Competition, Circulation And Advertising

Newspaper Research Journal, Winter 2004 by Lacy, Stephen, Martin, Hugh J

This article reviews academic literature about the impact of competition on newspaper circulation and advertising. It suggests some principles about competition and the long-run performance of daily circulation newspapers.

This report examines the impact of competition on newspaper circulation and advertising. It identifies a few general principles regarding competition and the long-run performance of daily, general circulation newspapers. Accomplishing this goal first requires a discussion of the nature of circulation and advertising competition. Economic theory states that competition exists when buyers can substitute one product for another. This willingness to substitute depends on several factors, such as price, price of substitutes, quality of products, income and degree to which various products provide the consumer with equivalent services. With news media, few products are perfect substitutes because readers add to the meaning by interpreting content and develop preferences for specific bundles of information, such as particular newspapers. Because of these preferences and the utility they provide, newspapers and all media do not fit well the assumptions of classic economic theories of perfect competition. Understanding newspaper competition requires different economic models than those emphasized in Economics 101.

Classic models of competition suggest there are many firms in a market, each selling an identical product. Each firm also pays identical costs to produce its product. Consumers want to buy the product at the lowest possible price, and it doesn't matter which firm produces the product. Any firm that increases its price loses customers who switch to another firm selling the same product at a lower price. Each firm's product is a perfect substitute for any other firm's product. Firms cannot influence competitors and are forced to sell at a price that just covers their costs.

Market conditions must change before firms can increase prices without losing all of their customers. If only a few firms compete, each individual firm's actions will influence the response from other firms. In oligopolistic markets firms might agree to raise prices above production costs, earning excess profits. Explicit pricing agreements are illegal, so oligopolists must depend on tacit understandings to maintain pricing discipline. However, such agreements are unstable, and individual firms will violate these understandings if they believe they can gain an advantage.

When there is only one firm, the market is a monopoly. Monopolists can raise prices so long as consumers are still willing to pay for the product. However, even monopolists cannot raise prices without limit. If a newspaper is a monopoly, consumers and advertisers will substitute other forms of mass media when prices are too high. Monopolists with very high prices also risk attracting new competitors into their markets over the long run.

Most newspaper markets have other forms of mass media that compete for advertising and for the attention of consumers. However, newspaper competition is often described as ranging from oligopoly to monopoly, depending on the market.

Competition for Readers

Newspapers don't compete for readers solely on price. Newspapers offer news and other information that may not be available elsewhere, and newspapers' format and publication cycle differ from those of other mass media. Although the newspaper industry does not fit all the assumptions of classic economic theory, readers' behavior can be explained at least partially by the theory of monopolistic competition. ' It states that firms can limit to some degree the effects of competition on their firms by catering to differences in consumer taste. Differentiation makes products from other firms less than perfect substitutes. Differentiation costs money, and firms that use differentiation must raise prices to cover their higher production costs. However, even with the higher cost of differentiation, firms in an oligopolistic market may be able to raise prices high enough to earn excess profits. News media are naturally differentiated by their nature and distribution systems. Newspapers provide some types of information better than radio and television, but radio and TV news have their advantages as well. Print media (magazines, daily newspapers and weekly newspapers) differentiate themselves by publication cycle and product nature. Differentiation also can exist through political leaning of editorial pages, featured columnists, d istribution of newshole among topics, use of graphics and any number of other content elements.

Therefore, when newspaper managers vary content to increase circulation, differentiation becomes a product strategy. Managers pursue these strategies to influence readers' selections among newspaper and other news outlets. The differentiation makes people's demand less responsive to price changes (more inelastic) by convincing readers that one newspaper is better than another. If one is perceived to be better, then the reader is less likely to substitute between them. In other words, differentiating a newspaper reduces substitution and competition. Newspaper editors might have more of an influence over readers than they do if perceptions of the content were the only factor affecting demand, but it is not. Price, convenience of distribution, income, readers' education levels and other factors also affect demand. Differentiation is just one way, albeit the most important way, of affecting demand and the willingness to substitute products.