Julian Sanchez header image 2

photos by Lara Shipley

Falling Sales, Rising Prices

May 1st, 2009 · 5 Comments

James Boyce at HufflePuff:

No one is dumber than a Newspaper Executive.

Back in the day at Duke, I was an econ major, much to the amusement of many of my friends now. I learned a little something called “supply and demand.”

Let me use small words.

If someone really wants what you’re selling, you can raise prices.

If someone doesn’t, you better lower them.

So newspapers, faced with double digit declines every six months, are raising their prices.

The Boston Globe and the Boston Herald, both used to be a quarter, then fifty cents, then seventy five cents, are now going to both be $1.00.

Genius, I tell you, pure genius.

Actually, I think this is probably off base in the case of newspapers; raising prices might well be the right move here, if a couple assumptions about the market pan out.  First observation: The big problem for papers right now is supposed to be the collapse of the ad market.  When your primary revenue is ad-based, it might make sense to take a loss on each paper sold, because you’re really selling eyeballs to advertisers, not papers to readers. Part of the reason to charge anything at all is that it’s some reassurance that the buyer intends to actually read it rather than just make a bonfire.  With ad revenue dropping off, making more per copy on lower circulation to the most price inelastic readers (probably worth most to advertisers anyway) could well make sense.  Staring at a supply-demand curve won’t tell you whether basic cable or HBO is the better business model right now.

Some more superbasic econ: One way to describe why a monopolist gets away with charging more than a firm in a competitive  market is that when they don’t have to worry about being undercut on price, they can focus on the customers with the highest demand for the product rather than the marginal customer. In other words, if 100 people are willing to pay $1 each for my product, it’s only worth it to cut the price to 50 cents if that more than doubles my audience—and vice versa for hiking the price: it would need to more than halve my audience to be a bad bet. Under competition, I don’t have that luxury because I’ll lose even the price inelastic buyers—the ones who’d buy the monopoly product at $1—to a reasonably good substitute at 50 cents.

Now, waitaminit (I hear you cry): Isn’t the problem that the major dailies in most cities used to enjoy a near monopoly, and now they’re facing all sorts of competition from digital media?  Sort of, yes—but it depends how you define the market.  A newspaper is actually selling a bundle of a lot of different things: National news, local coverage, opinion, funny pages, real estate listings, classifieds and sudoku for the subway commute… and so on.  They’re screwed in a lot of those markets already. Newspaper classifieds can’t really compete with Craigslist. For national or international news coverage, you’ve got hundreds of online options for any story—why wait for the Globe coverage of a UK event when you can read about it at BBC, or read the same AP story they’re probably running at a dozen other sites? There’s still some residual water-cooler benefit to converging on the same opinion columnists as everyone else, but there’s a hell of a lot of free opinion out there. Even when it comes to local coverage, the print product is competing with the paper’s own free online version.  In short, they’ve already ceded the market for the information they’re selling: For the readers who just want the data and don’t care about the form particularly, they’ve already dropped the price to zero and gone to a pure eyeball-selling model.  The remaining market for the physical paper is at this point down to those people who really want a physical paper.  (I basically continue subscribing to the print New York Times for the sole reason that I like scribbling the crossword in ink with my morning coffee.)

This is actually yields interesting paradox—I’m sure there must be a name for it, and perhaps one of my econ-schooled readers can supply it—where more intense competition yields more monopolistic behavior.  A product that can be seen as competing in several overlapping markets simultaneously suddenly faces such intense competition in some of them that it effectively retreats from those markets, to a smaller exclusive domain where it gets to act like a monopolist. The easy case to imagine is geographic, but there’s no reason the same couldn’t apply for a “bundled” product that’s competing in muliple qualitatively different markets in the same geographic area, and with the same physical good.

Tags: Economics · Journalism & the Media


       

 

5 responses so far ↓

  • 1 chrismealy // May 2, 2009 at 10:29 pm

    That’s a great question. Economics is mostly interested in “how much?” and “what price?” but not so much “what kind of thing?”

  • 2 andthenyoufall // May 4, 2009 at 1:35 am

    It’s called “monopolistic competition”. I think cereal is the classic example. If raisin bran is the only cereal you’re dealing with a normal supply and demand curve, but when there are fifty different kinds of nearly-identical cereal, your remaining customers really, really like something about your raisin bran in particular.

  • 3 chrismealy // May 4, 2009 at 3:40 am

    I’m assuming JS is talking about the situation where your product isn’t changing, but everyone else’s is, so the nature of you product is becoming more of a monopoly.

    Whatever it is, the lower right hand triangle of the demand curve disappearing fast.

  • 4 CaptBackslap // May 4, 2009 at 8:28 pm

    Ah, another top-quality Duke education, I see.

  • 5 Mark // May 7, 2009 at 1:48 pm

    Some data to back you up, Julian: In 2001, the Washington Post charged $0.25. It now charges $0.75 – a 200% increase.

    In that same period, the paper has lost 17% of its circulation (and who knows how much of that loss would have occurred even without the price increase). It’s even possible that the Post has cut its ad rates by less than 17% because it can now claim to deliver a more engaged audience.

    If anything, newspapers should probably be raising prices more.

Leave a Comment