Two Equal-Sized Newspapers With Overlap Circulation Of 10 ✓ Solved

Two Equal Sized Newspapers Have An Overlap Circulation Of 10

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 are unwilling to pay twice to reach the same subscriber. Suppose the advertisers bargain by telling each newspaper that they're going to reach an 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 $14 of the value added by reaching an agreement with the advertisers.

The total gain for the two newspapers from reaching an agreement is $28 ($14 + $14). Suppose the two newspapers merge. As such, the advertisers can no longer bargain by telling each newspaper that they're going to reach an agreement with the other newspaper. Thus, the total gains for the two parties (the advertisers and the merged newspapers) from reaching an agreement are $29. According to the nonstrategic view of bargaining, the merged newspaper will earn $29 in an agreement with the advertisers.

This gain to the merged newspaper ($29) is greater than the total gains to the individual newspapers pre-merger ($28). This indicates that the merger increases the bargaining surplus, capturing more economic value than separate negotiations would yield.

Sample Paper For Above instruction

Analyzing the bargaining dynamics between newspapers and advertisers provides insights into how market structures influence economic outcomes. The given scenario illustrates a classic case of bargaining theory applied to media markets, emphasizing the differences in bargaining power and the impact of mergers on value creation.

Initially, two separate newspapers each possess a certain share of the advertising market, with an overlap that affects the total reach and potential revenues. The overlap of 10% implies some subscribers are counted in both newspapers, which influences advertising pricing. When advertisers negotiate with each newspaper individually, the value created per negotiation reflects the individual reach and the overlap effect. As per the problem, advertisers are willing to pay $15 for one newspaper but only $29 for both combined, due to the reduced incremental reach from overlapping subscribers. Under a nonstrategic bargaining framework, each newspaper captures half of the surplus generated from the combined agreement, which is $14 each, totaling $28. This sharing reflects a simple division of the surplus without strategic manipulation or game-theoretic considerations.

If the two newspapers merge, the combined entity gains market power, allowing it to negotiate higher advertising prices. The merge eliminates the overlap complication, making the entire circulation more valuable to advertisers. As the problem indicates, the total gain from the merged entity's bargaining is $29, which exceeds the combined surplus of $28 the separate newspapers could obtain. Under the nonstrategic view, the merged newspaper would therefore earn the full $29, capturing the entire bargaining surplus. This demonstrates that mergers can allow firms to extract greater value from bargaining negotiations by consolidating bargaining power, thus increasing the total gains to the firms involved.

Overall, the analysis underscores how mergers potentially increase bargaining efficiency and value extraction in markets with overlapping customer bases. It illustrates the importance of market structure and strategic bargaining considerations in determining economic profits and the distribution of gains among market participants.

In conclusion, understanding these bargaining dynamics is essential for assessing the economic impact of mergers, especially in media and advertising markets where overlapping audiences and bargaining power significantly influence outcomes. The nonstrategic bargaining view simplifies the analysis but highlights how market consolidation can lead to increased value for the firms involved, often at the expense of other stakeholders such as advertisers or consumers.

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