Reference no: EM131311438

Since Rupert Murdoch took over the archrival New York Post, a series of price cuts and retaliatory moves have taken place.  These events have severely affected industry profits.  Leonard N. Stern, formerly owner of The Village Voice, summarized the situation as follows:

The Daily News is the dominant tabloid of the city, and it is now under challenge for its life.  This is it.  I believe the battle has been joined.  When it's over, things are not going to look the way they do today.

And referring to Rupert Murdoch's willingness to take losses, he added:

I've been in many businesses, including publishing. I can tell you categorically: I don't want to be in any business where I have to compete with Rupert Murdoch.

Your study team has been hired by the Daily News as a strategy consultant. During your group's first meeting with the management of the Daily News, the situation was summarized as follows:

Everything was fine until Murdoch took over the Post. Currently, we are both pricing at 25¢, down from our normal 50¢.  True, circulation and advertising revenues have gone up, but the problem is that our net profit is down by a lot.  You can look at it from two points of view.  One is:  with low prices we are leaving a lot of money on the table.  The other one is:  we are playing the game against a fellow named Murdoch. 

At the meeting, you were provided with circulation and revenue data for both papers, which is given below.  You'll see there that newspapers have two important sources of revenue:  sales and advertising.  Advertising is tied to circulation, so a lower price that generates higher circulation may raise advertising revenue.  At the meeting with the Daily News, you were also told that overhead costs are in the order of $525k a week for both firms.  Marginal costs are estimated to be 12¢ for the Post and 13¢ for the News.  Also, for both papers, depreciation of equipment (printing presses, trucks, computers, etc.) averages at about 8¢ a copy (although it may vary with circulation). All of this information is common knowledge throughout the industry.

The senior management of the Daily News wants a short report that addresses the following questions with respect to newspaper pricing.