Rising Prices Under Declining Preferences: The Case of the U.S. Print Newspaper Industry
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© 2017 INFORMS. Between 2006 and 2011, daily print newspapers in the United States lost 20% of their paid subscribers, partly because of the 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 increases in subscription prices are mainly rationalized by (a) the decline in overall reader 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, because of 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 roles played by agents on the subsidy and demand sides in determining prices.
author list (cited authors)
Pattabhiramaiah, A., Sriram, S., & Sridhar, S.