both circulation and newspaper content. Rosse (1967) also finds important economies
of scale in both the circulation and advertising sides.
Reddaway (1963) provides evidence on the importance of fixed costs in the UK
newspaper industry, using detailed information on the cost structure of various papers,
including the differences between local and national papers, as well as between quality
and popular papers. Reddaway asks how it can be that the “quality” national papers
in Britain could compete with the “popular” papers, when the former had a tenth of
the circulation of the latter, as well as higher per-copy costs stemming from their larger
physical size. The answer, of course, lies in the greater ability of quality papers to charge
advertisers for delivering the most desirable audiences to them.
Berry and Waldfogel (2010) examine how market size affects the quality and variety
of products. They focus on two markets that are often defined at the level of a city or
metropolitan area: restaurants and newspapers. They show that while the range of qual-
ities in the restaurant industry increases linearly with market size, the same is not true of
newspapers. Although the average quality of newspapers is higher in bigger markets, these
markets do not offer much additional variety. Berry and Waldfogel suggest that fixed
costs are the explanation. In particular, they argue that quality improvements in news-
paper markets depend on investments in fixed costs, such as more or better reporters
and editors, rather than on marginal costs, such as paper, printing, and distribution. They
note that, while some economies of scale in newspaper production seem clear, it is not the
case that newspapers in even very small markets charge much higher prices, suggesting
some upper bound on how important economies of scale are. Of course, this argument
de-emphasizes the importance of the advertising side of the industry, and in fact Berry
and Waldfogel focus entirely on the circulation side of the market, treating advertising
revenue as a per-reader subsidy.
Berry and Waldfogel show that, even in very large markets, the market size of the
largest newspaper remains at least 20%, and usually considerably more, in sharp contrast
to the restaurant industry. The results appear to support the idea that, as market size
increases, at least one newspaper has the incentive to invest considerably in quality in
order to retain readers. Newspapers in larger markets tend to have a bigger staff of jour-
nalists, be physically bigger in terms of page size, and have a higher quality of reporting, as
measured by the number of Pulitzer Prizes won per staff member.
George and Waldfogel (2003) examine the relationship between consumer prefer-
ences and the number of daily newspapers that a market can support. They use zip-code
level newspaper circulation data in the US to show that race has an important relationship
with the number of newspapers in a market. In particular, the tendency for blacks to pur-
chase a daily paper increases with the aggregate number of blacks in the market but
decreases with the number of whites. The tendency for whites to purchase a newspaper
increases with the number of whites but is not affected by the number of blacks. There is a
similar finding with regard to Hispanics and non-Hispanics, but other characteristics,
414 Handbook of Media Economics