February 27, 2009

The Death of an Era

Note: For some reason Blogger doesn't like the URL to the article, so click here to view it.

After publishing news for almost 150 years, the Rocky Mountain News had to close its doors today, the most recent in a long parade of newspaper closings across the country. While most articles reporting on the matter tend to focus on how tragic it is for more people to be losing their jobs, I was finally able to find an article that offered a modicum of positive economic analysis.

Market Watch, sponsored by the Wall Street Journal, reported that “newspapers were already struggling to cope with a transition to online-news consumption that had siphoned off classifieds and other advertising revenue.” Essentially, the article is alluding to our basic supply and demand models.

In this model, online newsreels and sites such as Craigslist act as direct substitutes for physical newspapers. As such sites become increasingly prominent, with, more often than not, free-to-view content, the quantity demanded of newspapers has decreased significantly. Also, a cultural shift towards “being green” by reducing consumption has further lowered the demand for newspapers. Companies would be forced to consider reducing prices in order to keep up with these constant reductions in demand, but are unable to reduce prices beyond a certain point without cutting deeply into their total profit.

When a company is faced with a negative profit, it has a couple options: it can reduce costs, or it can leave the market. For a while, E.W. Scripps Co., the parent company of the Rocky Mountain News, tried reducing costs by closing other newspapers under its control. However, the company is unable to sell newspapers for free like its substitutes online, and was forced eventually to close up shop.

It should be noted that since a decrease in the price of newspapers did not lead to a significant increase in their consumption, it can be safely assumed that newspapers are currently an inferior good.

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