Download The theoretical model

Ownership consolidation
and product quality
-A Study of the U.S. Daily Newspaper
Market
Group:Dai Xincheng
Xu Lu
Zhang Xiaomeng
Xin Min
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
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 model
2.1 Demand
Assumption:
1.
2.
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
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:
profit
2.
Variable profit
Fixed cost
the variable profit from circulation and advertising
Circulation profit
Where:
everage cost:
marginal advertising sales cost:
Advertising profit
Preprint profit
2.3 Necessary Equilibrium Conditions
◆Regression equation (3):
the derivative of
with respect to advertising rate
◆Regression equation (4):
the first-order condition with respect to subscription price;
◆Regression equation (5):
the necessary optimality condition for the
characteristic
3. Estimation result
An increase in circulation and a decrease in
advertising rate raise advertising demand
4. Case study
What if the ownership consolidation of
Star and Pioneer had been upheld?
Star Tribune
Star Tribune
Pioneer
Pioneer Press
Press
Faribault Daily
St. Cloud Times
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
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