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

67 Pages Posted: 15 Dec 2016 Last revised: 18 Feb 2017

See all articles by Adithya Pattabhiramaiah

Adithya Pattabhiramaiah

Georgia Institute of Technology - Scheller College of Business

S. Sriram

The Stephen M. Ross School of Business at the University of Michigan

Shrihari Sridhar

Pennsylvania State University - Smeal College of Business

Date Written: August 10, 2016

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 readers’ willingness to pay (WTP) in the presence of heterogeneity among subscribers, 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.

Keywords: Pricing, Two-Sided Markets, Media Industry, Newspaper Industry, Print Newspapers, Newspaper Advertising

JEL Classification: M31, M37, L82, L11

Suggested Citation

Pattabhiramaiah, Adithya and Sriram, S. and Sridhar, Shrihari, Rising Prices under Declining Preferences: The Case of the U.S. Print Newspaper Industry (August 10, 2016). Marketing Science, Forthcoming; Georgia Tech Scheller College of Business Research Paper No. 17-3; Ross School of Business Paper No. 1340. Available at SSRN: https://ssrn.com/abstract=2885476 or http://dx.doi.org/10.2139/ssrn.2885476

Adithya Pattabhiramaiah (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

S. Sriram

The Stephen M. Ross School of Business at the University of Michigan ( email )

Ann Arbor, MI 48109
United States

Shrihari Sridhar

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802
United States

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