Academic journal article American Economist

The Effects of Monopolization on Newspaper Advertising Rates

Academic journal article American Economist

The Effects of Monopolization on Newspaper Advertising Rates

Article excerpt

It is almost universally assumed that monopolization in an industry leads to higher prices and lower output. This paper, however, demonstrates, both intuitively and empirically, that advertisers actually benefit from the geographic concentration of the newspaper industry. A regression, using thirty-five cities, showed advertising prices were positively related to competition, although the coefficients were statistically insignificant. This result is not surprising. Newspaper firms face substantial fixed costs and low marginal costs which creates the potential for a profit monopolist to charge lower prices. In fact, any industry which incurs high fixed costs is apt to experience economies of scale, resulting in lower average costs. If the reduction in average costs is substantial, lower consumer prices will result.

I. Introduction

It is almost universal assumed that monopolization in an industry leads to higher prices and lower output. The legislature, consumers and introductory textbooks point out the evils of monopolization and the virtues of competition. Economists have known that in theory monopolization can lead to lower prices because of economies of scale, but evidence supporting the benefits of monopolization is virtually never presented. This paper examines the daily metropolitan newspaper industry. Newspaper firms face substantial fixed costs and low marginal costs which creates the potential for a profit seeking monopolists to charge lower prices.

II. A Look at the Impact of Economies

of Scale on Average Costs

Newspapers are faced with high first issue costs; those costs necessary to produce the first copy of the paper which do not fluctuate with circulation. These costs include creating the content, news gathering, purchasing and editing costs, costs of typesetting, and printing plate preparation. James Rosse, Professor of Economics at Stanford University, estimates that first copy costs may account for as much as 40% of total costs for a "small circulation" (pp. 16).

Anumerical example can show the sharp increase in average costs which may be experienced under a duopoly. Let's assume A is the only firm producing a newspaper in a town and the circulation is 300,000 units of production. A's total costs are comprised of first copy costs and the variable costs associated with 300,000 units of production. Now suppose Firm B enters the market and both firms produce half the original circulation and charge the same price per reader for advertising as the monopolist had. Further, assume that all advertisers want to advertise in both papers to reach the complete original audience. Each firm will have to incur the first copy costs plus the variable costs associated with 150,000 units. The total industry's first copy costs will double, while variable costs and total revenue will stay the same. If first copy costs accounted for 20% of the monopoly newspaper's costs, industry costs have now arisen 20%, while industry production has remained unchanged. Average costs are much lower for the monopoly firm (first copy costs/300,000 + variable costs) than the duopoly firms (first copy costs/150,000 + variable costs).

The following table works through a simple numerical example to compare the firm and industry costs under the monopoly and duopoly cases. It will be assumed that fixed costs equal 20% of total costs for the monopoly firm and circulation is 300,000.

Today almost all metropolitan areas in the U.S. have either one or two major dailies; i.e. in each of these cities either a geographical monopoly or duopoly exists. The question is how the cost functions and the pricing decisions differ between duopoly and monopoly firms.

III. Previous Studies

This paper provides estimates of the effects of competition on advertising rates. Using the July 12, 1990, Newspaper Rates and Data, all thirty-five cities with circulation above 200,000 newspapers reporting a price for a standard advertising unit (sau) for black/while retail advertising were included in the data set. …

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