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

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

2. 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

3. 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

4. 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 .

5. 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.

6. 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

7. 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

8. The profit function: • the variable profit from circulation and advertising Where: everage cost: marginal advertising sales cost: profit Variable profit Fixed cost Circulation profit Advertising profit Preprint profit

9. 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

10. 3. Estimation result An increase in circulation and a decrease in advertising rate raise advertising demand

11. 4. Case study What if the ownership consolidation of Star and Pioneer had been upheld? Star Tribune Star Tribune Pioneer Press Pioneer Press Faribault Daily St. Cloud Times

12. Only prices are adjusted: Intuition: Subscription prices increase: positive cross price effectof these two newspapers Marginal value of circulation is higher for larger newspapers: the advertising profit function is convex in circulation

13. 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.

14. Comparison Without quality adjustment Both price and quality are chosen endogenously Reader surplus -4.02 million dollars Advertiser surplus -4.49% Publiser surplus 15.03 million dollars • Reader surplus • -4.04 million dollars • Advertiser surplus • -5.43% • Publiser surplus • 13.96 million dollars

15. Thank you for your attention