P12.2 SOLUTION
A. Economies of scale in production explain why few cities can support more
than one local newspaper. Local newspapers are the classic example of
natural monopoly. Almost all production and distribution costs are fixed.
Marginal production and distribution costs are almost nil. Once the local
news stories and local advertising copy are written, there is practically no
additional cost involved with expanding production from, say, 200,000 to
300,000 newspapers per day. Once a daily edition is produced, marginal
costs may be as little as 5 per newspaper. When marginal production costs
are minimal, price competition turns vicious. Whichever competitor is out in
front in terms of total circulation simply keeps prices down until the
competition goes out of business or is forced into accepting a joint operating
agreement. This is exactly what happened in Denver. Until 2001, the cost of
a daily newspaper in Denver was only 25 each weekday and 50 on Sunday at
the newsstand, and even less when purchased on an annual subscription basis.
The smaller News had much higher unit costs and simply couldnt afford to
compete with the Post at such ruinously low prices.