Collusion and the political differentiation of newspapers Marco Antonielli MSc Economics Università degli Studi di Firenze NMa trainee March 10th 2011 Research presentation

Introduction: my work at NMa -Master thesis in Industrial Economics topic -supervisor Prof. Lapo Filistrucchi -Media markets: attention of economists and policy makers -modelling collusion in the newspapers market 2

Two-sided markets: Media Magazine ReadersAdvertisers CopiesAd spaces 1.Two groups of consumers 2.Externalities from the two groups 3.The platform is necessary to bridge Why is it important to know that a market is two-sided? Pricing

4 Media markets 1.The product is differentiated: take the magazines specilized in cars: one talks about luxury vehicles, one about popular vehicles. One talks about a mix of these topics. In Economics: “horizontal product differentiation” Only luxury vehiclesOnly popular vehicles Newspapers compete on political orientation: readers buy a newspaper not only for its price but also for the political orientation conveyed in the newspaper Each newspaper selects its political orientation on the political spectrum (only market driven behavior)

5 2.Markets highly concentrated: high cost to start the business, high fixed costs in the production of media contents: Media markets Arising of collusion? Newspaper market: Two-sided: effect of advertising Collusive behavior Endogenous differentiation Aims of the work: Study the predicted outcomes of collusion behavior Study the incentives to collude resulting from the advertising

6 Readers market Market = political spectrum on which readers are uniformly distribuited; endpoints 0 and 1, market size is 1. Each reader has a political opinion and prefers newspapers with “close” political orientations. Each reader buys only one newspaper (single-home). 2 publishers compete in prices and political orientations. Model outline

Advertising market Each advertiser decides to place ads in a newspaper depending on the adertising tariff and on the mass of readers of the newspaper Each advertiser has a different propensity to place ads; the advertisers mass is given (parameter) Each advertiser can place ads in none, one or both newspapers (multi-homing) 7 Model outline

Each advertiser considers the decisions to advertise in the two newspapers separately Multi-homing on the avertising side Single-homing on the readers side Each publisher can charge its advertising tariff taking into account only its readership, i.e. act like a monopolist 8 Model outline

9 Competitive outcomes Minimal differentiation equilibrium: newspapers express very similar politics (centre of the spectrum) prices are very low (zero in the model) arises when the potential revenues from advertising are so high that the publishers cannot relax competition by offering differentiated products Maximal differentiation equilibrium: Newspapers express very different politics (endpoints of the spectrum) prices are “higher”: competition is relaxed arises in opposite conditions Model outcomes

Two kinds of collusion are considered; the publishers coordinate: a)Political orientation and prices, or b)Prices only. 10 Collusive behavior Model outcomes Collusion and defection: when one publisher defects (does not apply the agreed strategy), she surprizes the other one and does higher profits; afterwards, the other starts to "punish" her by returning to the competitive equilibrium. (this is needed to study the incentives to collude)

11 Collusion on prices and political orientations Model outcomes Intermediate differentiation outcome: newspapers target exclusive segments of the political spectrum; they "locate" in the middle of their demand prices are very high: the readers pay the "maximum" Collusion on prices only Minimal differentiation outcome: newspapers target express very similar politics (centre of the spectrum) prices are higher in respect to the other minimal differentiation case

12 Incentives to collude Is advertising increasing or decreasing the likelihood of collusion in the newspaper market? NO: when the advertising is very important as source of revenues, more advertising discourages coordination  each newspapers more willing to defect YES: when the advertising is not so important as source of revenues, more advertising encourages coordination  the advertising revenues become more easily to retain It depends..

Profit function Stage game (5) Profit of publisher i Price of newspaper i Advertising revenues per reader Unit cost Readership of newspaper i (y for publisher 1) 13

Stage game (2) is the marginal consumer = MARKET SHARE 14

Gabszewicz, Laussel and Sonnac (2002) identify two subgame perfect equilibria for the stage game. 15 One shot competition Maximal differentiation equilibrium 15 Equilibrium prices: Parameters set: Equilibrium profits:

16 One shot competition (3) Minimal differentiation equilibrium Parameters set: Profits: Equilibrium prices:

17 Collusion on locations and prices (2) Intermediate opinion differentiation State with:

18 Collusion on prices only (2) Minimal differentiation State with:

In 1995 the PCM Uitgevers group acquired NRC Handeslblad from Nederlandse Dagblad Unie. Several newspapers were part of the group, including De Volkskrant One could ask if the political orientations of De Volkskrant and NRC had a role in the merger: is there a problem for pluralism? NRC and De Volkskrant are close competitors (target readers similar in political opinion), albeit different in many respects De Telegraaf is another big journal (the biggest) but it’s more clearly targeted to the right wing Apply the model predictions to the acquisition/merger? Merger analysis

De Volkskrant and NRC Comparable circulations (around 200,000 for NRC, around 240,000 for De Volkskrant in 2009) Symmetric? Close competitors on politics But different in many respects (e.g. Morning or evening paper, and target customers different in demographics) Match with the model setting implies: Left = political spectrum Advertisers value De Volkskrant and NRC only for their relative circulations (not demographics)

Merger prediction Intermediate differentiation outcomes: -Newspapers target exclusive segments of the political spectrum (e.g. the left and the right); they “locate” in the middle of those segments so that they keep some distance -Prices are high: readers pay their reservation price minus a factor depending on the transportation cost

22 Intermediate opinion differentiation State with:

Intermediate opinion differentiation

Subscription prices Data from 1990 to 2011 Periods: Pre-merger 1990 – 1994 Post-merger 1995 – 2008 Independent 2009 – 2011

Have prices increased during the post-merger period?

-If De Telegraaf increases its price of 1%, how much De Volkskrant and NRC increase theirs? -If Trouw increases its price of 1%, how much De Volkskrant and NRC increase theirs? Period 90 / 95 Pre-merger Period 95 / 2008 Post-merger Period 2008 / 2011 Independent NRC3.79%NRC3.46%NRC3.01% De Volkskrant3.41%De Volkskrant3.55%De Volkskrant3.14% De Telegraaf3.24%De Telegraaf4.02%De Telegraaf3.57% Trouw3.42%Trouw3.28%Trouw2.32%

SubPeriod 95 / 99 Cartel period SubPeriod 99 / 2003 First post-cartel SubPeriod 2003 / 2008 Second post-cartel NRC2.79%NRC5.01%NRC2.75% De Volkskrant3.30%De Volkskrant5.23%De Volkskrant2.40% De Telegraaf2.87%De Telegraaf4.92%De Telegraaf4.23% Trouw2.70%Trouw4.81%Trouw2.52% Post-merger period Sub-periods: Cartel First post-cartel period Second post-cartel period

Average rate of the readers Distance between each other Distance from the centre Change from previous survey Significant at 5% 1994 Everyone5.53 n/a De Volkskrant n/a NRC n/a 1998 Everyone significant De Volkskrant insignificant NRC insignificant 2002 Everyone significant De Volkskrant significant NRC significant 2003 Everyone significant De Volkskrant insignificant NRC significant

Advertising and circulation 2000 – 2009