Economic Analysis of the Great Success of Free Newspapers

Microeconomic Theory and Application

Term Paper, 2008

12 Pages, Grade: 1








Index of figures

Figure 1: Budget constraint with regular goods and indifference curves

Figure 2: Budget constraint with a free Newspaper and a regular good and indifference curves

Figure 3: Marginal utility of a newspaper

Figure 4: Demand curve of a free newspaper

Figure 5: Characteristics Approach to Consumer Theory with two different free newspapers

Figure 6: Characteristics Approach to Consumer Theory with market launch of free newspaper All figures are self-created

1. Introduction

According to Hatts (2005) the small geographical area of the UK and the good travel infrastructure is the reason for a lot of national newspapers. UK newspapers are generally grouped into three, rather historical, groups. The most important competitors of daily Monday to Friday UK newspapers are (Circulation’s by ABC, 29 Sep 08 - 26 Oct 08):

- The mass market tabloids, also called red-tops:

- Owned by News International Ltd

- The Sun (Circulation of 2,853,638)

- Owned by Trinity Mirror Group

- Daily Mirror (Circulation of 1,419,335)

- The People (Circulation of 614,636)

- Owned by Northern and Shell Media Daily Star (Circulation of 579,448)

- The middle-market tabloids:

- Owned by Associated Newspapers Ltd

- Daily Mail (Circulation of 2,006,816)

- Owned by Express Newspapers Daily Express (Circulation of 697,124)

- The quality broadsheets:

Owned by Telegraph Media Group Ltd

Daily Telegraph (Circulation of 793,011) Owned by News International Ltd The Times (Circulation of 597,087) Owned by Guardian News and Media The Guardian (Circulation of 309,666)

The most important free newspapers in London (daily Monday to Friday) are:

- Owned by Associated Newspapers Ltd

- Metro (Circulation of 1,361,306)

- London Lite (Circulation of 401,494)

- Owned by News International

- The London Paper (Circulation of 500,614)

The free newspaper market is dominated by two publishers, which are both big players at the newspaper market already. News International Ltd is well positioned at the mass market and at the quality broadsheets market. Associated Newspapers Ltd is well positioned at the middle-market.

Metro is the only free newspaper distributed in the morning. It belongs to the middle-market tabloids. The London Paper and London Lite are competing on the evening market and both belong to the mass market. The market form is an oligopoly which is dominated by a small number of oligopolists.

2. Economic analysis of the free newspaper market

A Publisher is a firm in the publishing business. A firm is an organisation that decides what kind of good, how much and where to produce, to maximise prof- its. Furthermore the firm decides how to produce the good to minimise the costs of production (Perloff, 2009). In a nutshell, firms transform inputs into outputs mostly with the overall objective to maximise profit. Inputs of production are the means of producing goods and services demanded by society Inputs can general- ly be classified into labour, capital and material (Salvatore, 2002).

Publishers mainly act on two markets to generate profit with a newspaper. At the recipient market, where recipients have a particular willingness to pay for the newspaper to get it and at the advertising market, where potential companies have a certain willingness to pay for advertising space.

According to Picard, (cited in Bakker, 2008) free papers mainly serve readers who read newspaper occasionally. The readership of free newspapers is mainly aged between 18 and 35 (Reynolds, 2007). Traditional paid newspapers struggle to reach this target group.

In order to maximise profits a publisher is always trying to increase the circula- tion of the produced goods, because an increased circulation may lead to higher revenues on both markets. By launching a newspaper free of charge the publisher attracts a so far not attracted target group. On the one hand the publisher does not have the possibility to make any revenue at the recipient market, though on the other hand the chance to make additional revenue at the advertising market.

In line with the objective to minimise costs a publisher has the chance to lower costs due to economies of scale as there is a high fixed cost block for the first copy and a significant decrease in duplication costs (marginal costs)(Schumann, 2005). Moreover the costs may decrease due to the learning by doing effect as the capability of labour tends to improve its productivity by regularly repeating the same type of action. As publishers already have to produce or buy in content for their paid papers they can realise economies of scope simply by reusing the content of the other products, in particular the content of the paid newspapers. Not every publisher is able to enter into the market of free newspapers easily. Only particular publisher have the ability to enter into the free paper market. Ac- cording to Bakker (cited in Esposito, 2008) there is a market entry barrier of up to 20 million € (start-up investment) and the breakeven point will only be

reached on an average of three to seven years. As the free papers highly depend on the demand of potential advertising space buyers and as the current advertis- ing market conditions are highly competitive and the current economic outlook is bleak (PricewaterhouseCooper cited in Esposito, 2008) the market entrance could only be done by big players with a long term interest to gain market share and no needs to make short term profits.

On the basis of several factors like the price of a good, consumer taste, consumer level of information, prices of other goods (for example of substitutes or com- plements), consumer income and government actions a consumer decides how much he consumes of a good or service. In other words, consumers with individ- ual preferences try to maximise their utility within the limits by particular con- strains (Perloff, 2009).

Underlying the model of consumer choice consumers compare various bundles of goods and decide which bundle gives them the greatest pleasure. They max- imise their well-being subject to constraints. The most important constraint most people face in deciding what to consume is their personal budget constraint.

illustration not visible in this excerpt

Figure 1: Budget constraint with regular goods and indifference curves


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Economic Analysis of the Great Success of Free Newspapers
Microeconomic Theory and Application
University of Westminster  (Westminster Business School)
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ISBN (eBook)
ISBN (Book)
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london lite, media economics, maxim rabkin, metro, murdog, universität hamburg, microeconimics, media mix, kostenlose zeitungen, umsonst zeitungen
Quote paper
Maxim Rabkin (Author), 2008, Economic Analysis of the Great Success of Free Newspapers, Munich, GRIN Verlag,


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