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Individual Problems 16 11 Two Equal Sized Newspapers Have An Overl

Two equal-sized newspapers have an overlap circulation of 10% (10% of the subscribers subscribe to both newspapers). Advertisers are willing to pay $15 to advertise in one newspaper but only $29 to advertise in both, because they're unwilling to pay twice to reach the same subscriber. Suppose the advertisers bargain by telling each newspaper that they're going to reach agreement with the other newspaper, whereby they pay the other newspaper $14 to advertise.

According to the nonstrategic view of bargaining, each newspaper would earn $7 in value added by reaching an agreement with the advertisers. The total gain for the two newspapers from reaching an agreement is $14. Suppose the two newspapers merge. As such, the advertisers can no longer bargain by telling each newspaper that they're going to reach agreement with the other newspaper. Thus, the total gains for the two parties (the advertisers and the merged newspapers) from reaching an agreement with the advertisers are $14.

According to the nonstrategic view of bargaining, each merged newspaper will earn $7 in an agreement with the advertisers. This gain to the merged newspaper is less than the total gains to the individual newspapers pre-merger.

Sample Paper For Above instruction

The scenario involving two equal-sized newspapers sharing an overlapping circulation provides insight into the bargaining power and value distribution resulting from cooperative agreements versus mergers. In analyzing such situations, the nonstrategic view of bargaining assumes that each party's payoff is proportional to the value they add or capture, without strategic considerations about negotiation tactics or incentives.

Initially, the overlap circulation of 10% indicates that there is a significant shared audience, which affects advertising revenue potential. Advertisers' willingness to pay $15 for one newspaper but only $29 for both suggests that they value the combined reach less than the sum of individual reach due to overlap—essentially, they want to avoid paying twice for the same subscribers. The bargaining process involves both newspapers negotiating with the advertisers, with a proposed payment of $14 to split the value added by the agreement. Under the nonstrategic model, each newspaper earns half of this value, which is $7, reflecting an equal distribution based on their contribution or leverage.

When the two newspapers merge, the dynamics change significantly. The merged entity can negotiate directly with advertisers without sharing payoffs or bargaining among separate parties. Consequently, the total gains from the agreement stay at $14, but now the merged entity's share of the gain is entirely theirs, with no need to split. This results in the entire $14 being captured by the merged newspaper, which could imply a gain greater than the combined gains of separate negotiations, especially if efficiencies or additional synergies are realized through merging.

The key takeaway from this analysis is that the nonstrategic view suggests that merging can lead to a concentration of bargaining power and value capture. The merged newspaper effectively secures the total bargaining surplus, which can be greater than the sum of what the individual newspapers would have achieved separately. This has implications for market competition, pricing strategies, and the potential for monopoly power in local advertising markets. It also emphasizes that mergers can alter the distribution of bargaining gains, often favoring the merged entity and potentially reducing competitive pressures in advertising markets.

In the pharmaceutical context, similar principles can be applied to international market negotiations with distributors. When separate distributors, who provide distinct or overlapping coverage, negotiate independently, each is likely to secure a share of the total value based on their bargaining position and the value they add. However, when these distributors are part of a larger, consolidated entity, the combined firm may capture the entire value, potentially leading to higher revenues but also raising concerns about market power and competitive fairness.

In Egypt, where two independent distributors add a total value of $240 million when cooperating, the nonstrategic approach suggests the firm would aim to capture the entire value—$240 million—by negotiating as a single entity post-merger or strategic alliance. Similarly, in Argentina, with government-run distributors, the expected captured value would be aligned with the total value created, which is also $240 million. If negotiations fail or if alternative distribution channels are pursued—such as a less efficient internet-based system—the value drops to $60 million, indicating the importance of strategic bargaining and market power in capturing market-derived value.

The pharmaceutical industry exemplifies how bargaining power, market structure, and strategic alliances influence revenue and market access. The nonstrategic view underscores the potential for firms to maximize their share of created value through mergers or coordinated negotiations, although such strategies must be balanced against regulatory and competitive concerns to ensure market fairness and efficiency.

Similarly, in the context of formulary inclusion negotiations, PBMs and drug companies often engage in bargaining over the value each drug creates. When including one drug yields a surplus of $172 million, and adding a second yields only $34 million, the bargaining process determines how this surplus is distributed among stakeholders. Under the nonstrategic view, the PBM would aim to capture the entire surplus generated by the inclusion of these drugs, while each drug company would negotiate for their fair share based on their contribution to the total value.

If a merger occurs between the drug manufacturers, the combined entity would have increased bargaining power, potentially claiming a larger portion of the total value—an outcome that would influence pricing, formulary inclusion, and downstream competition. Analyzing these negotiations from a nonstrategic perspective highlights how consolidations can shift surplus distribution, often favoring the merged party, but also raises questions about the implications for drug pricing, innovation, and access to medicines.

Overall, the nonstrategic view of bargaining provides a straightforward framework to understand how value is distributed among negotiating parties, emphasizing the importance of market structure, bargaining power, and strategic alliances in shaping economic outcomes in advertising, distribution, and pharmaceutical industries.

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