Economics, Books, and Incomplete Models

Over the weekend, in a conversation between myself, Kaylia, and our friends John and Jen regarding the publishing industry brought up an issue that is directly related to the ways in which social scientists, including archaeologists, attempt to make sense of resource procurement. Although our discussion centered around paperback books and e-readers (such as the Kindle), the basic argument is applicable to everything from hunter-gatherer food procurement to broad discussions about economic policy. It essentially pits a philosophical model against questions of material reality.

The way that the discussion came up is as follows: a couple of months ago, Kaylia attended a writer's conference in San Francisco. Also in attendance were several representatives of the publishing industry, who discussed what they predicted for the future of their industry. One common claim went something like this: just as the CD and DVD production industry took a hit from internet distribution of music and movies/television shows, it should be expected that the printing industry will take a hit from the advent of e-readers. As prices are adjusted, it should eventually become less expensive to buy the e-reader and electronic books than to buy an equivalent number of paperback books. In the model described to us, the price of the e-reader remains more-or-less constant, but the cost of the electronic books decreases dramatically.

The model makes perfect intuitive sense, if someone can save money over the long term by making a larger one-time purchase (the e-reader) and then expending less money over the short term, then they would be wise to do so. It sounds correct - someone will choose saving money over spending money, right?

Well, not necessarily. Mind you, I'm not saying that this isn't what will happen - it may well be the case that e-readers will eventually drive the paperback out of existence - but the model itself is based on a principle that, while it seems to make perfect sense, doesn't take the realities of human behavior into account.

The first problem with the model is that it fails to take into account that the one-time purchase is a new cost. The comparison to the CD and DVD market is flawed for the simple reason that one has to have a CD or DVD player if one is to play the music, so there is an equipment cost right up front that is not present for the paperback book market. If one is going to spend the money to buy a CD player anyway, why not spend that money on another device (say, an iPod) which is in the same general price bracket but has improved function. What's more, the electronic delivery method for CDs and DVDs uses personal computers and, increasingly, video game consoles, devices which the consumer already owns but which can be turned to an additional purpose. While it is true that electronic versions of many books can be bought for us on a personal computer, the reality is that very few people do so due to limitations of physical space and readability. So, the changeover to electronic distribution of music and video is due in large part to the use of technology that most people already possess and the fact that the new devices purchased replace devices that the consumer would have had to purchase anyway.

Still, it follows that someone would opt to spend less money in the long run. Even if there is a large up-front cost, if it saves money over time, then people would want to do it, right?

Well, again, not necessarily. One of the things that has bedeviled social science researchers for well over a century is that people's behavior is often based on perception rather than actual measurable practicality. So, we'll predict that phenomenon X will occur because it is the most cost-effective course of action (whether in terms of actual money, or energy expended, or time spent on task), only to find that phenomenon X doesn't occur, or that it sort-of occurs, but only within certain limited parameters. In the case at hand, the fact that someone could have long-term savings if they make a large initial investment could easily be off-set by the fact that there is less money spent in the short-term. And given that the cost of a Kindle is somewhere in the neighborhood of the cost of ten paperback books, this might create an illusion of lesser cost if one simply buys the books - whether true or not, it may be perceived that way. Also, if someone is of more limited means, they may not have the one-time cost of the e-reader at hand, but may have the money to purchase a single paperback. You could make the argument that the person could simply save the paperback money until they had enough for the e-reader, but the fact of the matter is that only a small portion of people will actually behave in that fashion, rather than simply buying the paperbacks as they have the means.

And understand that this is not a behavior limited to modern people living in the U.S. Archaeologists and historians have long created models for everything from the purchasing habits of historic people to the foraging habits of hunter-gatherers based on the principle that option that produces the best long-term return on investment (whether measured in money spent on goods or calories burnt while gathering and hunting) will be the option chosen. Time and again we have found that this is only partially true, and that nobody ever seems to behave in a truly optimal fashion. People will often go for a "good enough" return rather than a really good one, and there are often factors that make a lousy return on investment attractive.

To this last point, there is one other thing that may protect the paperback market, at least to a degree. For most people, buying books is not about economics - yes, economics plays a role, and prices will influence if and what people buy, but if it was solely economic most book buyers would be more likely to simply go to the library. There is an experience involved with browsing book stores, with being able to pick up a book that you want and find one that you had not been aware of but now really want to read. The smell, appearance, and layout of book stores make for part of the experience. Many readers find the purchase and possession of a paperback to be satisfying. All of this is part of the book market, but none of this gets factored in when one only considers basic financial transactions.

Now, will e-readers eliminate the paperback market? Quite possibly. They do seem to have economics on their side. However, one should always be wary of predictions made on the basic equation of "X costs less, therefore it will spell the doom of Y" - there are many factors that may prevent such predictions from coming true, or may only allow them to become partially true. Whether you're building models for human behavior (like I do) or pondering national policy, these types of arguments sound really good until you look at the data and find out that it's never THAT simple. No model that fails to account for complicating factors should ever be taken as gospel (in other words, no model at all should ever be taken as gospel).