expensive. Noam emphasizes that chain ownership has steadily replaced independent,
local newspapers. The fraction of daily papers owned by newspaper groups rose from
15% in 1930 to 65% in 1980. While this trend has slowed in recent years, it remains
the case that 70% of newspapers today are owned by an out-of-town company.
Fu (2003) docu ments t he incre asing importance of newspaper ch ains in the US
and points out that, by 1997, the top 20 newspaper chains owned 32% of daily news-
papers, but 62% of daily circulation, showing that chain newspapers t end to be larger.
Chandra and Collard-Wexler (2009) document a similar ph enomen on of chain con-
solidation in Canada. They describe how 75% of Canadian daily newspapers changed
ownership between 1995 and 1999, primarily driven by the expansion of two nation-
wide chains.
The growth of newspaper chains raises two concerns: the first is that it can reduce the
variety of opinions put forward by the media. This is especially the case as chain news-
papers tend to carry the same syndicated columnists in all of their papers. The second
concern—potentially more important from an Industrial Organization perspective—is
that the rise in chain ownership increases the possibility of multi-market contact between
publishers and raises concerns about tacit collusion. Both papers mentioned above discuss
these issues.
Fu (2003), in particular, examines multi-market contact between newspaper
chains in detail and shows that newspaper publishers who compete with each other in
multiple markets tend to have higher advertising prices.
Ferguson (1983) provides evi-
dence that newspapers that are part of chains tend to have higher advertising rates.
Dertouzos and Trautman (1990) note that the rise of newspaper chains has been subject
to both Congressional hearings and investigations by the Federal Trade Commission. We
discuss their paper in more detail in
Section 9.4.1, but note for now that they find no
evidence that chain newspapers are more efficient than independents.
9.4. NEWSPAPERS AND MAGAZINES AS TWO-SIDED MARKETS
An important feature of print media is that they cater to two different types of consumers:
readers and advertisers. Advertisers value circulation so that advertising demand and mag-
azine demand are related. At the same time, readers may have a (dis-)taste for advertising,
leading to the two sides of the market being interrelated. These two-way network exter-
nalities create a two-sided market, and print media markets are prototypical examples of
it. In this section, we review papers that use the two-sided markets framework to analyze
print media markets, although we note that a large number of studies on this topic existed
well before the recent development of the two-sided market literature. We also review
some special topics on pricing in these industries. Readers should see
Chapter 2 for a
more comprehensive review of the two-sided market literature. Our focus in this section
is on empirical studies but we also discuss theoretical contributions where appropriate.
416 Handbook of Media Economics
9.4.1 The Older Literature on Cross-Externalities in Print Media Markets
Common to the older literature on print media markets and cross-externalities is that it
primarily is what we would nowadays call “structural.” These papers derive (inverse)
demand equations for circulation and advertising, which are subsequently estimated.
These equations are linear and therefore do not allow for competition. Like recent struc-
tural studies, the early scholars use their models to conduct counterfactual analyses and to
calculate own-price elasticities.
Network externalities in newspaper markets had been recognized decades ago with
the diagrammatic exposition of the newspaper firm’s profit maximization problem by
Corden (1952–1953). In other early work, Reddaway (1963)—then President of the
British Royal Commission on the Press—emphasized the role of circulation in the
demand for advertising.
The first paper to actually estimate a “structural” model with interrelated demand was
Rosse (1967), who studies why the newspaper industry had become more concentrated
over time. One of the explanations for increased concentration is economies of scale in
production, as we discussed in
Section 9.3. Rosse’s (1967) paper has two parts, an analysis
of economies of scale in newspaper and advertisement production, and an analysis of
advertising space. The first part endogenizes the number of content pages, cover prices,
ad rates, circulation and advertising space, and separately estimates each (interrelated)
equation. He uses the parameters of these equations to back out estimates for marginal
production cost, finding evidence for returns to scale in newspaper and advertisement
production. In fact,
Rosse’s (1967) is the first paper to estimate marginal cost based
on functional form assumptions and under the absence of actual cost data.
8
The second part of Rosse (1967) deals with the estimation of demand elasticities and
serves to corroborate the earlier findings regarding economies of scale using a longer time
span and a broader set of newspaper firms. The second study does in fact confirm the
initial finding of returns to scale in production. It also indicates that returns to scale have
remained fairly constant since 1939, which may not explain the observed increase in
newspaper concentration. The second part of
Rosse (1967), explained in much greater
detail in
Rosse (1970), constitutes the first true estimated two-sided market model as he
makes advertising demand dependent on circulation, and circulation dependent on
advertising.
In a paper that analyzes the importance of audience characteristics for advertising
rates,
Thompson (1989) deals with the tradeoff between newspaper circulation and
the share of high-income newspaper readers. The paper also explicitly accounts for
the two-sidedness of the newspaper market, and estimates a system of simultaneous equa-
tions for circulation, cover prices, and advertising rates.
8
Rosse (1967) was also among the first to take Chamberlin’s (1960) model of monopolistic competition
to data.
417
Newspapers and Magazines
Much of the literature that followed also concerned itself with concentration in print
media markets, often motivated by the occurrence of “one-newspaper cities” in Australia
(
Chaudhri, 1998; Merrilees, 1983) and the US (Blair and Romano, 1993; Bucklin et al.,
1989; Dertouzos and Trautman, 1990; Ferguson, 1983
).
Merrilees (1983) provides a primarily descriptive event study of a price war between
Sydney-based newspapers in the 1980s. His theoretical considerations include an equa-
tion for the demand for advertising that depends on circulation. He does not, however,
account for reverse network effects.
Bucklin et al. (1989) estimate a system of simulta-
neous equations where newspapers set ad rates, cover prices, and editorial quality to max-
imize profits. They show that feedbacks between each market side exist and argue that
these feedback structures make the newspaper industry prone to what they refer to as
“ruinous competition.”
In their study of US newspapers,
Dertouzos and Trautman (1990) also focus on the
competitive situation of media firms and estimate a model that takes into account the
interrelatedness between circulation and advertising. Their main findings are that there
exist scale economies in newspaper production, that these are not larger for chain news-
papers than for independent ones, and that newspapers in adjacent geographical areas put
competitive pressure on local newspapers. They do not, however, find evidence for com-
petitive pressure from radio broadcasting.
In an earlier study of media cross-ownership that, however, does not consider feed-
backs from either market side,
Ferguson (1983) examines cross-ownership of newspapers
and other media; we discuss this paper in more detail in
Section 9.6.
9.4.2 The Two-Sided Market Framework
The earlier papers on the newspaper market typically assumed monopoly with respect to
the readership side. As a result, the literature does not consider how the structure of prices
emerges from competition between two platforms that strategically set prices to each side
to take into account interrelated demands. This actually constitutes a key question in
print media markets and two-sided markets more generally: How does a print medium
as a platform price each distinct type of user?
Armstrong (2006), Gabszewicz et al. (2001),
as well as
Rochet and Tirole (2003) provide theoretical frameworks of two-sided markets
to explain the pricing structure of these firms, and
Weyl (2010) generalizes Rochet and
Tirole’s model.
A central finding of
Armstrong (2006) is that prices on either market side are deter-
mined by the size of cross-group externalities—the network effects that run from the
reader market to advertising and vice versa—the way fees are charged (lump-sum or
on a transaction basis) and whether advertisers multi-home, i.e., advertise in multiple
print media. Cross-group externalities make competition fiercer and reduce platform
profits. He shows that there is under-advertisement compared to the social optimum
418 Handbook of Media Economics
since platforms operate as monopolists on the advertising market. Armstrong (2006) also
coins the term “competitive bottleneck” model, where readers single-home and adver-
tisers multi-home. He additionally considers two other types of platform competition,
monopoly platforms and competing platforms.
That publishers have an incentive to cross-subsidize one side of the market by the
other has been discussed in earlier theoretical work by
Rochet and Tirole (2003).
9
They
show that it may pay off for publishers to set copy prices even below marginal cost in
order to make the print medium more attractive for advertisers. In their paper, which
is primarily written with the credit-card market in mind,
Rochet and Tirole (2003) dis-
tinguish for-profit and not-for-profit platforms. They compare the respective market
outcomes in each case to the social optimum and recognize that prices on one market
side depend on the degree of multi-homing on the respective other market side. The
consequences of multi-homing for market outcomes is an issue that is the focus of a
few of the subsequent papers that we shall review below.
Gabszewicz et al. (2001) also use a Hotelling setup to explain the pricing structure in
newspaper markets. They consider what later was termed a competitive bottleneck
model and show that advertising revenues are used to subsidize the reader market.
We now turn to recent empirical work that uses structural methods based on the two-
sided markets framework.
Rysman (2004) was the first to derive a structural model for a
market with externalities where only advertisers are priced: Yellow Pages. He establishes
that network cross-effects exist in both directions in the Yellow Pages market: advertisers
value the number of readers and readers value advertising. He estimates a nested logit
model for the demand for Yellow Pages and an inverse demand equation for advertising.
His inverse advertising demand function assumes that readers of Yellow Pages single-
home, i.e., they read at most one Yellow Page directory, an assumption that appears
reasonable in this setting. His estimates suggest that an internalization of these network
effects would significantly increase surplus.
Kaiser and Wright (2006) was the first paper to estimate a structural model of two-
sided markets where both sides are priced. This is not the case in Rysman’s Yellow Page
analysis because directories are usually given free to consumers. Kaiser and Wright build
on the generic two-sided market model of
Armstrong (2006), discussed above, to set up
an estimable structural model for German duopoly magazine markets. They derive mag-
azine and advertising demand from a Hotelling specification where magazines compete
in differentiated Bertrand fashion. The parameters of these demand equations are
subsequently used to back out the subsidies publishers pay to each market side, as well
as marginal cost, distribution cost, and profits.
Kaiser and Wright (2006) also conduct
9
Armstrong’s (2006) model has a general setup quite similar to Rochet and Tirole (2003), but differs in
important ways in how the benefits of joining a platform are defined, which changes the definition of
profit-maximizing prices in the two papers.
419
Newspapers and Magazines
comparative-static analyses whose results are consistent wi th the per ception tha t prices
for readers a re subsidized (cover p rices are around o r even below marginal cost) and that
magazines g enerate their prof its from adve rtisements. They a lso find that advertisers
value readers more than rea ders value advertisements. This implies that higher demand
for copies raises ad rat es and that an increased demand for advertisements decreases
copy prices. They also show that their estimated production costs are similar to those
reported by industry sources. Finally, they show that their results are qualitatively
invariant to accounting for multi-homing on behal f of advertisers (adverti sers who
place their ads in multiple magazines) and readers (readers who purchase multiple
magazines).
In a study of market power in the Italian national newspaper industry that also uses
structural econometric modeling and that we discuss in more detail in
Section 9.5,
Argentesi and Filistrucchi (2007) assume away feedbacks from the advertising market
to the reader market. Advertising demand and circulation are both specified as logit-type
demand models. They back out markups from their estimations and compare estimated
and actual markups to infer market conduct.
In a recent study of the US newspaper industry that we discuss in more detail in
Section 9.5, Fan (2013) assumes that newspaper readers do not care about advertising,
which implies that network externalities only flow from readers to advertisers but not
vice versa. This assumption is supported by her estimation results.
Van Cayseele and Vanormelingen (2009) also provide evidence for advertising neu-
trality of newspaper readers. Their paper generalizes
Kaiser and Wright (2006) by allow-
ing for oligopoly (instead of duopoly) competition and multi-market contact of
publishers. They derive a model of supply and demand for newspapers and advertising,
using a nested logit model for circulation and a linear inverse demand function for adver-
tising similar to that of
Rysman (2004). Their data on Belgian newspapers allows them to
assess newspapers’ market power and market competitiveness before the background of a
major market consolidation. They also evaluate an actual merger that occurred in the
Belgian newspaper industry.
In an attempt to test theories derived from behavioral economics in an Industrial
Organization setting,
Oster and Scott Morton (2005) use US magazine data to analyze
whether wedges between subscription and news-stand prices are larger for magazines that
generate future benefits (like investment magazines) and that generate instantaneous ben-
efits (like leisure magazines). They argue that this wedge should be relatively larger for
investment magazines than for leisure magazines since news-stand consumers fully value
the leisure good but discount future payoffs from investment magazines. In their data for
300 consumer magazines, they find evidence that such wedges do in fact exist, which
implies that publishers are aware of the time-inconsistent behavior of their customers.
Oster and Scott Morton (2005) also consider feedbacks from the advertising market to
the reader market by including advertising rates in their equations for relative news-stand
420 Handbook of Media Economics
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