Pricing Practices in the Denver, Colorado, Newspaper Market Essay Example

Pricing Practices in the Denver, Colorado, Newspaper Market Paper Beginning with the basics, economics is based on scarcity. Price has no connection to morality or â€Å"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. We will write a custom essay sample on Pricing Practices in the Denver, Colorado, Newspaper Market specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on Pricing Practices in the Denver, Colorado, Newspaper Market specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on Pricing Practices in the Denver, Colorado, Newspaper Market specifically for you FOR ONLY $16.38 $13.9/page Hire Writer 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 Agency tries to charge high prices for advertising. Consumers will stop buying advertisements causing a decrease in quantity demand. Figure 3 shows the demand curve shift right as there would be an increase in consumers for the Denver Newspaper Agency since it would be the only supplier. The graph shows the initial equilibrium where QD1=QS1=Q1. The increase in consumers causes the shift in demand from D1 to D2. At initial price (P1), with new demand curve (D2), QD2 QS2, therefore there is a shortage. Consumers compete for scarce goods and bid up price, so price increases, quantity supply increases, and quantity demand decreases; therefore shortage disappears. This will continue until P* (Pt. B. ) where QS3=QD3=Q3. 2. Price discrimination occurs when the same product is sold at more than one price. In general, managers try to identify submarkets on the basis of an individual’s price elasticity of demand. There are three types of price discrimination: first, second, and third degree. The case of selling classified advertising that varies in price according to the value of the item advertised is an example of the most common form of price discrimination: third-degree price discrimination. This type of discrimination is most popular because although managers would prefer to identify the preferences of individuals, it is too expensive. Instead, they chose the next best alternative. This alternative is to identify individuals with similar traits and group them together. Buyers of the product must fall into specific groups with considerable differences in price elasticity of demand for the product. For example, a newspaper knows that an average person is willing to pay more to advertise a car than to advertise a bicycle. One reason to consider is the â€Å"return on investment†. I, personally, would be willing to pay more to advertise my car knowing that I would be making thousands of dollars off the sale. With a bike, it may not be worth it if the return is only a few hundred dollars. Like I mentioned in the previous answer, price has no relation to morality or objective value. Taking an ad out in a newspaper for a funeral is very expensive. However, the newspaper knows that consumers are willing to pay the price because it is one of the easiest ways to get the information out to friends and family in the community. Another reason may be that funeral homes usually take care of all the arrangements, so consumers don’t know how much the newspaper advertisement really cost until they see the bill of the entire funeral broken down. Simply put, the person advertising a funeral has a much less elastic demand than the person advertising a bicycle. The person selling the bicycle has more substitutes. Figure 4 (attached) illustrates third degree price discrimination. 3. Managers practice price discrimination either when they sell physically identical products at different prices or when similar products are sold at prices with different ratios to marginal cost. The strategy works best in markets with various classes of buyers who are differentiated in price elasticities of demand. In order for price discrimination to exist, there has to be two or more distinct groups, the groups must be identifiable, there must be market power, and the good has to be difficult to resell. In the case of airline fares, there are different types of travelers, identifiable groups (business and leisure), and the airline ticket cannot be resold. Once the flight has happened, the experience cannot be shared and the ticket cannot be used again. With local newspapers, there are different types of customers that have different reasons for advertising different items. Once the paper is printed and issued, the advertisement cannot be used again. It cannot be resold. I would argue that the example of airline fares is a better example of price discrimination. It is easier to identify different groups of people traveling than it is to identify different reasons as for why people want an advertisement. The experience of a flight on an airplane cannot be resold. Although an advertisement is only good for the one issue of a newspaper printed, it can still be seen by multiple people in a household or workspace. An airline ticket can only be used by one person. It is also easier to identify passengers as business or leisure. In the case of newspaper advertisements, it is harder to identify groups of people.