DAVID KESTENBAUM, HOST:

Since the very early days of PLANET MONEY, we have regularly gotten emails from people asking us please, please, do a show about this thing, this thing I had to buy that seems weirdly expensive - textbooks.

You got the textbook there?

KENDALL RAYDUN: I do, yeah. Let me grab it. Yeah, it wasn't cheap, that's for sure.

KESTENBAUM: This is Kendall Raydun. She goes to school at American River College in California.

What's it called? What's the title? Can you read it?

RAYDUN: It is "College Physics."

KESTENBAUM: And how much was the textbook? How much...

RAYDUN: It is about $310.

KESTENBAUM: It was the most expensive book she'd ever seen. Really, she thought, $310 for a book with some online stuff?

RAYDUN: So I was actually kind of irritated, you know? So I ended up - you know, at some point, though, I just needed the book. You know, we were starting class and homework and all that stuff. So I just went and bought it, put it on a credit card.

KESTENBAUM: Kendall is not questioning the value of an education or that in the long run she'll be earning more as a result of this class and the price of that book will be a drop in the bucket. It just seemed like a lot of money for what it was. And something truly strange has been going on in the textbook market. There's this chart that gets cited a lot, maybe you've even seen it. It's from a government report on textbook prices and shows the price of new textbooks over the past decade, and it is a very steep line. The prices of new textbooks have been going up like crazy, faster than clothing, food, cars, even health care.

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KESTENBAUM: Hello, and welcome to PLANET MONEY. I'm David Kestenbaum.

JACOB GOLDSTEIN, BYLINE: And I'm Jacob Goldstein. Today on the show, by popular demand, why are textbooks so expensive? We talked to students and textbook authors and analysts and publishers. And after all that, we think we found a pretty satisfying answer.

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GOLDSTEIN: Let's start with a guy named James Koch. He taught economics at Old Dominion University for a long time. And he never thought about the economics of textbooks until at some point students started coming to him and asking, excuse me, professor, do we really need this book you assigned for class? It's kind of expensive. Koch said, yes, you need it. It's a good book. But this got him thinking about the odd nature of the textbook market.

KESTENBAUM: One thing in particular struck him, which is that he was the one who was choosing the books for class. He thought about it carefully. The book was well-written. He knew it was clear and knew it had good problems at the end of the chapters. But he realized there was one key thing he did not know about it.

JAMES KOCH: I did not know how much it cost.

GOLDSTEIN: Normally, Koch says, the person deciding to buy something is also the person paying for that thing. In this case, that relationship was severed. The person choosing was not paying. Economists call this the principal agent problem. The principal is the person with the money. The agent is the guy figuring out how to spend it.

KESTENBAUM: I call it the someone-else's money problem. It's someone spending someone else's money.

GOLDSTEIN: Is it really true professors don't think about price when they're looking at textbooks for the class?

KOCH: I've been in higher education now for - what? - about four decades, and I never have had a single textbook sales person come into my office and talk about price. They're always talking about, gee, we have this new coverage of these new topics. We have this new DVD. We have these ways that you can test students and give them quizzes and keep track of their progress. It's always what's in the textbook package, never about the price.

KESTENBAUM: It's odd for a salesperson not to talk about price.

KOCH: Well, it's not odd when you think that they're talking to a person who doesn't have to pay it.

KESTENBAUM: (Laughter) That's the problem, huh?

GOLDSTEIN: This can lead to higher prices really in two different ways. I mean, first, the simple one is publishers just have less of an incentive to keep prices down to compete on price. But the second one is actually more interesting to me. This market can lead to a fancier textbook than you'd get otherwise, a textbook loaded up with stuff that students might not need because remember it's the professor who's the customer. So publishers go to professors and say, hey, buy our textbook. It comes with online quizzes and slides and a workbook. I mean, I remember when I was in college, like, at the back of the biology textbook there was this DVD sitting there that I never once used. But I paid for it in the price of the book.

KESTENBAUM: I asked Koch about this particular economics textbook I happened to have in my desk. It is the best-selling economics textbook in America by Harvard economist Greg Mankiw. You can buy it on Amazon for $286.36. So I ask Koch does what you're saying mean that Greg Mankiw, your fellow economist, is making more money than he should off this book? It was an awkward question, but I had to ask. Koch did not want to weigh in, so we did something more awkward. We called up Greg Mankiw himself.

GREG MANKIW: This is Greg Mankiw. I'm a professor of economics at Harvard University.

KESTENBAUM: Let me just start by saying thank you for agreeing to come in and be grilled about the price of your textbook.

MANKIW: It's my pleasure, I think.

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KESTENBAUM: I wanted to know what did the author of an economics textbook think about the very market that that textbook was in. The principal agent problem is right there in his book. It's on page 462. So we ran the idea by him that professors who pick the books aren't paying attention to price. He agreed this was not ideal, but he didn't see it as a big problem.

MANKIW: I don't think it's as unusual a market as you suggest. I think there's lots of other markets that are similar. When you go get a medical operation, you often rely on the advice of a doctor, even though you're paying - you or the insurance company's paying the price. When you go get your car fixed, you're relying on the mechanic to pick out the parts for you. When you're building a new house or a new extension on your house, you're relying on your contractor to find the right parts and look out for your best interests. So I think there's lots of situations where we rely on someone else to help us make an informed decision. And certainly the textbook market is that way.

GOLDSTEIN: I feel like the examples you chose - health care, paying a contractor to work on your house, going to a mechanic - are all the things that people hate paying for for this reason. I mean, people who get their homes renovated talk about what a nightmare it is, and health care is this famously broken market.

MANKIW: Well, I think it's - whenever you have a principal agent problem, there's a risk that the agent, which in this case is the professor, doesn't do due diligence and doesn't do their job correctly and look for the best interests of the principal, which in this case is the student. But a good professor would do that.

GOLDSTEIN: Mankiw says professors do think a lot about what's best for the students.

MANKIW: The biggest expenditure for students is not the expenditure of money, but it's the expenditure of their time. They're spending a lot of time - and, of course, they should spend a lot of time on their course if they're going to get a lot out of it. And I want their time to be used as productively as it can be. And giving them the best book to read that I can is far more important than saving them a few dollars. So if somebody comes in and says I have a book that's - it's not as good, but it's going to save your students $30, I'm going to say given that they're going to spend 40, 50, 60, 70 hours reading this book over the course of a semester, am I really going to skimp on a textbook to get something that's inferior? I don't think so.

KESTENBAUM: So, OK, we have this theory about the someone-else's-money problem driving up the cost of college textbooks. It makes sense, but it seems hard to test, right? You need some parallel universe where the people choosing the textbooks were paying for them so you could see what difference it makes.

GOLDSTEIN: Fortunately for us, that parallel universe exists. It's called high school.

KESTENBAUM: Very nice. High school textbooks are chosen and paid for by the local and state governments. It turns out that forces publishers to keep the cost down. Jonathan Helliwell is a financial analyst at Panmure Gordon, one of the oldest brokerages in England. He says publishers earn much smaller profit margins on high school textbooks than they do on college textbooks.

JONATHAN HELLIWELL: School book publishers make about 5 to 10 percent profit margins and college textbook publishers make 20 percent - can make 20-25 percent profit margins.

KESTENBAUM: And you think one reason is that the people picking the books aren't thinking about cost.

HELLIWELL: I'd say that's the biggest reason is who's the customer and what's the effect of the buying process.

KESTENBAUM: Has anyone in the publishing business ever acknowledged to you that they have this advantage, that the professors aren't thinking about cost?

HELLIWELL: (Laughter) They haven't argued about it when I put it to them. Let's put it that way.

GOLDSTEIN: The someone-else's-money theory is powerful, but it leaves out this one big thing that just about everybody we talked to agreed was a major factor driving up prices, and it's something that oddly does not seem like it would make prices go up.

KESTENBAUM: It is the used textbook market. Twenty years ago, the used book market was local. Basically, you'd go to your college bookstore. If they had a used copy, you could buy it. If not, you were stuck. The internet, of course, changed all that. Now when a student in Florida finishes her class, she can sell her book on eBay to someone in Montana or just get a book on Amazon. Here, I'm looking at the page for Mankiw's textbook - new version, $286; used, $227. If you don't mind one that's a few years old, you can get the previous edition used for $26.

GOLDSTEIN: All of this means that if you're a publisher or a textbook author, you have this really short window to make money off your book because after the first semester, all the students who bought your book are going to turn around and sell it to the next batch of students.

KESTENBAUM: Robert Frank is an economist at Cornell who's written a textbook with former Fed Chairman Ben Bernanke.

ROBERT FRANK: It used to be your new edition would come out. Then, the next year, it would sell half as many copies as the first year and then half again on the third year. Now it's you sell copies - if you sell any at all in the first year - and it's done.

KESTENBAUM: Nothing the next year?

FRANK: Almost nothing the next year.

KESTENBAUM: So if you're a textbook company faced with this problem, what do you do? You're selling fewer books. How are you going to cover your costs? Well, you raise prices.

GOLDSTEIN: And this, it seems, is what textbook companies did, but raising prices just made things worse. People came up with new ways to avoid those higher prices - textbook rentals, illegal downloads. Some students just skip buying books altogether.

KESTENBAUM: Which meant the textbook companies were selling even fewer books, so they raised the price for new books again. You can see where this is going. One textbook salesman I talked to called it a spiral of destruction.

GOLDSTEIN: So you have this battle. On the one hand, the price of new textbooks going up and up and up. On the other hand, students finding lots of ways around buying new, full-priced books. Who's winning?

KESTENBAUM: Turns out, there's data on this, comes from the National Association of College Stores. They do these student surveys asking, how much do you actually spend on textbooks? We talked to Rich Hershman there. He went through the numbers with us.

In 2007, how much did students spend?

RICH HERSHMAN: Seven hundred and two dollars.

KESTENBAUM: 2009 - two years later?

HERSHMAN: Reported spending - $667.

KESTENBAUM: Oh, so it went down?

HERSHMAN: Yes, it did.

KESTENBAUM: 2011?

HERSHMAN: Six hundred and fifty-five dollars.

KESTENBAUM: Down again, went up a bit the next year, then down even further.

HERSHMAN: So what we've seen, essentially, is flat to declining spending from students - what the students are saying they're spending on required course materials over the last five-six years.

GOLDSTEIN: Students have, basically, fought the publishers to a draw on this one.

KESTENBAUM: And yet, everyone seems to feel like they're losing - students who have to pay $300 for new physics textbooks, professors who are hearing their students complain, textbook sales people who once felt proud that they were helping further education but are now embarrassed to be out selling these really expensive books, which may be one reason why when I finally sat down with David Levin, the president and CEO of one of the biggest textbook companies around, McGraw-Hill Education, he did not want to talk about textbooks. I kept asking about books. He kept talking about educational software. He saw it as a way out of this big spiral of destruction and rising prices - electronic, interactive versions of textbooks.

DAVID LEVIN: We've got now 500 engineers building those full time, about $150 million a year going into product creation. Your grandfather's textbook company didn't do that. It sat astride a business which was simple - produce books, and that's what it did. We are ploughing huge resources into creating a new set of instructional materials which help students and help instructors and do so at a much lower price than it's ever been seen before.

KESTENBAUM: You really don't want to talk about books anymore.

LEVIN: I - we don't. This isn't - this is not - it's not very interesting to us.

GOLDSTEIN: Digital textbooks are cheaper than traditional textbooks, easy to update, they don't weigh anything. But for students, there is this one big drawback. You can't sell them back to the bookstore or to anyone at the end of the semester. There is no used market for digital textbooks.

KESTENBAUM: They just got to find a way to keep students from downloading them illegally.

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GOLDSTEIN: Our show today was produced by Phia Bennin. You can email us at planetmoney@npr.org. You can find us on Facebook or Twitter.

KESTENBAUM: Also special thanks to Eric Weil at Student Monitor for sharing your data on textbook spending and to all the students who talked to me about their expensive textbook purchases - Beverly Minton (ph), Jamie Pyce Phillips (ph), Josh Raymond, and Brittany Basile (ph).

Several of you, by the way, asked us to look into why there seemed to be this constant stream of new editions of textbooks. Were those really necessary, you asked, or just attempts to sell more new copies? So we asked this question. Robert Frank, the economist, told us that for the micro-economics textbooks that he writes, he did not see any good reason why it needed to be updated as often as it is. He said for macroeconomics, you would want to update it because, you know, there are things like the financial crisis that happened.

I also asked David Levin, the CEO of McGraw-Hill Education, about new editions. In particular, we were talking about calculus textbooks because, you know, the subject of calculus doesn't really change. He told me they published one calculus book. It had last been updated in 2011, five years after the previous edition. He said they added a bunch of new problems and revised some parts of the text. But he wrote, quote, "I can pretty much guarantee that we will never produce another print edition of this book."

All right, I think that's it. I'm David Kestenbaum.

GOLDSTEIN: And I'm Jacob Goldstein. Thanks for listening.

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