Rising Prices Under Declining Preferences: The Case of the U.S. Print Newspaper Industry

Abstract

Between 2006 and 2011, daily print newspapers in the U.S. lost 20% of their paid subscribers, partly due to increasing availability of alternative sources of news, such as free content provided on newspaper websites and by news aggregators such as Yahoo. However, contrary to the expectation that firms respond to softening demand by lowering prices, newspapers increased subscription prices by 40-60% during this period. In this paper, we explain and quantify the factors responsible for these price increases. We calibrate models of readership and advertising demand using data from a top-50 U.S. regional print newspaper. Conditional on these demand models, we calibrate the newspaper's optimal pricing equations, and assess whether the increase in subscription prices are mainly rationalized by: a) the decline in overall readers' willingness to pay (WTP) in the presence of heterogeneity among subscribers which rendered it optimal for the newspaper to focus on the high WTP readers, or b) the newspaper's reduced incentive to subsidize readers at the expense of advertisers, due to softening demand for newspaper advertising. We find that the decline in the ability of the newspaper to subsidize readers by extracting surplus from advertisers explains most of the increase in subscription prices. Of the three available subscription options (Daily, Weekend, and Sunday only), subscription prices increased more steeply for the Daily option, a pattern consistent with the view that newspapers are driving away low valuation weekday readers while preserving Sunday readership and the corresponding ad revenues. Thus, our research augments theoretical propositions in two-sided markets by providing a formal empirical approach to unraveling the relative importance of the role played by agents on the subsidy and demand side in determining prices.

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“…Nation-wide newspaper markets are often divided among a small group of suppliers (Schütz, 2012). As Pattabhiramaiah et al (2018) argue, local newspapers nevertheless face competition from (the relatively few) national newspapers. Second, newspapers are differentiated products (George, 2007).…”

“…This is of particluar relevance in light of recent findings. As Pattabhiramaiah et al (2018) observe, newspapers are confronted with declining demand for newspaper advertising, 21 leading to a reduced incentive to subsidize readers at the expence of advertisers. Consequently, prices per copy tend to rise.…”

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“…Whereas the choice of media for this study were newspapers, it is important to highlight that there has been some debate in the academia about the extent to which recent developments in information and communication technologies (ICTs) have led to a decline in readership in some cases. Pattabhiramaiah, Sriram and Sridhar, (2018) observe that the command of the traditional newspaper is perceived to have been undermined by alternative online news sources. Such sources include blogs, social media, and free internet content.…”

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