Entry and Competition in local

Newspaper Retail Markets

When two are enough

Roberto Balmer

BAKOM

Disclaimer: The views presented here are those of the author and do not reflect those of BAKOM.

Swiss IO Day

University of Bern, 13 June 2014

2

Agenda

1. Introduction (the NEIO story, Bresnahan (1982))

2. Model (Bresnahan-Reiss (1991))

3. Variables

4. Results

1. Introduction 2. Model 3. Variables 4. Conclusions

3

Structure – Conduct – Performance

Source: Davis, Quantitive Techniques for Competition and Antitrust Analysis, Chap. 6

• The pre-Game Theory IO world was dominated by the SCP paradigm (50s)

• Causality between market structure, competition and performance (prices, profits, welfare)

• Bain (1950): Regresses profit on market structure (HHI) finding positive coefficients; interprets

as direct causality.

• SCP is obsolete. Conduct may depend on numerous factors.

• Example: A monopolist may non act like a monopolist but in the extreme case like a firm

under perfect competition in case of low barriers to entry.

• Structural parameters continue to play an important role in market analyses as indicators for

competition (e.g. number of firms, market shares, HHI). But challenge is to measure conduct.

1. Introduction 2. Model 3. Variables 4. Conclusions

4

New Empirical Industrial Organization

• SCP is «old IO», «NEIO» is coherent with game theory; Example

• Structural demand/supply model can allow to directly measure the level of

competition / conduct with sufficient data on prices, volumes, etc.

• Inverse demand: (1)

• Marginalkostenfunktion

• Supply; F.O.C. of profit maximisation problem. Parameter lamda can nest PC,

Cournot or Cartel:

F.O.C.

• Lamda=«conduct»

• Therefore supply relation: (2) where

Quelle: Bresnahan 1982. “The oligopoly solution concept is identified”

1. Introduction 2. Model 3. Variables 4. Conclusions

5

• Simultaneous equations (1) und (2)

(1)

(2)

• Identification as usual: An equation is identified if at least one variables is excluded of it. I.e.

if a variable only shifts demand (e.g. income), then supply is identified and vice versa (e.g.

input prices).

• In this case parameters can be estimated (including demand elasticities etc.). BUT:

Estimation of gamma does not allow any inference on Lamda (conduct/level of competition).

The Solution: Rotation

1) When Beta1 is known (i.e. the cost function), Gamma can be calculated. This is also the

case when MC are assumed to be constant (Beta1=0).

2) If next to cost and demand „shifters“ and demand „rotators“ (Z) are available (i.e. Variables

that change both the level as well as the slope of the demand function), estimation of Gamma

becomes possible in any case.

New Demand (1’)

New Supply includes now

interaction term (2’)

-Tests can now tell which form of competition / conduct best explains the data. E,g, econometric

test for Lamda=0 becomes possible (perfect competition)

- Such regressions are still rare in NRA/NCA practice, but approach is promising

New Empirical Industrial Organization

1. Introduction 2. Model 3. Variables 4. Conclusions

6

Newspaper and magazine publishers

Wholesaler 1 (e.g. Valora)

Subscribers

Distributor (e.g. Post)

R1 R2 R3 R4

Consumers

x

Advertising customers

Introduction: Local newspaper retail markets

1. Introduction 2. Model 3. Variables 4. Conclusions

• Motivation:

Show how to “measure” competition

in composite goods markets,

i.e. without individual price and volume data

• Local in-depth news in rural areas

• Newspaper selling points

• Wholesale: Valora is largely a monopolist: exclusive contracts with publishers,

delivery before 9 a.m. means high entry barriers (Post services 12 a.m.)

• Retail: Market “radius” may be limited. E.g. for basic shopping needs 10 minutes of

travel time (Valora/Cevanova). Lower for newspapers. 73% of communes have 1+

selling point

• Geo. Market = small communes.

• Retail: Subscription channel targets different customers (habitual readers)

7

• Largest newspaper retailers 2008: Valora (20%), Volg (11%), Coop (10%), Post (7%)

• All retailers should have non-discriminatory access to newspapers by Valora (in Valora-

Melisa the CompCom announces that it would otherwise intervene)

• Positive externality (foot traffic): Possible that even with unprofitable standalone

business continue to sell newspapers is reasonable

> Consider a virtual, composite good including complements such as food & near-food

items (any other goods of daily use).

• Coverage lowers entry barriers for local newspaper publishers (“experience good”).

• TV, radio, Internet content and Commuters dailies’ care not considered substitutes in

2004 (different range & depth of information, accessibility, habits)

• Way to quantify effects of entry on Competition & Competition–Coverage trade-off?

Introduction: Local newspaper retail markets

1. Introduction 2. Model 3. Variables 4. Conclusions

8

Bresnahan-Reiss 1991 Model (1/2)

• Broad range of products, impossible to take all individual prices & quantities into account

• NEIO: Estimate “conduct”. A monopolist does not necessarily show monopolist conduct

• BR1991 “Entry threshold” model: Estimate minimum demand necessary for N firms to enter

and development of market power with entry using only

1) Number of firms per commune (N)

2) Demand and supply shifters (Z, W) - income / real estate availability

3) Demand rotators: Market size S(Y)

• Market size S rotates per firm demand outwards; d(Z,P) being representative customer demand:

• Outward total demand rotation increases profits in the market but also profits of potential

entrants (market is split) up to entry of second firm (competition increases). Relate rotation of per

firm market demand S to the equilibrium number of firms (N(S)), N-th firm entry condition

-D1: Minimal per firm demand level that can sustain

profitable entry (P=AC) of a first entrant

-Q1: Level of per firm demand allowing entry of first

firm

-P1: Price of the virtual good at Q1

-DN: Level of per firm demand allowing entry of N

firms; margins decrease with competition.

-D∞: Further increase of per firm demand impossible

– MES: here any number of firms is sustainable.

Margins are 0.

P for newspapers ofter front printed and MC could be

decreasing for newspapers alone

)(),( YSPZdQd

1. Introduction 2. Model 3. Variables 4. Conclusions

9

Bresnahan-Reiss 1991 Model (2/2)

Formalisation• Minimum profit for N firms to enter

• Minimal total market size required for N-th firm to enter (“entry threshold”;

“Trigger” market size):

• Minimal market size per firm (“per firm entry threshold”) required for N-th

firm to enter:

• Idea: Define the “(Per firm) Entry threshold ratio”

• Assuming equal fixed costs, the entry threshold gives the fall in variable

profits with entry (from N to N+1 firms). A scale free measure of the

evolution of competition with entry

• Entry threshold ratio always above 1. A subsequent entrant needs more (at

best same) demand to break even as profitability per consumer decreases

with entry due to competition (also fixed costs increase with entry as

opportunities are rare)

• But: 1.00 may mean perfect competition or cartel!

N

Ss N

N

),(),(

)(

NNN

NPZdWqAVCP

WFs

customers per firm split symmetrically, so

0)(),(

),()( WFN

SPZdWqAVCPS NN

NNNN

N

PZdWqAVCP

WFS

NNN

N ),(),(

)(

1),(),(

),(),(

)(

)(/

111

11

NNN

NNN

N

NNN

PZdWqAVCP

PZdWqAVCP

WF

WFss

1. Introduction 2. Model 3. Variables 4. Conclusions

10

• Number of sellers in a commune N (selling «Blick»)

• Market size of a commune:

where Y0 is population and Y1 is inbound commuters. =1 for

normalization

• Fixed costs of entrants with N firms

where W variables includes the available agricultural land per capita

(indicator for low real estate prices). 𝛄s expected to be positive

(opportunities are rare)

• Variable profits per customer in a market with N firms

where the X variables include income in the commune and socio-

demographic variables such as the number of aged people in the commune,

the average number of schooling years and foreign resident population. αs

expected to be positive and decreasing with N

Latent variable:

Variables and Market model 1/2

N

n

nN XV2

1ˆˆˆ

0

),(),,,(),( WFWZVYS NNNN

1100ˆ),( YYYS

N

n

nLN WF2

0ˆˆˆ

1. Introduction 2. Model 3. Variables 4. Conclusions

11

Variables and Market model 2/2

Estimation procedure

• N=0, 1, 2 is a ranking only: Ordered choice dependent variable, “ordered probit”

estimation (based on cumulative normal Φ).

• Likelihood, maximise product of probabilities,

• Maximising log likelihoods which is equivalent

• Maximise log likelihood

)(1)Pr(1)Pr()Pr()0Pr()0Pr()0Pr( 111111 N

)()(

)Pr()Pr()00Pr()1Pr(

21

212121

andandandN

)()Pr()Pr()0Pr()2Pr( 2222 N

1042

1

2

1042

1

12

1042

1

1 )(1)2(1)()()1(1))()0(1m

m

m

m

m

m nnnL

1042

1

22

1042

1

1122

11

1042

1

)),(),,,(),((1ln)2(1

)),(),,,(),(()),(),,,(),((ln)1(1

))),(),,,(),(((ln)0(1ln

i

m

i

m

i

m

WFWZVYSn

WFWZVYSWFWZVYSn

WFWZVYSnL

1. Introduction 2. Model 3. Variables 4. Conclusions

12

Estimates

• Problem? Nonlinear Oprobit. Needs

dedicated programming

• Most coefficients as expected and

significant

• α, γ, λ all as expected

• 1 commuter counts 0.78 of a

resident in terms of market size

β:

- Proportion of elderly and foreign

people boost demand

- Income negative (richer communes

have higher subscribership?)

- Education insignificant

γ: land availability impacts fixed costs

negatively as expected

1. Introduction 2. Model 3. Variables 4. Conclusions

13

Entry thresholds

Per firm entry threshold (market size)

strongly increases from N=1 to N=2 (ratio

1.9), i.e. strong competitive effect

Equality test (Wald tests for proportionality)

> s1 is “different”

> “Two are enough”

S1 S2 S3 S4 S5

Newspaperretailers, S

482 1,841 3,012 4,123 5,512

Newspaper retailers(state dep. sample

means), S*490 1,864 3,066 4,154 5,156

01,0002,0003,0004,0005,0006,000

s1 s2 s3 s4 s5

Newspaperretailers, s

482 921 1,004 1,031 1,102

Newspaper retailers(state dep. sample

means), s*490 932 1,022 1,039 1,031

0200400600800

1,0001,200

s2/s1 s3/s2 s4/s3 s5/s4

Newspaper retailers,S

1.91 1.09 1.03 1.07

Newspaper retailers(state dep. sample

means), S*1.90 1.10 1.02 0.99

0.00

0.50

1.00

1.50

2.00

2.50

1. Introduction 2. Model 3. Variables 4. Conclusions

14

Entry threshold ratios - Comparison

- Similar to U.S. Doctors

- Common that second entrant has strong competitive effect

- Most other estimates find that the 3rd entrant has a stronger effect on

competition

- On this basis, AVG2007 used results to suggest to block 3-to-2 local

hospital mergers

- Not the case here. “Two are enough”. May not apply to other retail

markets

0

0.5

1

1.5

2

2.5

s2/s1 s3/s2 s4/s3 s5/s4

Druggists (BR1991)

Plumbers (BR1991)

Dentists (BR1991)

Hospitals (AGV2007)

Tire dealers (BR1991)

Doctors (BR1991)

Newspaper retailers (Balmer 2013)

1. Introduction 2. Model 3. Variables 4. Conclusions

15

Policy implications 1/2

a) Only way to make inferences on conduct in this market

b) Competition much stronger with 2 or more players in

market

c) Coverage: “If a monopolist in a small commune would earn

only the variable profits a duopolist would earn”, 263

Communes with market size between 482 and 921 would no

longer be able to sustain any selling point (2.1% of

population).

Competition – Coverage trade-off. Welfare implications of

increased (potential) competition or regulation then unclear.

d) Optimal that 2nd entrant has strong competitive effect, as

then coverage is already sustained (no differentiation)

1. Introduction 2. Model 3. Variables 4. Conclusions

16

Policy implications 2/2

e) Direct public intervention: Government could instruct the

Swiss Post to sell local newspapers (again) in some post

offices. Ideally access to post sales infrastructure would be

granted at cost-oriented prices to editors.

> Only appropriate where competition is not distorted. In

communes representing market sizes below 482, where

entry would not be economically viable, direct market

intervention unproblematic (eventually also with N=1).

> Analysis shows that in past, intervention often in other

Communes risking distortion of competition and

investment.

Limits of the model:

- No travel costs

- Independence between communes

1. Introduction 2. Model 3. Variables 4. Conclusions

17

Questions?

Roberto Balmer

Bundesamt für Kommunikation

TC / Sektion Ökonomie

Zukunftstr. 44

2501 Biel

Tel. +41 32 327 56 43

roberto.balmer@bakom.admin.ch

linkedin.com/in/RobertoBalmer

slideshare.net/RobertoBalmer

amazon.com/author/roberto.balmer

ssrn.com/author=572707