The Economic Advantage of Being the “Voice of the Majority”

Abstract

This article analyzes price competition in a duopolistic newspaper industry, where politically differentiated newspapers compete in 2 distinct markets: circulation and advertising. Assuming that 1 of the newspapers represents the “voice of the majority,” the theory of the circulation spiral is investigated and whether the interdependence between newspapers' demands in the circulation and advertising markets favors the majority's newspaper to the detriment of the minority's newspaper is investigated.

ACKNOWLEDGMENTS

Financial support is acknowledged from CETE and FCT (POCI 2010). I gratefully acknowledge Paul Belleflamme, António Brandão, Sofia Castro, João Correia da Silva, Jean Gabszewicz, Filomena Garcia, Didier Laussel, Paula Sarmento, Steve Wildman, the participants of the UCL doctoral workshop, the attendants of a seminar at the Universidade do Porto, and two anonymous referees for their detailed comments on an earlier version of this article.

Notes

¹ More precisely, in the case of German magazines (Kaiser, 2006; Kaiser & Wright, 2006).

² To a certain extent, these results are in line with Furhoff (1973), who argued that newspapers could employ a strategy of differentiation to avoid the circulation spiral effect.

³ Notice that when 4k(π ^a _i − π ^a _j ) ^e > (p _i − p _j ), newspaper i is always more attractive than newspaper j for all readers in population i. In fact, this newspaper not only supports their political viewpoints but is also cheaper or more attractive in terms of advertising.

⁴ The significance of the price relation in Equation 6 is that in R ₁, all readers buy newspaper 1 (regardless of their political positioning); in R ₂, all type 1 readers and a fraction of type 2 readers buy newspaper 1; in R ₃, only a fraction of type 1 readers buy newspaper 1; and finally, in R ₄, nobody buys newspaper 1.

⁵ Indeed, it is well-established in the literature that normalizing costs to zero will not change the qualitative nature of our results, as long as newspapers have constant and symmetric marginal costs.

⁶ As noted by Gabszewicz, Laussel, and Sonnac (2001), the game between newspapers in the advertising market has a degenerate nature because each editor i behaves as if he or she is monopolist (in the sense that he or she does not take into account his or her rival's strategy).

⁷ Given subgame perfection, readers are able to anticipate subsequent interactions in the advertising market. As a result, Equation 13 must be considered when analyzing readers' behavior at equilibrium.

⁸ To obtain the price relation (p ₁, p ₂) ∈ ₁ on Equation 4, one must assume i = 1 and j = 2, considering (π ^a ₁) ^e = 1/4 and (π ^a ₂) ^e = 0.

⁹ Later, it becomes clear that this condition corresponds to a sufficient (non-necessary) condition that guarantees the existence of a unique equilibrium in price region ₃. The first term in Z arises from the stability condition, and the second is due to restrictions related to non-negativity of prices. For more details on this, please see the Proof of Proposition 1.

¹⁰ Notice that, whereas the first term in V stems from non-negativity, stability and price relation conditions (please see the Appendix B2 for further details on this), the second term in V is due to the restrictions entailed by price relations leading to “well-behaved” demand functions (please see Appendix A for further details on this).

¹¹ Such problems are entailed by readers' fulfilled expectations with respect to other readers' behaviors.

¹²

¹³ It is worth noting that Condition A2 imposes some constrains on the domain of parameters. In fact, the analysis of intermediate circulation spiral effects is only valid for 8/19 < λ₂ < 1.2. For higher degrees of asymmetry in the ideological composition, this analysis is not valid since Condition A2 is violated.

¹⁴ 1/2λ₂ > 1∀λ₂ < 1/2.

¹⁵ Given that, under strong circulation spiral effects, readers' (indirect) benefits from newspapers' advertising surpasses the benefits obtained from newspapers' political leaning.

¹⁶ When circulation spiral effects are strong, equilibrium outcomes have a monopolistic nature (see Proposition 3).

¹⁷ More precisely, under Condition A1, the total profits received by newspapers (at equilibrium) are respectively given by π*₁ = and π*₂ = .

¹⁸ More precisely, under Condition A2, the total profits received by the newspapers (at equilibrium) are given by π*₁ = and π*₂ = .

¹⁹ For the reasons explained in the main text (see the section titled, First Stage: Subscription Prices), these values of circulation spiral effects have been excluded from our analysis of the subscription price game.

²⁰ For p*₁ = λ₂/3λ₁ − k + 5/12, when newspaper 2 intends to induce a switch in price relation from ₃ to ₂, it should set a price equal to p′₂ = λ₂/6λ₁ − k + 7/12, which guarantees that π ^Total ₂/p _{2 p*1, R 2} = 0. In that case, newspaper 2 would obtain profits of π′₂ = (λ₂(5λ₁ + λ₂ − 6kλ₁)²) (36λ² ₁(1 − 2kλ₂)), which are always inferior to π*₂ in Equation 35, as long as Condition C4 holds.

²¹ Again, there is no need to check the stability conditions for newspaper 1 because newspaper 1's profits are a concave function of prices. This is not the case for newspaper 2 (i.e., the minority's newspaper), whose profit function might present two local maximums.

²² For p*₁ = 2λ₁/(3λ₂) − k + 1/12, inducing a switch in price relations from ₂ to ₃ would require newspaper 2 to charge a price lower than ₂ = k(1 − 2λ₁) + p*₁ = 2λ₁/(3λ₂) − 2kλ₁ + 1/12 < 0, violating the price non-negativity conditions.

²³ In our setting, the process of the formation of readers' expectations is exogenous to the model.