Spatial Predation in the UK newspaper industry

1. Spatial Predation in the UK newspaper industry 5th Workshop on Media Economics Bologna 2007 by Stefan Behringer

2. Motivation I • Price war in the 1990s in the UK quality broadsheet newspaper industry. • Rupert Murdoch, who recently acquired The Times, initiates a price war on 6 September 1993 with a cut from 45p to 30p.

3. Prices from 1990 to 2000

4. Motivation II • The Independent claims that the price of 20p per copy of The Times amounts to a „£30m a year subsidy“. • OFT decides on the 21 October 1994 that price cuts does not establish the case for fomal action under competition legislation with a focus on „predatory pricing“.

5. Motivation III • Problem of definition of „predation“. To escape the „Chicago critique“ models are based on asymmetric information, such as financial predation, signalling, and reputation mechanisms. • Gual et. al. 2005 argue for a more „effects based“ rather than „form based“ approach to EU competition law.

6. „Spatial Predation“ I • The newspaper industry is a prima facie case for a market that can be looked at using the Hotelling model. The product differentiation space is the political orientation of the newspaper on the unit line.

7. „Spatial Predation“ II • This potentially allows for „spatial predation“ by a predator moving towards a prey on the political line to induce exit (which is not even costly for given prices, contrary to „price predation“). • The „spacial predation“ idea is related to the literature on „product proliferation“ that studies incumbents‘ motivation to occupy locations to prevent entry.

8. Problems with the Hotelling model • „Undercutting“ in leads to discontinuities. • Existence of equilibria in pure locations with n>2 firms especially on the line. • The sequence of events is critical. • A general model with n>2 firms on the line, and with endogenous prices and locations is very complex to solve.

9. Bringing data to the model • A spreadsheet approach simplifiying the theoretical problems by assuming that firm prices and locations are as given by the data. • Consumers (readers) are optimizing and fully rational. • Key question: Was there „spacial predation“ by The Times and who was the prey?

10. Market Shares from 1990 to 2000

11. Assumptions • Consumers are distributed normally with quadratic disutility from distance. • There are 4 firms: i=G,I,T,DT, the Guardian, The Independent, The Times, and the Daily Telegraph in political order. • Firms choose political orientation (location) and price. • Indifferent consumer x. is at

12. Theory I • Market shares determine the location of the marginal consumers x as • Then firm locations given prices can be calculated recursively with one d.f. from

13. Theory II • We fix the location of the Guardian as • Fixing the location of a different paper each period reveals that the location of G does not change much (G is peripheral to the price war, no price changes occur).

14. Results I

15. Interpretation I • Times moves towards the political Left over the period. • Room between T and I becomes tighter (the marginal consumer is „politically squeezed“) but T does not lose too much in its backyard as DT moves to the Right. • In the Hotelling model location and price choices jointly determine market shares.

16. Separating the price effect • Problem of „undercutting“ given data and choice of parameter t. • We now compare locations for small and large product differentiation parameters during the price war period. • A large difference between curves implies that much of the market share movements can be explained by the price changes.

17. Results II

18. The price war period

19. Interpretation II • First phase of price war 47-56 (Times cut to 30p) much of the changes in market shares can be explained by price changes. • In the second period 57-68 (T cut to 20p with I and DT following with a cut to 30p) relative price differences play a minor role and was accompanied by a significant (and costly) move of the Times to the political Left.

20. Possible Extension I • Newspapers as two-sided markets: Price war was intended to increase circulation and thereby advertising revenue. • Data on advertising revenue is needed to make investigations along the lines of Kaiser & Wright 2006 and Argentesi & Filistrucchi (forthcoming) possible and answer the question about „predation“.

21. Possible Extension II • Model the advertising side as Hotelling. • Take newspaper locations as above and use them in the advertising demand equations to estimate coefficients. • Compare the performance of first order conditions for profit-maximizing prices and advertising rates during the critical period.