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When Pricing Below Marginal Cost Pays Off: Optimal Price Choice in a Media Market with Upfront Pricing

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Author Info
Ulrich Kaiser (University of Southern Denmark)

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Abstract

I derive a model of profit maximization for a print media firm with upfront advertising pricing. The model is estimated using detailed quarterly data on German women's magazines observed between I/1994 and IV/2004. Main empirical results are that (i) cover price increases lead to substantial reductions in advertising revenue, thereby offsetting possible corresponding gains in magazine sales revenue, (ii) magazines with particularly large advertising revenues per copy set cover prices well below marginal cost and (iii) marginal production cost are decreasing in a magazine's own circulation but are unaffected by the own publishers' total printing volume which does not provide evidence for an efficiency defense in print media mergers.

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File URL: http://www.econ.ku.dk/CIE/Discussion%20Papers/2007/2007-05.pdf
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Publisher Info
Paper provided by University of Copenhagen. Department of Economics. Centre for Industrial Economics in its series CIE Discussion Papers with number 2007-05.

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Length: 28 pages
Date of creation: Apr 2007
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Handle: RePEc:kud:kuieci:2007-05

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Related research
Keywords: magazines; cost estimation; twosided markets;

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Find related papers by JEL classification:
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Rosse, James N, 1970. "Estimating Cost Function Parameters without Using Cost Data: Illustrated Methodology," Econometrica, Econometric Society, vol. 38(2), pages 256-75, March. [Downloadable!] (restricted)
  2. Roller, L.-H. & Stennek, J. & Verboven, F., 2000. "Efficiency Gains from Mergers," Research Institute of Industrial Economics Working Papers 543, Research Institute of Industrial Economics (IFN).
    Other versions:
  3. Marc Rysman, 2004. "Competition Between Networks: A Study of the Market for Yellow Pages," Review of Economic Studies, Blackwell Publishing, vol. 71(2), pages 483-512, 04. [Downloadable!] (restricted)
  4. Elena Argentesi & Lapo Filistrucchi, 2005. "Estimating market power in a two-sided market: the case of newspapers," Economics Working Papers ECO2005/07, European University Institute. [Downloadable!]
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  5. Marc Rysman, 2006. "An Empirical Analysis of Payment Card Usage," Boston University - Department of Economics - Working Papers Series WP2006-002, Boston University - Department of Economics. [Downloadable!]
  6. Doganoglu, Toker & Wright, Julian, 2006. "Multihoming and compatibility," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 45-67, January. [Downloadable!] (restricted)
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  7. Merrilees, William J, 1983. "Anatomy of a Price Leadership Challenge: An Evaluation of Pricing Strategies in the Australian Newspaper Industry," Journal of Industrial Economics, Blackwell Publishing, vol. 31(3), pages 291-311, March. [Downloadable!] (restricted)
  8. Nevo, Aviv, 2001. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, Econometric Society, vol. 69(2), pages 307-42, March.
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  9. Mark Armstrong, 2005. "Competition in Two-Sided Markets," Industrial Organization 0505009, EconWPA. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Elena Argentesi & Lapo Filistrucchi, 2007. "Estimating market power in a two-sided market: The case of newspapers," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(7), pages 1247-1266. [Downloadable!]
    Other versions:
  2. Ulrich Kaiser, 2007. "Do Media Consumers Really Dislike Advertising? An Empirical Assessment of a Popular Assumption in Economic Theory," CIE Discussion Papers 2007-08, University of Copenhagen. Department of Economics. Centre for Industrial Economics. [Downloadable!]
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