Ownership consolidation and product quality

-A Study of the U.S. Daily

Newspaper MarketGroup:Dai Xincheng

Xu LuZhang Xiaomeng

Xin Min

1. Introduction1.1 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

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

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 .

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.

2. The theoretical model2.1 DemandAssumption:1. A household buys no more than 2 newspaper.2. 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

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

1. The profit function:

2. 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

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

An increase in circulation and a decrease in advertising rate raise advertising demand

3. Estimation result

What if the ownership consolidation of Star and Pioneer had been upheld?

Faribault Daily

St. Cloud Times

Star TribunePioneer Press

Star Tribune

Pioneer Press

4. Case study

Only prices are adjusted:

Intuition:Subscription prices increase: positive cross price effect of these two newspapersMarginal value of circulation is higher for larger newspapers: the advertising profit function is convex in circulation

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.

Comparison

Without quality adjustment• Reader surplus

• -4.04 million dollars• Advertiser surplus

• -5.43%• Publiser surplus

• 13.96 million dollars

Both price and quality are chosen endogenously• Reader surplus

• -4.02 million dollars• Advertiser surplus

• -4.49%• Publiser surplus

• 15.03 million dollars