South Belgium Press produces the academic journal Nanoeconomics, which has a loyal following among short microeconomists, and Gigaeconomics, a journal for tall macroeconomists. It offers a license for the electronic version of each journal to university libraries at a subscription cost per journal of $1,000 per year. The 200 top universities all
subscribe to both journals, each paying $2,000 per year to South Belgium. By revealed preference, their willingness to pay for each journal is at least $1,000.
(a) In an attempt to lower costs, universities decide to form pairs, with one member of each pair subscribing to Nanoeconomics and one member of each pair subscribing to Gigaeconomics. They agree to use interlibrary loan to share the other journal. Since the copies are electronic, there is no incremental cost to doing this. Under this pairing scheme, how many subscriptions of each journal will South Belgium sell?
b) In order to stem the revenue hemorrhage, South Belgium raises the price of each journal. Assuming library preferences and budgets haven’t changed, how high can they set this price?
(c) How does library expenditure and South Belgium’s revenue compare to those of the previous regime?
(d) If there were a cost of interlibrary loan, how would your answer change?