Ownership consolidation and product quality -A Study of the U.S. Daily Newspaper Market

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Ownership consolidation and product quality -A
Study of the U.S. Daily Newspaper Market
GroupDai Xincheng Xu Lu Zhang Xiaomeng Xin Min
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1. Introduction

• 1.1 Goals of the paper
• The author studies newspaper markets of U.S. and
  develops a structural model of the markets, where
  firms can choose both price and quality, to
  analyze the effects of ownership consolidation.
• The effects includes
• How price changes
• How product characteristics change
• How welfare in the U.S. change
  

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1.2 Framework of the paper

• structural model set up

The demand side Demand for newspapers and
Demand for advertising
The supply side firms profit function.
Necessary Equilibrium conditions FOC of the firms
profit function with respect to price,
advertising rate as well as the characteristics
of the paper
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1.3 Estimation part

• First, the author estimates the parameters of the
  model using data set
• Next, based on the estimation of the model
  parameters, the author then simulates the effects
  of a merger.
• Further, the author conducts a case study in the
  Minneapolis .

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• 1.4 What is novel about this paper
• (1) Data The author estimates the model using a
  relatively new and more complete data set on
  newspaper prices and characteristics.
• (2) Model set up The author shows that ignoring
  quality adjustment can be a serious omission when
  investigating the price effect and the welfare
  effect of a merger.
• (3)Estimation New computational method to
  solve the problem in this paper which involves
  endogenous product choice.

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2. The theoretical model

• 2.1 Demand
• Assumption
• A household buys no more than 2 newspaper.
• Utility decreases from the second choice.
• ?Regression equation (1) demand for
  newspaper

? Regression equation (2) demand for
advertising
Here, author assumed that reders do not care
about advertising
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• 2.2 Supply
• Assumption
• a). the characteristics and prices of the three
  national newspapers are taken as given
• b). limit the set of counties
• c). a newspaper publisher can exploit economies
  of scope
• only if the home counties of its newspapers
  are in the same Metropolitan Statistical Area

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• The profit function
• the variable profit from circulation and
  advertising
• Where
• everage cost
• marginal advertising sales cost

Variable profit
profit
Fixed cost
Circulation profit
Advertising profit
Preprint profit
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• 2.3 Necessary Equilibrium Conditions
• ?Regression equation (3)
• ?Regression equation (4)
• ?Regression equation (5)

the derivative of with respect to
advertising rate
the first-order condition with respect to
subscription price
the necessary optimality condition for the
characteristic
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3. Estimation result
An increase in circulation and a decrease in
advertising rate raise advertising demand
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What if the ownership consolidation of Star and
Pioneer had been upheld?
4. Case study
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Only prices are adjusted
Intuition Subscription prices increase
positive cross price effect of these two
newspapers Marginal value of circulation is
higher for larger newspapers the advertising
profit function is convex in circulation
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Both quality and prices are endogenously chosen
by publishers
? Intuition McClatchy increases the product
differentiation cannibalization concern
dominates, since the overlap between the two
newspapers in the merger and the other newspapers
is small.
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Comparison

• Without quality adjustment

• Both price and quality are chosen endogenously

• Reader surplus
• -4.04 million dollars
• Advertiser surplus
• -5.43
• Publiser surplus
• 13.96 million dollars

• Reader surplus
• -4.02 million dollars
• Advertiser surplus
• -4.49
• Publiser surplus
• 15.03 million dollars

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Thank you for your attention