Tag: death spiral

A textbook death spiral

NPR has a nice article on self-regulation in the textbook industry. It turns out that textbook prices are up almost 100% from 2002, yet student spending on texts is nearly flat. (See the article for concise data.)

Here’s part of the structure that explains the data:

Starting with a price increase, students have a lot of options: they can manage textbooks more intensively (e.g., sharing, brown), they can simply choose to use fewer (substitution, blue), they can adopt alternatives that emerge after a delay (red), and they can extend the life of a given text by being quick to sell them back, or an agent can do that on their behalf by creating a rental fleet (green).

All of these options help students to hold spending to a desired level, but they have the unintended effect of triggering a variant of the utility death spiral. As unit sales (purchasing) fall, the unit cost of producing textbooks rises, due to the high fixed costs of developing and publishing the materials. That drives up prices, promping further reductions in purchasing – a vicious cycle.

This isn’t quite the whole story – there’s more to the supply side to think about. If publishers are facing a margin squeeze from rising costs, are they offering fewer titles, for example? I leave that as an exercise.

The Health Care Death Spiral

Paul Krugman documents an ongoing health care death spiral in California:

Here’s the story: About 800,000 people in California who buy insurance on the individual market — as opposed to getting it through their employers — are covered by Anthem Blue Cross, a WellPoint subsidiary. These are the people who were recently told to expect dramatic rate increases, in some cases as high as 39 percent.

Why the huge increase? It’s not profiteering, says WellPoint, which claims instead (without using the term) that it’s facing a classic insurance death spiral.

Bear in mind that private health insurance only works if insurers can sell policies to both sick and healthy customers. If too many healthy people decide that they’d rather take their chances and remain uninsured, the risk pool deteriorates, forcing insurers to raise premiums. This, in turn, leads more healthy people to drop coverage, worsening the risk pool even further, and so on.

A death spiral arises when a positive feedback loop runs as a vicious cycle. Another example is Andy Ford’s utility death spiral. The existence of the positive feedback leads to counter-intuitive policy prescriptions: Continue reading “The Health Care Death Spiral”