full-time students would spend about $886 in 2003- 2004 on books and supplies. In 2002-2003, the last year for which enrollment data are available, students attending 2-year public colleges represented 42 percent of all postsecondary students. While publishers, retailers, and wholesalers all play a role in textbook pricing, the primary factor contributing to increases in the price of textbooks has been the increased investment publishers have made in new products to enhance instruction and learning according to industry executives we interviewed. In particular, publishers point to the high cost associated with the development of technology applications that supplement traditional textbooks. Publishers told us they have made these investments to meet changing needs of higher education, such as the increase in part-time faculty who require greater instructional support and supplements that will enhance student learning of the subject matter. While wholesalers, retailers, and others do not question the quality of these materials, they have expressed concern that the publishers’ practice of packaging supplements with a textbook to sell as one unit limits the opportunity students have to purchase less expensive used books. Additionally, wholesalers, retailers, and others have expressed concern about how certain publisher practices, such as revising textbooks more frequently and increasing the availability of custom publishing options for instructors, have affected their ability to help students save money by providing used textbooks and buyback services. Publishers set the net price, or the price bookstores pay publishers to obtain the textbook, based on development and production costs, expected sales, and competition from comparable products available in the market. While the amount spent on development and production varies across publishers and specific titles, the publishers to whom we spoke underscored the substantial investments they make before a single textbook is sold. These include the cost of author advances, the development of content for the textbook and supplements, copyrights and permissions for illustrations and photographs, along with the cost of typesetting and printing enough copies to provide sample copies and cover expected sales. In estimating expected sales of textbooks, publishers must consider the size of the overall market for a given textbook, the amount of market share they can reasonably capture based on the availability of competing products, and the availability of used books in subsequent years. The publishers we talked to focus heavily on publishing textbooks for introductory-level courses because the market is larger, even though competition for market share tends to be greater. Publishing in smaller markets can still be attractive, though, according to one publishing executive, because publishers may be able to attain greater market share, as there are generally fewer competing titles. Regardless of the market for a particular textbook, publishers told us that new textbook sales are highest in the first year an edition is available, with sales declining each year as the supply of used books becomes greater. Publishers told us that they must price their textbooks based on what similar textbooks in the market are selling for, even if it will not generate enough revenue to offset their costs or they could lose sales to more competitively priced products. As a result, publishers noted that textbooks may not realize a profit in the first year of publication. Publishers told us that they are willing to take this financial risk because of the long-term rewards they expect for successful textbooks. While each college store determines its own pricing model, many utilize a similar approach for determining the price of new and used textbooks. Bookstores set the retail price to ensure a certain percentage of the selling price goes to the bookstore. This percentage, commonly referred to by retailers as the margin, covers bookstore costs and may allow the store to realize a profit. While the margin may vary at different individual bookstores, the average margin on new college textbooks among stores reporting to the National Association of College Stores is about 23 percent. The margin on used textbooks, however, is typically higher. Used textbook prices are directly linked to new textbook prices as retailers and wholesalers typically follow a traditional pricing practice. According to this practice, retailers purchase used books from wholesalers at 50 percent of the new retail price and in turn charge students 75 percent of the new retail price to purchase the book. This pricing practice results in a 33 percent margin on used books for bookstores. Table 1 illustrates the typical pricing practice for a new and used textbook. College bookstores justify higher margins on used textbooks based on increased inventory risks and resources involved in preparing the books for resale. The factors that publishers consider in determining the price of their textbooks has not changed over time, but the nature of offerings from higher education publishers has changed in recent years. Publishers say they have invested heavily in developing additional textbook supplements for instructors and students, particularly resource-intensive technology applications, and ensuring that the content they provide is updated with the most current pedagogy and examples. Publishers told us they are making these investments in response to the changing needs of the higher education community and to remain competitive in the marketplace. While supplements are not new, publishers told us the number and variety of supplements available for a given textbook have increased substantially in the last 10 years. Even though there has been widespread consolidation among textbook publishers over the last 20 years, publishers characterized the textbook market as intensely competitive and said this competition drives what products they offer and ultimately how they price their textbooks. Because the adoption process in which instructors select the textbooks and materials they wish to use in their courses is central to ensuring sales, publishers told us that they focus their efforts on developing textbooks and accompanying materials that will meet the diverse needs of instructors and their students. To ensure their products are appealing to instructors, publishers say they must offer a wide range of materials that accommodate a variety of teaching and learning styles. Publishers fear that if they are unable to keep up with offerings of their competitors they will lose adoptions and ultimately market share. One industry analyst we spoke to speculated that the consolidation of publishers and a lack of new entrants are largely factors of the enormous investments required to compete in the marketplace. The analyst said that by consolidating, publishers may gain economies of scale and spread their overhead and other costs across more titles. Publishers say the investments they are making in product development are largely in response to changes in higher education that have resulted in publishers playing a more central role in facilitating instruction and learning. For example, publishers have always provided no-cost instructional supplements to help faculty teach their courses, but these offerings have intensified in recent years. In particular, publishers told us that the increased demand for instructional technology applications has resulted in high development costs. They say that since the advent of the Internet, postsecondary institutions have made substantial investments in technology and increased their expectations for instructors to make use of technology in the classroom. In response to this demand, publishers have invested millions of dollars in developing content that can be delivered via technological applications, such as Web sites and CD-ROMs, to accompany their textbooks. Some of these applications are designed to help instructors be more effective in the classroom, while others are intended for student use to enhance their learning of the material. Publishers told us that they have tailored their instructional supplements to enhance instructor productivity and teaching, largely to meet the needs of instructors in an environment of funding cuts. Publishers say tools designed to enhance instructor productivity are in demand because reductions in the number of teaching assistants available to help instructors have increased the administrative burden for instructors. For example, publishers have developed online homework and quizzes that allow instructors to track student progress quickly, saving instructors time. The homework and quizzes students complete online can be graded immediately to provide both the instructor and students with immediate feedback on performance. The need for greater teaching support is another area in which publishers told us there has been increased demand, stemming largely from a reduction in the employment of full-time tenure track faculty at institutions across the country. Publishers say they are now providing more extensive curricular support including lesson plans, homework sets, multimedia lectures, and even workshops on specific teaching approaches. While these materials are provided at no cost to instructors, the cost of developing them is built into the price of the textbook. Publishers also described a wide array of supplements that faculty can adopt that are intended to enhance student learning and success in the course. Publishers say there is a growing demand for these products because the number of students who are unprepared for college-level work has been increasing. Student supplements are either sold separately or bundled with the textbook, but the bulk of the development costs are typically built into the price of the textbook, according to publishers. While publishers produce print supplements, such as study guides and solutions manuals to accompany their textbooks, technology content represents the area in which publishers say they are investing more substantially. For example, one publisher told us the company had invested over $1 million in the development of a CD-ROM that provides three-dimensional images to enhance learning in anatomy. In the short term, these investments are very costly for publishers, but publishers are predicting increased demand for these products over time, with more content delivered digitally. Electronic content is appealing to publishers because sales of these products would be less affected over time by the used textbook market than print products, which can more easily be bought and sold in the used textbook market. Specifically, passwords to restricted access Web sites cannot be resold, and there is no national used market for other types of electronic products, such as CD-ROMS and software, because retailers and wholesalers cannot easily verify that the products are functional once they have been used. Wholesalers, retailers, and some public interest groups acknowledge that publishers are making substantial investments to develop textbooks and supplementary materials, but they have expressed concern about the impact some publisher practices may have on student costs. In particular, they think some of the strategies employed by publishers, such as bundling textbooks with supplements and revising textbooks more frequently, may limit the ability students have to decrease their costs by purchasing less expensive used textbooks. Wholesalers, retailers, and some public interest groups agree that there has been a proliferation of supplements in recent years, and they have expressed concern about the increasing practice of selling supplements and textbooks bundled together in a package. While wholesalers and retailers do not question the quality of these materials, they suggest the practice of combining these supplements with textbooks limits students’ ability to reduce their costs by purchasing less expensive used books and choosing which, if any, supplements they want to purchase. Retailers told us that when bundling started becoming more common, it became difficult for them to obtain supplements separately from publishers to provide students the option of buying a used book and selected supplements. Though publishers say that most supplements are now available separately, retailers said that because publishers often discount bundles, most of the savings students could expect from purchasing a used textbook would be negated if they bought the supplements separately. For example, a new book may be bundled with an access code to a companion Web site at no additional cost to the student. Students who choose to buy a less expensive used textbook will have to purchase the access code separately, but the combined cost of the used book and the access code will be similar to the price of the new course materials sold in a bundle. One retailer also noted that publishers assign every product a unique identification number, whether sold individually or bundled. Because the identification number for a bundle varies based on the specific combination of materials included in the package, the retailer told us it can be difficult to identify the individual components in the bundle to order them separately from publishers or, when available, through the used textbook market. Publishers note, however, that the standard industry practice of assigning each bundle a unique identification number is intended to make it easy for students, retailers, and wholesalers to obtain a complete description of the bundle’s contents by entering the identification number online. Publishers told us that textbook sales representatives work to identify materials that will best meet a given instructor’s needs and generally bundle course materials with the textbook when the instructor desires it. However, retailers said that instructors are often unaware that the course materials they selected will come bundled, based on routine follow-up discussions that stores have had with instructors. Retailers told us that many instructors want the supplements to be available for their students but also want students to have the option of buying a used book. However, some publishers say that the discounts available on bundles are a selling point with instructors, along with the assurance that students will purchase the correct course materials. While publishers typically allow retailers to return new textbooks that are not sold without penalty if the textbooks are in new condition, when course materials are bundled together they can be returned only if the seal is unbroken. Retailers explained that their stores offer generous return policies to accommodate students who, for example, buy the wrong course materials or drop a course. If a student has broken the seal of the bundle, retailers say they will not be able to return the materials to the publisher for a refund. One retailer told us that its stores will generally accept returns of unsealed bundles to minimize ill will with students but that they would have to absorb the return as a loss. Some publishers acknowledged that there has been resistance to the practice of bundling, and some told us they are now more carefully considering when bundling may be appropriate. While the practice is designed to provide students with greater value, publishers understand that students must perceive that value for a bundle to sell. Publishers say they are also beginning to understand that as students may be sensitive to high prices, they must strike a balance between quality and price. For example, one publisher provided an example of a bundle that did not sell well because the number of components increased the price beyond what students were willing to pay. While the publisher knew that the textbook and the individual components would retail separately for much more, students perceived the price as too high. Publishers also told us that bundling is most effective when instructors make use of all the materials included in the bundle and stress their importance to students. Publishers understand that when students spend money for course materials that are never used they may perceive the purchase as unnecessary. Industry representatives and some public interest groups also suggested that publishers are revising textbooks more frequently, and some expressed concern about the financial impact revisions have on students. Retailers and wholesalers told us that because instructors typically use the most current edition of textbooks in their courses, the previous edition becomes obsolete once a new edition is released. Once retailers and wholesalers learn of a pending new edition, typically several months in advance of the release date, they said the buyback value drops rapidly to zero. Once a new edition is released, retailers say they generally cannot buy back an old edition from students, a practice that helps students reduce their costs. Publishers agreed that the revision cycle for many books has accelerated over time, but most said that it has been stable in recent years. While textbook revision cycles can vary based on several factors, such as the level of the course and the discipline, publishers told us that textbooks are generally revised every 3 to 4 years, compared with cycles of 4 to 5 years that were standard 10 to 20 years ago. Publishers say that the revision cycle is driven by instructors who want the most current material and may seek products from competitors if they are unable to meet the demand. Publishers cited a recent poll of 1,029 college professors commissioned by the Association of American Publishers that found that 80 percent of those polled think it is important that the material in the textbook be as current as possible. However, this may not be universal across disciplines. For example, over 700 mathematics and physics instructors from 150 universities across the country have petitioned one publisher to delay revisions until there have been substantial changes in content or teaching methods that merit revision. Publishers noted that while not every revision results in substantial content changes, revisions must also be made for other reasons, such as changing teaching methods. For example, one publisher cited a teaching approach from the 1980s that has regained popularity in calculus. Revisions may be based on current events, such as including recent accounting scandals in textbooks for business law and ethics courses, or recent elections in political science textbooks. Publishers told us that changes in industry standards that are relevant to a discipline may also necessitate out-of-cycle revisions or updates, such as pronouncements issued by the Financial Accounting Standards Board for accounting textbooks. Some wholesalers and retailers think that the revision cycle for some textbooks has the effect of limiting the used market. For example, retailers and wholesalers have observed that books for introductory-level classes are on a shorter revision cycle than other books, possibly because there is a greater supply of used books, as students are less likely to keep them. One publisher we talked to said that books for introductory classes are typically revised more frequently because demand for current content and technology applications is greater in these courses. Most publishers maintain that their decisions to revise a book are based on factors other than sales patterns. However, one publisher we spoke with said that the current revision cycle at the company is tied to the pattern of sales revenues, which all publishers agreed decline the longer the textbook is on the market and more used copies become available. Publishers estimated that in the second year of an edition they might sell 25 percent to 70 percent of the textbooks that were sold in the first year, depending on level and discipline. Moreover, publishers say that they count on textbook revisions to recoup the initial investment costs of developing the textbook. They told us that first-edition textbooks are highly risky and that only about 20 to 30 percent of their first-edition textbooks are ever revised. However, they said that they are willing to take on this risk based on the long-term rewards they expect to receive from successful textbooks that are revised. Wholesalers, retailers, and some public interest groups have also raised concerns about other publisher practices that may limit students’ ability to purchase used textbooks, such as custom publishing, which allows instructors to customize their course materials by adding or deleting chapters from a single textbook or multiple textbooks. According to publishers, technological advances have made the practice more cost- effective and the adoption of custom materials has been increasing. Publishers say that custom publishing appeals to instructors because it allows them to consolidate material from multiple sources into one textbook for their students. Publishers also think it provides students with good value because instructors are more likely to use all of the material they select. Because the price of custom publishing is based on the content, the price of custom textbooks may be lower than for a traditional textbook, according to publishers. For example, students might pay less for one custom textbook than they would for several books the instructor might have required if customization was not available. Some publishers also observed that sales of custom materials tend to be better because instructors are committed to using all of the material, and there is no national used textbook market for them. Retailers and wholesalers said that because there is no resale market for a given custom textbook outside the campus where it was originally used, students may lose out on the ability to save money by buying used books and selling them back at the end of the term. One retailer expressed particular concern about a few specific instances in which textbook covers had been customized with the mascot or logo of a specific institution, but the content of the textbook was the same. Because these textbooks are designed for a specific campus and have a unique identification number, there is no national used market for them. In addition, retailers say that publishers place strict return limits—typically 10 percent—on custom textbooks, even though traditional textbooks are usually fully returnable to the publisher. As a result, retailers say that they have to carefully balance their commitment to carrying an adequate supply of custom materials for students against the risk of exceeding the return limit if they do not sell enough copies. Wholesalers, retailers, and others are also concerned about the long-term cost implications for students that may result from publisher practices to provide lower-cost alternatives to the traditional textbook. Among these alternatives are loose-leaf textbooks that are designed to be placed in a binder and electronic textbooks that are available for purchase online. While these options may save students money initially, wholesalers and retailers are concerned about the long-term cost implications for students. For example, students may initially pay less for a loose-leaf textbook than they would for a textbook that is bound, but wholesalers and retailers said students would be unable to sell a loose-leaf book back because it is not possible to determine whether all the pages are intact. With electronic textbooks, students may pay about half of the price of a new textbook for password-protected access to an online version of the textbook. Until the password expires, students can access the textbook as many times as they wish, either reviewing the chapters online or printing a hard copy. Some public interest groups initially embraced the idea of electronic textbooks but now point out that students may run into technical difficulties if they have to rely on Internet access. Additionally, because access to the textbook may expire, students may not have the option at the end of the term to keep the textbook. According to publishers, electronic textbooks have not caught on with students, and sales of these products have been unsuccessful. College textbook prices in the United States may exceed prices in other countries because textbook publishers assign prices that reflect the market conditions found in each country. The demand for textbooks can vary across countries because of, for example, differences in income levels or in the classroom role of textbooks. Publishers typically incur substantial costs in order to develop textbooks, but once these development costs have been undertaken, the additional cost of producing more copies is quite low. As a result, a publisher may be able to profitably sell textbooks in one country at prices that are closer to actual costs of printing and distributing additional copies while charging higher prices in the United States that reflect the substantial development costs undertaken. Two factors are typically cited as enabling a seller, such as a publisher, to profitably charge different prices to different buyers, such as textbook buyers in different countries. The seller must be able to distinguish among groups with differences in their willingness and ability to pay a given price, and the ability for these groups to buy and sell among one another must be restricted. Traditionally, the geographical separation of markets has made it difficult for U.S. students to acquire lower-priced textbooks from other countries. More recent developments in Internet commerce have reduced the costs for buyers in the United States to acquire textbooks from other countries, causing publishers to reexamine their distribution arrangements. Textbook publishers told us that college textbooks are developed primarily for sale in the United States, based on cost considerations and demand forecasts for the North American market, but that they sell textbooks in other markets when there is international demand. Textbooks developed for certain academic disciplines are more likely to have broader international appeal than others, according to publishers. For example, the content found in many mathematics, science, and engineering textbooks is essentially global in its applicability. However, the content found in textbooks used in other disciplines, such as political science, may pertain much more specifically to U.S. experiences, institutions, or culture. If international demand for a textbook exists, publishers may sell the same textbook that is sold in the United States, an international edition produced with less expensive materials, or an adaptation of the textbook that includes locally relevant examples. In international markets where the primary language spoken is not English, publishers may sell the rights to translate the textbook into the local language. In assigning prices to the different versions of U.S. textbooks sold in the international marketplace, publishers told us that they consider local market conditions and the willingness and ability of students to purchase the textbook. As there can be significant intercountry differences in the demand for textbooks, publishers told us that they make country-by- country and book-by-book distribution and pricing decisions. Specifically, publishers told us that factors they consider in making pricing decisions are income levels, the cost of living, the role of the textbook in the classroom, intellectual property protections, the strength of the local currency, and the prices of competing textbooks sold in that marketplace. In some cases, international prices may be substantially lower than prices at which the textbook is sold in the United States, while in other cases, they may be the same as or higher than U.S. prices. For example, publishers told us that in many developing countries, incomes are generally too low for students to buy textbooks at U.S. prices. However, in areas where the cost of living is generally higher than in the United States, such as in Scandinavian countries, textbook prices may be higher. Publishers told us that they have to be particularly concerned about pricing at a level that is affordable to students in developing countries because of the threat of piracy in these countries. Although they already grapple with piracy in many of these markets, publishers say that even fewer legitimate copies would be sold in these markets if prices were too high. According to publishers, some countries do not have a strong commitment to intellectual property protections, but governments have been more responsive in dealing with piracy cases when textbooks are priced at a level that local students can afford. In addition to income levels, differences in instructional styles and systems of higher education influence publishers’ pricing decisions. For example, publishers told us that even though average income levels are high in the United Kingdom, textbooks tend to sell for lower prices than in the United States because the demand for textbooks is lower. Specifically, they said that instructors in the United Kingdom are more likely to recommend several textbooks for students to consider, rather than requiring a specific textbook. Additionally, publishers told us that there is less demand for electronic and print supplements to support teaching and learning in non-U.S. markets. Publishers also told us that because higher education funding tends to be highly subsidized in the United Kingdom and European countries, students may not be willing to pay out-of-pocket costs for textbooks at U.S. prices. According to publishers, textbook prices in Canada and Australia tend to be similar to those in the United States because the instructional styles are similar in that instructors select specific textbooks for their classes. However, publishers noted that in these markets there is also greater demand for U.S. textbooks that have been adapted to the local culture or economy. The National Association of College Stores has criticized the practice of differential pricing, or the publisher practice of charging lower prices in some countries, saying that it is unfair for U.S. students to pay more for the same textbooks. However, the practice of differential pricing is not exclusive to textbook publishing and occurs both within and outside the United States. For example, GAO has reported on differential pricing in the airline industry, where business travelers typically pay much higher fares than leisure travelers. Likewise, we have reported on differential pricing of prescription drugs in the pharmaceutical industry. Publishers can afford to sell textbooks at prices that are sometimes lower outside the United States because once development costs have been incurred for the U.S. market, the incremental cost of producing additional copies for the international market is low. This allows publishers to sell textbooks in other countries at prices that are closer to printing and distribution costs while charging prices in the United States that better reflect the high costs of development. The publishers we talked to estimated that international sales make up from 5 to 15 percent of their total revenues. Some publishers speculated that without the added revenues from international sales, they would feel more cost pressure and would have to either increase U.S. prices or invest less in certain products. In order for international pricing differences to persist, there must be barriers that limit mass importation of less expensive U.S. textbooks from other countries. Such barriers ensure that individuals and businesses purchase from the intended distribution channels and insulate students from awareness of price differences in other countries. Historically, the geographic separation of countries served as a natural barrier preventing such trade from occurring. Geographic distances and lack of information made it difficult for individuals or businesses in the United States to save money on textbooks by purchasing lower-priced textbooks in other countries and having them shipped to the United States, a practice commonly referred to as reimportation. However, recent technological developments in electronic commerce have diminished the effects of this natural barrier, increasing awareness of prices in other countries and making it easier for students and retailers to purchase lower-priced textbooks from international markets. Retailers and publishers have expressed concern about the reimportation of lower-priced textbooks from international locations. Specifically, they cited the ability students have to purchase books from online distribution channels outside the United States at lower prices, which may result in a loss of sales for U.S. retailers. Additionally, the availability of lower-priced textbooks through these channels has heightened distrust and frustration among students regarding textbook prices, and college stores find it difficult to explain why their textbook prices are higher, according to the National Association of College Stores. Retailers and publishers have also been concerned that some U.S. retailers may have engaged in reimportation on a large scale by ordering textbooks for entire courses at lower prices from international distribution channels. Concerned about the effects of differential pricing on college stores, the National Association of College Stores has called on publishers to stop the practice of selling textbooks at lower prices outside the United States. Publishers told us that they intend for the textbooks they distribute in other countries to be sold for use in those countries, not for resale to the United States, and so have taken recent actions to limit large-scale reimportation. Most of the publishers with whom we spoke say they are particularly concerned about the actions of foreign distributors and U.S. retailers that may result in large-scale reimportation of textbooks. As a result, publishers told us they have taken recent steps to limit the reimportation of textbooks in large quantities. Specifically, publishers told us that they have strengthened their agreements with foreign wholesalers to prevent the large-scale sale of U.S. textbooks back to the United States. Some publishers also said they have made an agreement with an online retailer outside the United States to limit the number of copies of a given textbook that can be delivered to a single U.S. address in one order. Because these measures target large-scale reimportation of U.S. textbooks from international sources at lower prices, they will not prevent U.S. students from purchasing single copies of textbooks from international sources. College textbook prices have risen steadily, along with tuition and fees, and appear to have been largely driven by investments in supplements. While price increases have resulted in increasing costs for students and their families, they reflect a change in the characteristics of postsecondary education. Just as teaching and learning have changed with increasing reliance on technology, the college textbook has evolved from a stand- alone text to include a variety of ancillary products designed to enhance the educational experience for instructors and students. By increasingly becoming involved in the development of instructional aids, publishers are assuming roles that have traditionally belonged to postsecondary institutions. If publishers continue to increase these investments, particularly in technology, the cost to produce a textbook is likely to continue to increase in the future. Although changes in the nature of college textbooks are evident, it is difficult to assess the impact of these changes on students. Instructors can now select from a much wider variety of supplements to tailor their courses to the needs of their students, but these additional textbook offerings may come at an increased cost to students. While textbook prices have risen with tuition costs, these costs can vary greatly depending on the type of institution a student is attending. Because textbooks may represent a substantial portion of the cost of tuition and fees for students attending some public institutions, any increase in textbook prices may affect affordability and access disproportionately for some students. Consequently, while students may benefit from the advances in textbook supplements, they may not feel the price increases are justified relative to what they spend on tuition. Students may also think the amount they have to pay for their textbooks is unfair, especially if some of the same textbooks are available at lower prices outside the United States. Because the cost to students may not be the primary factor considered when publishers are developing textbooks that students are ultimately required to buy, the rate of textbook price increases is not likely to slow. Students may lower their costs by purchasing used textbooks and may search for lower-priced textbooks from online sources, including international retailers, and directly from other students. However, these options are unlikely to provide a sustainable source of lower prices because the supply of these textbooks is limited and international prices are subject to change. In addition, because publishers, wholesalers, and many retailers are profit-seeking firms, any widespread action that would lower costs to students at the expense of profits would be met with changes in their business practices, such as changing distribution patterns. We provided copies of a draft of this report to the Department of Labor and the Department of Education for review and comment. The Department of Labor provided technical comments on the use of its CPI data, which we incorporated as appropriate. The Department of Education did not have any comments. We also sought comments on our characterization of the textbook industry from the National Association of College Stores and the Association of American Publishers, the trade groups representing the companies we interviewed for this study. NACS generally agreed with our findings, stating that the report accurately portrayed the textbook industry. NACS also provided technical comments that we incorporated as appropriate. NACS’s comments appear in appendix III. AAP agreed with some findings in the report but expressed concern with respect to the data sources we used in our analyses and the tone and objectivity of the report. With respect to the data sources we used, AAP expressed concern about the limitations of the data we used in determining textbook price increases over time, and the proportion of tuition and fees that spending on textbooks and supplies represent for students at different types of postsecondary institutions. AAP also suggested alternative data sources for addressing these issues, but we found that they were not sufficiently reliable for our purposes. While AAP disagreed with our use of CPI data from BLS, these are the most complete and reliable data on textbook prices available. Further, we clearly disclose the limitations and definitions of the CPI data in the report. AAP’s claim that BLS data do not capture the “penetration of lower-cost alternatives” is not accurate. The college textbooks CPI is an index designed to capture the prices of assigned textbooks. To the extent that lower cost alternatives are assigned, they would be fully reflected in BLS’s index. AAP also suggested that the availability of alternative data from Student Monitor that differ substantially from the BLS data call into question our decision to use BLS data as a sole source. We disagree because the two data sources are not comparable. Student Monitor data are measuring annual changes in student spending, while BLS data measure annual price changes. AAP also expressed concerns about the use of Education’s IPEDS data, in particular that estimates are for textbooks and supplies and that we did not validate the estimates postsecondary institutions provided. We use IPEDS data because they are the most complete data available on estimated student spending. As we state in appendix I, we tested IPEDS for reliability and note that other available data sources are not as complete or reliable. AAP also questions the appropriateness of measuring estimated spending on textbooks and supplies as a percentage of tuition. We present these data to provide perspective on college affordability—a primary federal policy concern. To address AAP’s concerns about what constitutes supplies, we have noted in appendix I that supplies are defined as usual costs incurred by a majority of students. AAP also expressed concern that in discussing estimates of student spending on textbooks, we did not take into account the extent to which students lower their costs through buyback. We have added this context where we discuss costs to students. AAP also provided additional data sources for consideration and expressed concern that deadlines prevented us from giving these sources appropriate consideration. We considered other sources available that provide estimates of student spending. Time was not a factor in our decision not to use the data, but rather we found these sources to be not as complete or as reliable as the IPEDS data. Student Monitor, one of the sources suggested by AAP, provides market research for those targeting college students as a consumer group. Student Monitor employs a nonprobabilistic sampling methodology using an intercept-based quota sample of 1,200 students covering 100 colleges and universities. Because of the sample selection process used, it cannot be used to estimate to the college student population as a whole for the purpose of addressing a key finding. Other industry sources AAP suggested provide estimates on the total size of the market, but they cannot be used to provide representative estimates on student spending for textbooks. AAP expressed concern about the tone and objectivity of the report, particularly the characterizations of retailers and wholesalers on the impact of publisher practices on students. In most instances we had already discussed issues raised by AAP in other sections of our report. AAP took issue with comments made by wholesalers and retailers regarding the impact of textbook revisions, bundling, and custom publishing on students’ ability to pursue lower-cost, used textbooks. We specifically provide information on the views of wholesalers and retailers to add balance and include more perspectives in our report. We provide publisher perspectives on why they revise textbooks and characterize why and how the revision cycle has changed over the last two decades. We also extensively discuss in our report publisher perspectives on supplements, bundling, and other options, such as custom publishing, while capturing publisher views regarding their benefits. Wholesalers and retailers provided a different perspective on these practices as they relate to potential costs to students, which we captured in our report. More generally, GAO’s approach to this study was to rely primarily on publishers to provide information on how they price textbooks and gain their perspectives on the factors that influence price changes. We also sought out other experts in the field, including retailers and wholesalers, to better understand how students obtain textbooks and what factors affect the cost to the student. Retailers and wholesalers did not place blame on publishers but pointed out the impact of some publisher practices on students. We do not place any blame in our report on the publishers and do in fact note that they offer a variety of options for students, sometimes at a discount. We also note in our report that faculty have primary responsibility for determining what students are required to buy. AAP stated in its letter that it agreed with the findings related to international price differences and the report’s concluding observations. AAP also provided technical comments, which we incorporated as appropriate. AAP’s comments appear in appendix IV. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies of this report to the congressional committees and subcommittees responsible for the Higher Education Act, the Secretary of Education, the Secretary of Labor, and other interested parties. Copies will also be made available to others upon request. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you have any questions about this report, please contact me on (202) 512-7215. Key contributors to this report are listed in appendix IV. To determine the extent to which textbook prices have changed over time, we reviewed college textbook pricing data from the Bureau of Labor Statistics’ Consumer Price Index (CPI). The CPI measures the average change over time in the prices paid by urban consumers for consumer goods and services, and in the case of textbooks represents an index of change over time of the retail price of college textbooks, or the price that students and their families pay. While college textbooks have been included in the CPI since 1964, data on textbooks in the Bureau of Labor Statistics’ (BLS) research database only go back to 1986, when BLS collected textbook prices as part of an index on the price of books and supplies. The agency began publishing a separate CPI series on textbooks in 2001. Using these data, BLS constructed an unpublished research series on college textbooks for GAO for the period of December 1986 through December 2004. The index was compiled from three separate index series, as outlined in table 2. The implications on the index of these differences in methodology are discussed below. The college textbook CPI is constructed using a probability-based selection process that identifies bookstores as well as textbooks that are assigned for use in courses of higher education. Prices for specific books are taken from a variety of bookstores located on and off campus, as well as from Web-based retailers, reflecting prices at public and private postsecondary institutions, including 2-year, 4-year, graduate, and professional schools. The sample composition changes each year for the following reasons: (1) books assigned to classes change over time, (2) some books cycle out of circulation, and (3) a quarter of the sample rotates out annually. Similarly, the sample size for this research series varies over time as sampling procedures are modified and may range from 200 to 500 price quotes. This variation in sample size does not affect the value of the index, though fewer observations may affect the variance of the index. Overall, BLS reports that the response rate for college textbook CPI data collection is very high, 88 percent. Most of the textbooks included in the sample are designated as required texts for courses offered by the college or university associated with each sampled bookstore. In some cases, the selected textbook may not be available for pricing because the course has been terminated, the course requires a different textbook, or the course is not offered every term. In instances in which the course is no longer offered and the textbook is not used in any other course, then the assigned textbook for a similar course is selected as a substitute. If the textbook is no longer used for the selected course, it is replaced with the textbook that is currently used for the selected course. If the book is temporarily out of use (for example, the course associated with the book is offered only in the fall semester), then the book is listed as temporarily not available and the price change is imputed based on the price changes of the other books. An important limitation to this research series is that prior to 2001, prices for such substitute books were not usually compared and no adjustments were made for any qualitative changes between the previous and substitute books. With the introduction of quality adjustment in 2001, the index is adjusted when certain characteristics of a textbook change, such as a move from a major to a smaller publisher or a considerable change in the number of pages. If the new version of the textbook contains substantially different characteristics and quality adjustment values are not available, the price movement is imputed based on the prices of comparable textbooks. Because hedonic quality adjustment is implemented only for the published portion of the research series, for the periods before 2001, the index may have higher variance than the published index, which begins in 2001. In addition, BLS officials pointed out that textbooks are increasingly wrapped in packages along with additional materials, making it difficult to collect all of the qualitative characteristics of the textbook. If the selected textbook is sold by itself, then only the textbook is priced. However, if the selected textbook is automatically sold with another item, such as a CD or workbook, then the agency must price the entire package. As a result of these packaging practices, it is sometimes difficult for BLS to obtain the information necessary for quality adjustment, and other times the price recorded as the textbook price may also include ancillary materials. To put changes in textbook prices into the context of other changes in the cost of higher education, we also reviewed CPI data on tuition and fees, which are constructed using a probability-based selection process and reflect the cost of tuition and fees at 2-year and 4-year institutions and professional schools. We analyzed data from the Department of Education’s (Education) Integrated Postsecondary Data System (IPEDS) to determine the proportion of tuition and fees that expenditures for textbooks and supplies represent. Specifically, postsecondary institutions estimate the amount first-time, full-time, degree-seeking students will spend for an entire academic year on textbooks and supplies and report on the amount of tuition and fees. IPEDS defines books and supplies as the average cost of books and supplies for a typical student for an entire academic year (or program). Supplies are to include usual costs that are incurred by a majority of students. Supplies required of special groups of students, such as engineering or art majors, would not be counted unless they constituted a majority of students at the institution. The Department of Education has not established a comprehensive definition of what supplies are. However, an Education official told us that supplies can include such things as allowances for personal computers, but such expenses should be reported only if they are required for a majority of students at the institution. To assess the completeness of the IPEDS data, we reviewed the National Center for Education Statistics’ documentation on how the data were collected and performed electronic tests to look for missing or out-of- range values. On the basis of these reviews and tests, we found the data sufficiently reliable for our purposes. We did not validate the methodology the institutions used to derive their estimates for the cost of books and supplies, and there has been no review of how well these institutional estimates actually predict student spending on textbooks and supplies. There are other sources available that provide estimates of student spending on college textbooks that we considered, but we did not find these sources to be as complete or reliable as IPEDS. The College Board collects estimates from postsecondary institutions on spending for books and supplies for full-time undergraduate students as part of its Annual Survey of Colleges. While the methodology employed was similar to that used for IPEDS, the survey included responses from a smaller population of institutions than IPEDS. Another source, Student Monitor, estimates spending on college textbooks based on student-reported expenditures. Student Monitor provides market research for those targeting college students as a consumer group. Student Monitor employs a nonprobabilistic sampling methodology using an intercept-based quota sample of 1,200 students covering 100 colleges and universities. Because of the sample selection process used, it cannot be used to estimate to the college student population as a whole for the purpose of addressing a key finding. To determine what factors have contributed to the change in college textbook prices, we interviewed executives from five of the largest textbook publishers, representing more than 80 percent of new textbook sales; the three national used textbook wholesalers; three companies that operate over 1,300 college textbook retail stores, or 29 percent of stores nationwide; the National Association of College Stores; the Association of American Publishers; and various other industry experts. To determine what factors have led to differences in the price of some U.S. textbooks in non-U.S. markets, we conducted a review of economic theory and relevant GAO work on differential pricing. We interviewed representatives from textbook publishers, operators of textbook retail stores, and used book wholesalers to determine the extent to which books may be available in other countries at lower prices, their analysis of the reasons behind these price discrepancies, and their concerns about pricing differences. CPI average annual percent increase Academic year 1987-1988 shows the growth in prices over the previous academic year, 1986-1987. Data for the 1986-1987 estimate lack the months of September through November, as data became available in December of 1986. As a result, the average price level in 1986-1987 is based on 9 months of data rather than 12. Bryon Gordon, Assistant Director Debra Prescott, Analyst-in-Charge Whitney Schott, Analyst In addition to those named above, Stephen Brown, Jonathan McMurray, and John Mingus made significant contributions to this report.

Summary: The federal government strives to make postsecondary education accessible and affordable, primarily by providing financial aid to students and their families. Given that nearly half of undergraduates receive federal financial aid, Congress is interested in the overall cost of attendance, including the cost of textbooks. We were asked to determine (1) what has been the change in textbook prices, (2) what factors have contributed to changes in textbook prices, and (3) what factors explain why a given U.S. textbook may retail outside the United States for a different price. We received technical comments from the Department of Labor. The Department of Education had no comments. The National Association of College Stores generally agreed with the report's findings. The Association of American Publishers agreed with some findings but expressed concern about the data sources we used and the characterizations made by retailers and wholesalers regarding the impact of publisher practices on students. We carefully reviewed the data sources available on college textbook pricing and found the data we used to be the most complete and reliable data available for our purposes. Additionally, we sought perspectives from publishers, retailers, and used book wholesalers to ensure our characterization of the textbook industry was balanced and complete. In the last two decades, college textbook prices have increased at twice the rate of inflation but have followed close behind tuition increases. Increasing at an average of 6 percent per year, textbook prices nearly tripled from December 1986 to December 2004, while tuition and fees increased by 240 percent and overall inflation was 72 percent. The cost of textbooks as well as supplies as a percentage of tuition and fees varies for first-time, full-time, degree-seeking students by the type of institution attended--72 percent at 2-year public institutions, 26 percent at 4-year public institutions, and 8 percent for 4-year private institutions. While many factors affect textbook pricing, the increasing costs associated with developing products designed to accompany textbooks, such as CD-ROMs and other instructional supplements, best explain price increases in recent years. Publishers say they have increased investments in developing supplements in response to demand from instructors. Wholesalers, retailers, and others expressed concern that the proliferation of supplements and more frequent revisions might unnecessarily increase costs to students. U.S. college textbook prices may exceed prices in other countries because prices reflect market conditions found in each country, such as the willingness and ability of students to purchase the textbook. While geographical barriers have historically limited the reentry of textbooks intended for international distribution back into the United States, known as reimportation, recent advances in electronic commerce have broken down this barrier. In response to concerns that the international availability of less expensive textbooks might negatively affect textbook sales, publishers have taken steps to limit large-scale textbook reimportation.