Pricing Practices in the Denver, Colorado, Newspaper Market
On May 12, 2000, the two daily newspapers in Denver, Colorado, filed an application with the U.S. Department of Justice for approval of a joint operating arrangement. The application was filed by The E.W. Scripps Company, whose subsidiary, the Denver Publishing Company, published the Rocky Mountain News, and the MediaNews Group, Inc., whose subsidiary, the Denver Post Corporation, published the Denver Post. Under the proposed joint operating agreement, printing and commercial operations of both newspapers were to be handled by a new entity, the “Denver Newspaper Agency,” owned by the parties in equal shares. This type of joint operating agreement provides for the complete independence of the news and editorial departments of the two newspapers. The rationale for such an arrangement, as provided for under the Newspaper Preservation Act, is to preserve multiple independent editorial voices in towns and cities too small to support two or more newspapers. The act requires joint operating arrangements, such as that proposed by the Denver newspapers, to obtain the prior written consent of the attorney general of the United States in order to qualify for the antitrust exemption provided by the act.
Scripps initiated discussions for a joint operating agreement after determining that the News would probably fail without such an arrangement. In their petition to the Justice Department, the newspapers argued that the News had sustained $123 million in net operating losses while the financially stronger Post had reaped $200 million in profits during the 1990s. This was a crucial point in favor of the joint operating agreement application because the attorney general must find that one of the publications is a failing newspaper and that approval of the arrangement is necessary to maintain the independent editorial content of both newspapers. Like any business, newspapers cannot survive without a respectable bottom line. In commenting on the joint operating agreement application, Attorney General Janet Reno noted that Denver was one of only five major American cities still served by competing daily newspapers. The other four are Boston, Chicago, New York, and Washington, DC. Of course, these other four cities are not comparable in size to Denver; they are much bigger. None of those four cities can lay claim to two newspapers that are equally matched and strive for the same audience. In fact, that there is not a single city in the United States that still supports two independently owned and evenly matched, high-quality newspapers that vie for the same broad base of readership.
Economies of scale in production explain why few cities can support more than one local newspaper. Almost all local newspaper production and distribution costs are fixed. Marginal production and distribution costs are almost nil. After the local news stories and local advertising copy are written, there is practically no additional cost involved with expanding production from, say, 200,000 to 300,000 newspapers per day. Once a daily edition is produced, marginal costs may be as little as 5¢ per newspaper. When marginal production costs are minimal, price competition turns vicious. Whichever competitor is out in front in terms of total circulation simply keeps prices down until the competition goes out of business or is forced into accepting a joint operating agreement. This is exactly what happened in Denver. Until recently, the cost of a daily newspaper in Denver was only 25¢ each weekday and 50¢ on Sunday at the newsstand, and even less when purchased on an annual subscription basis. The smaller News had much higher unit costs and simply could not afford to compete with the Post at such ruinously low prices. Therefore the production of local newspapers is often described as a classic example of natural monopoly.
On Friday, January 5, 2001, the Justice Department gave the green light to a 50-year joint operating agreement between the News and its longtime rival, the Post. Starting January 22, 2001, the publishing operations of the News and the Post were consolidated. The Denver Newspaper Agency, owned 50/50 by the owners of the News and Post, is now responsible for the advertising, circulation, production, and other business departments of the newspapers. Newsrooms and editorial functions remain independent. Therefore, the owners of the News and Post are now working together to achieve financial success, but the newsroom operations remain competitors. Under terms of the agreement, E.W. Scripps Company, parent of the struggling News, agreed to pay owners of the Post $60 million. Both newspapers publish separately Monday through Friday. The News publishes the only Saturday paper and the Post the only Sunday paper.
A. Use your knowledge of monopoly pricing practices to explain why advertising rates and newspaper circulation prices were likely to increase and jobs were likely to be lost, following adoption of this joint operating agreement. Use company information to support your argument (see http://www.denverpost.com and http://www.rockymountainnews.com/).
B. Classified ads to sell real estate in a local newspaper can cost five to ten times as much as a similar ad used to announce a garage sale. Use your knowledge of price discrimination to explain how local newspaper monopolies generate enormous profits from selling classified advertising that varies in price according to the value of the item advertised.
C. Widely differing fares for business and vacation travelers on the same flight have led some to accuse the airlines of price discrimination. Do airline fare differences or local newspaper classified-ad rate differences provide stronger evidence of price discrimination?