Pricing Decisions of the Newspaper Monopolist

In nearly every city in the United States there is only one daily newspaper of general interest. Given the prevalence of monopoly,' it seems anomalous that newspapers are typically sold well below cost. Compaine 5, 19, for example, reports that sales revenue is only 28.7 percent of total cost. Moreover, it appears that price is below marginal cost since the sales revenue does not cover the cost of the ink and paper used in producing the newspaper.2 If the newspaper publisher were selling only newspapers, he or she would be in dire straits. But in reality, the publisher has two products to sell: the newspaper itself and advertising space within the newspaper. Although very few newspaper customers are also purchasers of advertising space, there is an important interaction between the circulation of the newspaper and the sale of advertising space. The higher the circulation of the newspaper, the greater the demand for advertising and the more advertising there is in the newspaper, the greater the circulation of the newspaper.3 As a consequence, the publisher has a more complicated pricing problem since the prices of advertising space and of the newspaper have feedback effects upon one another. In the next section of this paper, we shall derive the publisher's optimal prices for advertising space and for the newspaper under fairly general conditions. One purpose of this analysis is to show that there are two meaningful measures of demand elasticity. In section IV, we discuss some of the associated empirical problems that this poses and relate this to two existing newspaper demand studies.