Textbook publishers typically issue new editions every 3 years, in order to keep copies of the old edition from circulating on the used-textbook market. Suppose that each student keeps his or her textbook for 1 year and values his possession of the textbook at $20 for that year. Suppose also that a new edition is no more intrinsically valuable than an old edition, but that the appearance of a new edition makes the old edition worthless. The market interest rate is 10%.
a. If new editions cause old editions to become completely obsolete, what is the price of a new textbook?
b. If the publisher issued just one edition of each book and credibly promised never to issue another one, what would be the price of a new textbook?
c. If it is possible to issue a promise as in part (b), and if it is costly to bring out new editions, what is the publisher’s optimal strategy?
d. Suppose that publishers would like to issue a promise as in part (b), but that there is no way for them to legally bind themselves to keeping the promise. If students suspect publishers of dishonesty, what will be the price of a new textbook? Now what is the publisher’s optimal strategy?
e. True or False: Even though publishers voluntarily bring out new editions every 3 years, they might be better off if they were legally forbidden to do so.