Textbook publishers hope to maximize profits. Authors, however, face very different incentives. Authors are typically paid royalties, which are a specified percentage of total revenue from the sale of a book

Question

And so, for example, if an author's contract says that she will receive 20 percent of the revenues from the sale of a text and the publisher's total revenues are $100,000, the author's royalties will be $20,000 . Who will prefer a higher price for the text, the publisher or the author?

Answer 1

The publisher is likely to prefer a higher price for the text. The diagram below helps explain this problem. The publisher wants to maximize profits and therefore would prefer to sell Q1 books, the quantity that equates MR and MC. The publisher would therefore like to choose the price P1 . In contrast, an author who wishes to maximize royalties will want to maximize total revenues; the author in our example maximizes 20 percent of total revenues by maximizing total revenues. In order to maximize total revenue, the author would choose Q2, the quantity such that MR = 0 . If MR = 0, then total revenues will not rise if the publisher sells one more book nor rise if the publisher sells one fewer book. The author would therefore like to choose P2, which is less than the publisher's preferred price P1 .