Pricing Practices in the Denver, Colorado, Newspaper Market

Topics: Advertising, Supply and demand, Newspaper Pages: 3 (1064 words) Published: December 13, 2011
Beginning with the basics, economics is based on scarcity. Price has no connection to morality or “objective value”. Since everything has a cost, price is therefore a signal of how scarce a good is. The price also tells us how much the good is worth to the marginal consumer. Knowing that firms are greedy and want to maximize profits, the joint operating agreement between the Post and News will lead to one independent newspaper in Denver. If there is only one newspaper, then they are solely responsible for the advertising, circulation, and production. With the merger between two companies, there is obviously no reason to have two editors, two directors of each department, etc. Even the amount of people delivering newspapers will be cut in half. Therefore, jobs are going to be lost with the merge. With only one company, the Denver Newspaper Agency can charge any rate they want for circulation prices and they can increase advertising costs because they are the only newspaper to advertise in. At first, if all the consumers continue to buy newspapers, there will most likely be a shortage in supply. If P1 < P*, then QD1 > QS1. Therefore, a shortage exists and some consumers have incentive to bid up the price. As price increases, quantity supply increases, and quantity demand decreases. This will continue until equilibrium (P*) is met and the shortage will disappear. At equilibrium QD=QS=Q*, therefore no one has incentive to change behavior. Price remains constant. Figure 1 (attached) shows a graphical explanation. If consumers in Denver decide that the Denver Newspaper Agency is charging too much for a newspaper, then consumers will stop buying the product. If P2 > P*, and QS1 > QD1, a surplus exists. Firms can’t sell all goods, therefore price decreases, quantity demand increases, and quantity supply decreases. This continues until equilibrium is met again at P*. This relationship is shown in Figure 2. The relationship also explains if The Denver Newspaper...
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