Fewer Ads Subtract From Newspaper Profit
Subject Changes in fixed and variable costs
Topic Production and Costs
Key Words Advertising, Ads, Cost, Expenses, Prices, Cash flow margins
News Story

Newspaper publishers are often one of the first groups to feel changes in the economy. Last year, the major papers benefited from rapidly increasing advertising by Internet companies; now, ad sales are down steeply due to less technology and finance advertising and fewer classified ads, especially help-wanted ads. At the Wall Street Journal, ad sales in February 2001 were 32 percent lower than a year earlier.

At the same time, the cost of newsprint has been rising. It went up by about $50 a ton to $610 a ton in September 2000, and is expected to increase further in 2001 and 2002.

Newspapers have responded in various ways. Expenses have been trimmed by cutting news coverage, reducing staff, and restricting travel. Both subscription and newsstand prices have been raised by The New York Times and the Los Angeles Times, while the Washington Post has only increased its subscription rate, and The Wall Street Journal has raised the price of single copies. However, there is a reluctance to increase prices because it can upset customers in a market that is slowly declining anyway, and it can make the newspaper's circulation look less attractive to advertisers. Besides, newspapers are generally profitable, with cash flow margins averaging about 28 percent.

(Updated May 1, 2001)

1. a) Draw a diagram of the average total and marginal costs of a newspaper publisher. Draw a price line such that profits are being made. Shade the area representing profits.
b) Show the effect of higher newsprint costs on the curves. Explain why you shifted the curve(s) you did. Illustrate what happened to output and profit as a result, assuming a constant price.
c) Assume that ad sales have the effect of reducing the fixed costs of producing newspapers. Draw the effect of lower ad sales on the curve(s). Explain why you moved the curve(s) you did. What happened to output and profit as a result, assuming a fixed price level?
d) Do laying off staff and cutting back travel constitute a reduction in fixed or variable cost? Why? How would these responses by publishers affect output and profit?
2. In fact, prices were raised by newspaper publishers.
a) Using a supply and demand diagram, show how higher costs lead to higher newspaper prices. What is the effect on circulation and what does it depend on?
b) The Washington Post increased its subscription fee, but The Wall Street Journal raised the price of single copies. Justify each of these two approaches using economics.
Source David Lieberman, "Newspapers struggle as ad sales have 'fallen of a cliff,'" USA Today, March 13, 2001.

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