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Asian Journal of Communication
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Heterogeneous multi-product competition in Taiwan's
newspaper industry
Shirley J. Hoa; Mine Ping Sunb
aDepartment of Economics, National Chengchi University, Taiwan bDepartment of Journalism, National Chengchi University, Taiwan
Online Publication Date: 01 June 2008
To cite this Article: Ho, Shirley J. and Ping Sun, Mine (2008) 'Heterogeneous multi-product competition in Taiwan's newspaper industry', Asian Journal of Communication, 18:2, 102 — 116
To link to this article: DOI: 10.1080/01292980802021822 URL:http://dx.doi.org/10.1080/01292980802021822
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RESEARCH ARTICLE
Heterogeneous multi-product competition in Taiwan’s newspaper
industry
Shirley J. Hoa* and Mine Ping Sunb
a
Department of Economics, National Chengchi University, Taiwan;bDepartment of Journalism, National Chengchi University, Taiwan
Taiwan’s daily newspaper industry is characterized by multiple products and heterogeneous competition. This article develops a game-theoretic model to analyze the strategic and competitive reaction of the incumbent in the newspaper market to a recent tabloid-like entertainment newspaper entrant and its impact on the industrial structure through a modification of Judd’s multi-product competi-tion model (1985), considering the property of heterogeneous competicompeti-tion in the Taiwan newspaper market. The leading incumbent operated newspapers in the general news and entertainment-oriented news segments of the market and our equilibrium analysis shows that closing its entertainment-oriented paper was the optimal response to the competitive entry in the short run. However, when the possibility that the entrant might invest in disruptive innovations in other product segments after entry is considered, the model shows that the incumbent’s withdrawal from the entertainment market could induce more severe competition in the general news market and thus hurt its long-term profits. Managerial insights and implications of the analysis are discussed.
Keywords: media economics; game theory; Apple Daily; Taiwan newspaper industry
Introduction
The Min Sheng Daily, a product of the United Daily group with a colorful history of 28 years ceased publication on November 20, 2006. The Min Sheng Daily was once labeled as ‘Taiwan’s only professional entertainment newspaper which covered the people’s livelihood,’ (The Min Sheng Daily ceases, 2006) and reached a pinnacle of 570,000 copies in July 1987. In its cessation of publication declaration, the Min Sheng Daily proclaimed that its decision was not due to harsh competition from a new competitor (the Apple Daily), but was rather the result of a rapidly changing environment, coupled with tremendous changes in consumers’ reading habits.
However, in the same harsh environment, the Apple Daily, a tabloid newspaper from Hong Kong, has started to reap positive profits only 2 years and 10 months after its launch in May 2003. According to the 2005/06 annual financial report of Next Media which owns the Apple Daily, by March 2006 the Taiwan branch of Apple Daily had earned its first positive profit of 1.2 million Hong Kong dollars (Young, 2006). Subsequently, the 2006/07 annual financial report showed total profits of
*Corresponding author. Email: sjho@nccu.edu.tw
ISSN 0129-2986 print/ISSN 1742-0911 online #2008 AMIC/SCI-NTU
DOI: 10.1080/01292980802021822 http://www.informaworld.com
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69.4 million Hong Kong dollars (Next Media Limited Corporation, 2007). According to AC Nielsen’s survey (Nielsen Media Research, 2007), at the end of March 2007, the Apple Daily’s readership shares had reached 15.9%, closely tailing The Liberty Times’ 16.3% and far ahead of the United Daily’s 10.4% and the 8.5% of the China Times.
The Apple Daily entered the market as a tabloid, providing paparazzi-style scandal exposures and exhibiting a flair for flaunting sex and violence in full-color. The so-called ‘Apple Effect’ moved the traditionally defined ‘serious reporting’ to celebrity/entertainment tabloids, so that only firms capable of transforming all types of information into ‘entertainment’ would survive. The first victims of this effect were those news firms providing entertainment news. The Da Cheng Daily, a celebrity newspaper which was once the only competition to the Min Sheng Daily, ceased publication by the end of February 2006. In November 2006, the Star News, another celebrity newspaper aimed at younger readers and also an affiliate of the United Daily group, quietly terminated operations. Finally, the Min Sheng Daily, despite undergoing a sequence of modifications, caved in after an 8-month struggle. An interesting question to ask is why, given that it was restructured to gradually become more market-oriented, the Min Sheng Daily was still unable to turn the tide. More importantly, after ridding itself of the economically burdensome Min Sheng Daily, will the United Daily group necessarily stop losing money? After the closing of the Min Sheng Daily, what will happen to Taiwan’s newspaper industry?
The main purpose of this paper is to address these questions in an industrial economics model. We provide a game-theoretic analysis to explain the current competition in the industry as well as provide management insights into the future development of existing firms. Our paper starts by modifying Judd’s (1985) model of multiple products when considering the property of heterogeneous competition in Taiwan’s newspaper industry, and concludes that the closing of the Min Sheng Daily is indeed an optimal decision for the United Daily group in the short run. However, when we consider disruptive innovations (Christensen & Raynor, 2003) by extending the model to a four-stage framework where the entrant can strategically invest in R&D, we show that the United Daily group’s withdrawal from the entertainment market will induce severe competition in the general news market. Based on this model, we provide some recommendations for management in regard to the current crisis in Taiwan’s newspaper industry.
Notice first that since our purpose is to provide managerial insights into the present situation and future development of Taiwan’s newspaper industry, Judd’s model provides us with an easy and straightforward setup to focus our concerns, rather than distract readers with complicated mathematical calculations. We hope that by adopting a multiple product model which incorporates the possibility of ‘disruptive innovation’ mentioned by Christensen and Raynor (2003), the theoretical discussion of our paper can provide insightful explanations regarding recent developments in Taiwan’s newspaper industry and provide recommendations to the management of the incumbent news firms.
The remainder of this paper is organized as follows. Section 2 describes the current status of Taiwan’s newspaper industry, our purpose being to understand the fundamental properties of the market’s structure, which serve as empirical justifications for our model’s setup. Sections 3 and 4 present the modified Judd
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(1985) model, incorporating the heterogeneous competition in the news industry and the possibility of ‘disruptive innovation.’ We will derive the short-term equilibrium first and then the long-term equilibrium, where we will also provide some managerial suggestions for the incumbent news firms. Section 5 concludes the paper.
Taiwan’s newspaper industry
This section first describes the multiple product properties of Taiwan’s newspaper industry, and then summarizes the incumbents’ strategic reactions to the rapid change in the industry. The history of the industry reviewed will serve as empirical justification for our assumptions in the basic model, and will help us provide more realistic management suggestions.
Multiple products
Taiwan’s newspapers can be classified into six categories: general newspapers (e.g., the China Times, the Liberty Times, and the United Daily), business newspapers (e.g., the Commercial Times and the Economic Daily News), entertainment newspapers (e.g., the Da Cheng Daily and the Min Sheng Daily), evening newspapers (e.g., the China Times Evening and United Daily Evening), English language newspapers, and regional newspapers (e.g., Hualien’s Keng Sheng Daily and Tainan’s Chung Hwa Daily). It is important to notice that, to both the public and academia (So, 1997; Tsai, 2005), the Apple Daily is considered to be an undisputed provider of entertainment and recreational news. Hence, our model will treat the Apple Daily as a newspaper providing soft information or entertainment news.1
Declining newspaper demand, substitutes, and readership changes
Cable TV and the Internet have provided plenty of substitutes for newspapers, causing the demand for these to decline. In addition, these diverse, plentiful, cheap, and accessible media have rapidly changed people’s media consumption habits. The cable TV law was passed in 1992, and cable penetration rose from 26% in 1992 to the current 85%. Furthermore, according to AC Nielsen’s survey in December 2006, the percentage of the population using the Internet had risen from 40.8% in 2002 to 51.3% by the end of September 2006.
The ‘television culture’ is slowly replacing the culture of written language and, for some, free information on the Internet is displacing newspapers. With declining interest in public affairs, most consumers seek gossip-oriented recreational information instead of spending time and money on newspapers (Denton, 1993; Kurtz, 1993). According to Nielsen’s media survey (Nielsen Media Research, 2007) since the early 1990s Taiwan’s newspaper readership rate had slipped from its peak of 76% to a low of 46% by March 2007. In other words, more than 50% of Taiwan’s population does not read newspapers. In another survey conducted by Rainmaker Company, the advertising revenue of newspapers has been continuously declining from near NT$16,514 million in 2001 to NT$14,450 million in 2006. From a holistic point of view, the golden age of newspapers in Taiwan has already passed.
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Competitive entry into a heterogeneous product market
The Apple Daily was launched on May 2, 2003, by Hong Kong businessman Jimmy Lai Chee Yin. Six months later, the Apple Daily had reached an impressive 10% of total newspaper readership, ranking fourth behind the three major newspapers: the United Daily, the China Times, and the Liberty Times. In the first half of 2005, the Apple Daily took second place in terms of circulation to the top selling paper, the Liberty Times. In what follows, we will briefly describe how the Apple Daily provided differentiated products that turned consumers away from the incumbent firms, the management strategy that they adopted to quickly meet consumers’ requirements, and the resulting impact that the newspaper had on the incumbents in the industry. The Apple Daily adopts a reader-first attitude in deciding on the content of its news; the content of the news is chosen to satisfy the consumers’ preferences, rather than to educate the public.2 The Apple Daily interacts enthusiastically with consumers by instantly responding to consumers’ suggestions on its layouts and, most of all, by conducting ‘focus group interviews’ with readers on a daily basis. The Apple Daily was the first of Taiwan’s newspaper industry to establish an ‘exposure hotline,’ asking readers to provide potentially newsworthy material and suggestions. ‘These flexible strategies to fulfill the market demand and to provide a completely market-oriented content have successfully closed the gap between the consumers and media content’ (Tsai, 2005).
When faced with the competition from this new entrant, there were mainly three types of reactions from the incumbents: to give up and close down their papers, to restructure and provide new and differentiated products, and to fight back. As described, the entertainment news market was the first to encounter the competition from the Apple Daily. Local newspapers and evening papers were the first victims to stop publication, to be followed by the Da Cheng Daily, the Star News, and the Evening China Times.
Second, in the name of ‘restructuring,’ the incumbents introduced new products or changed their layouts in order to differentiate themselves from the Apple Daily’s sensational style. For example, after the launch of the Apple Daily in 2003, the market share of Min Sheng Daily, whose overall readership rates originally ranked it in fourth place, began to decline from 3.1% in 2003. In April 2005, the Min Sheng Daily introduced the ‘Sunday News,’ issued every Sunday as a 24-page, octavo-format delicate tabloid. In late March 2006, the Min Sheng Daily underwent an overall revamp that turned its focus to boutique consumption, comprising in-depth features on entertainment and sports that were aimed mainly at the social elite. However, these efforts did not provide sufficient differentiation to insulate the Min Sheng Daily from the Apple Daily’s competitive threat. When the Min Sheng Daily ceased publication in December 2006, it had a circulation of merely 80,000 copies (The Min Sheng Daily with, 2006).
Third, the major newspapers (i.e., the United Daily, China Times, and Liberty Times) adopted a more aggressive attitude to fight the Apple Daily, including offering sales discounts, making layout and content adjustments, and featuring much more sensational news (Sun, 2005). However, such ‘Apple-ization’ or ‘tabloidization’ was unable to prevent readers from turning to the fresher and newer Apple Daily. Since the three major papers could not both differentiate themselves from each other and mimic the Apple Daily, they fell into a fierce competition amongst themselves
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(Li & Mai, 2003), while the Apple Daily established a loyal readership and differentiated itself from the other papers right from the beginning. Within 3 years, the China Times had lost 36% of its readers, the United Daily had lost 14%, and the Liberty Times had lost 23%. This forced the China Times and the United Daily to turn back to their original styles to keep their loyal readers. The Liberty Times, on the other hand, ventured further down the path of Apple-ization by further investing in providing paparazzi-type news and sharper sensationalism. In addition, the Liberty Times distributed a large quantity of free papers and published extra recreational issues as weekend supplements.
In sum, Taiwan’s newspaper industry is characterized by multiple products and heterogeneous competition. To correctly describe these two properties, in the next section we will modify Judd’s (1985) model of multiple products by considering the nature of heterogeneous product competition in Taiwan’s newspaper industry. Then the model will be extended into a four-stage framework to capture the long-term development of the market equilibrium, considering that the new entrant is capable of working on R&D to increase demand in the general news market (i.e., disruptive innovations).
The basic model
Judd (1985) examined a sequential game in which a multiproduct incumbent firm, when facing competition from an entrant offering a substitute for one of its products, needs to decide whether to continue or withdraw from the invaded market. Then each firm will determine its prices in each market accordingly. Judd characterized an equilibrium where it can be optimal for the incumbent firm to withdraw from the invaded market. This is similar to the evidence in Taiwan’s newspaper industry, where the entrant started invading in the low-end entertainment news market. As our purpose is to provide managerial insights into the present situation and the future development of Taiwan’s newspaper industry, Judd’s model provides us with an easy and straightforward setup to derive the equilibrium and to focus our attention on the development of the newspaper industry, rather than distracting readers with complicated mathematical calculations.3
We will modify Judd’s model by considering the property of heterogeneous competition; that is, we assume that, except for the invaded market, the incumbent firm will also compete with other firms in another market (e.g., the general news market). This setup can generally fit similar situations being faced in other industries. For example, Yahoo is competing with eBay in the E-auction market, while Yahoo is also providing other services that are competing with Google. Another example is the telecommunications industry, where the entrants have invaded the long-distance calls market and the incumbents are competing with other firms in local phone services.
The model setting
The structure of the basic model is given as follows. First, to simplify the analysis, we assume that there are three news firms: 1, 2, and 3. There are two kinds of products in the newspaper industry: general newspaper (G) and entertainment newspaper (E). Firm 1 and firm 2 are in the general newspaper market,4and firm 1 and firm 3 are in
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the entertainment newspaper market. To see the correspondence to the Taiwan newspaper industry, assume that firm 1 is the United Daily, firm 2 is the China Times or Liberty Times, firm 3 is the entrant Apple Daily, and the United Daily’s entertainment-oriented product is the Min Sheng Daily. Here, in order to focus on the firms’ market choices, we follow Judd (1985) in normalizing the firms’ operating costs to zero, and leave for later discussion cases where this assumption is relaxed.
To capture heterogeneity among consumers, we modify Judd’s (1985) assumption by considering three types of consumers: G1, G2, and E, where Gi, for i 1 or 2,
represents a consumer oriented toward firm i in the general news market and E identifies a consumer oriented toward any entertainment newspaper, for the reasons given below. Without loss of generality, we follow Judd (1985) in assuming that there is only one consumer for each type, and each consumer purchases only one newspaper. The consumers’ utilities are given as Equations (1) and (2):
UGi
apG
i; if buys Gfrom firm i;
alpG
j; i " j; if buys G from firm j;
agpE
i; i 1; 3; if buys E from firm i:
8 <
: (1)
UE apEi; if buys E from firm i;
agpG
i; i 1; 2; if buys G from firm i:
(2)
/pGi and pEi denote firm i’s prices in the G and E markets, respectively. a reflects the
benefit in terms of the satisfaction derived from reading the most preferred news; l denotes the slight reduction in utility a consumer experiences if she buys her favorite type of news from a less preferred newspaper firm that still specializes in her favorite type of news; and g denotes the greater loss in utility experienced if a consumer buys a less favored type of newspaper (one that specializes in providing the less preferred type of news).
Take consumer G1as an example. G1is the consumer oriented toward firm ‘1’ in
the ‘general’ news market, and firm 1 denotes the United Daily. The interpretation of UG1 is as follows. If G
1buys her favorite United Daily, then her satisfaction will be
the highest a. Her overall utility will be the benefit in terms of the satisfaction derived from reading the paper minus the purchase price, i.e., apG
1; If G1buys general news
from a less preferred general news firm such as the China Times or Liberty Times, then the satisfaction from reading the paper will be reduced by l, so that the overall utility will be the benefit in terms of the satisfaction (/al) derived from reading it
minus the cost of purchasing general news from firm j (for j " i); i.e., alpG j:
However, if she buys the entertainment newspaper, then there will be a larger reduction in utility, g, and the overall net utility gain will be the benefit in terms of the satisfaction derived from reading the paper of ag minus the cost of purchasing the entertainment news from either firm 1 or firm 3, i.e., agpE
i for i 1; 3: To
simplify the analysis, we will assume that l B g B a B 2l to capture the fact that even within the general news market, there is still heterogeneous competition.
The specification of consumer E’s utility is different in order to reflect the current situation in Taiwan’s entertainment news market. That is, for consumer E, the satisfaction from consuming the product of either firm 1 or firm 3 is the same (i.e., a), but if she is forced to read the general news, there will be a loss of utility of g compared to the satisfaction derived from reading an entertainment-oriented newspaper.5 This is assumed to be so because, comparatively speaking, Taiwan’s
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entertainment news is small and both of the main providers (i.e., the Min Sheng Daily and Apple Daily) have focused on the same consumer-related and entertain-ment news. The readers exhibit a less strong loyalty toward the news firms than they do in the general news market. This can be justified by the observation that, when the Apple Daily entered the market, its experimenting with a low price of NT$5 successfully turned most readers from the Min Sheng Daily to the Apple Daily. In the case of strong loyalty, a low price strategy should not permanently move the readers to another provider.
Hence the interpretation of consumer E’s utility function is that, if she buys entertainment news, her net utility gain will be the benefit from satisfaction a, minus the purchasing price pE
i for i 1; 3: If she buys the general news from either firm
1 or firm 3, there is a dissatisfaction loss g, and hence the overall utility will be agpG
i;for i 1; 3:
Sequential stages of the basic game
At the start of the game, firms 1 and 2 are in the G market, and firms 1 and 3 are in the E market. In the game, the firms make decisions sequentially as follows: at stage 1, firm 1 first decides whether to continue or withdraw from the E market. Then, at stage 2, each of the firms competitively sets the price(s) of its newspaper(s). Accordingly, there are two subgames after stage 1, namely, (1) firm 1 simultaneously operates in the G and E markets, and (2) firm 1 withdraws from the E market. 6
Deriving the equilibrium
Since the game is a sequential one, the subgame perfect equilibrium (Selten, 1975) of the game will be derived by backward induction. For this end, we first calculate the equilibrium prices in each of the two subgames with respect to firm 1’s stage-1 decision possibilities and then determine firm 1’s equilibrium decision.
The subgame if Firm 1 stays in the E market
The equilibrium prices in this subgame are the prices where no consumer or firm will find it beneficial to unilaterally deviate. We now demonstrate that the equilibrium prices for this subgame will be pG
1 pG2 g and pE1 pE3 0: 7
Consumers G1and G2
will purchase from firm 1 and firm 2, respectively, and consumer E will be indifferent between buying from firm 1 or from firm 3.
First, since the E market is homogeneously competitive, firm 1 and firm 3 will charge competitive prices, i.e., marginal cost pricing will prevail. Since we have assumed a zero marginal cost of operation, the equilibrium prices will hence be/
pE
1 pE3 0: Second, given pE1 pE3 0 in the E market, we need to demonstrate that
consumers G1 and G2 will make choices consistent with this equilibrium and
purchase product G from firm 1 and firm 2, respectively. Notice first that if both of them deviate by purchasing product E, their utilities will be the same, i.e., ag0: For both G1and G2to adhere to the equilibrium and not deviate to purchase
product E, the highest possible prices that firm 1 and firm 2 can charge must be set at the levels where G1and G2are indifferent between buying product G and product E.
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This requires the utilities to be the same in these two cases, that is, apG
i /ag0;
for i 1, 2. Therefore, we have/pG1 pG2 g:
In addition, we need to consider the following deviation where, say, firm 1 could charge a lower price so that even G2finds it beneficial to purchase from firm 1. To
attract G2, firm 1 must reduce its price to pG1 gl; so that consumer G2will be
indifferent between purchasing from firm 1 and firm 2. In this case, firm 1 will have the payoff 2(gl): Since we have assumed earlier that l B g B aB 2l; this deviation cannot be profitable as 2(gl) is less than the equilibrium payoff l. We have restricted the range of parameters to simplify the discussion,8 so that a unilateral deviation will not be profitable. Since our main purpose is to study the current situation and future development of Taiwan’s newspaper industry, we need this assumption to avoid burdening readers with a complicated discussion, and this also applies to the following discussion and Note 12.
Finally, we can calculate each player’s payoff in this subgame. Under these prices, consumer Giwill not unilaterally change her consumption decision, and since she
can purchase from her most favored firm, the utility will be ag: Next, since consumer E is indifferent between buying from firm 1 and firm 3, her utility will be/
a0: Since both firm 1 and firm 3 will be operating in the E market, the competition among firms offering homogeneous products will drive the profits down to zero. In addition, as consumers rationally compare prices, the competition in the E market will influence the profits in the G market. To sum up, the firms’ profits in this subgame will be p1 g; p2 g; and p3 0:
The subgame given Firm 1’s exit from the E market
We will demonstrate that the equilibrium prices in this subgame are: pG
1 pG2 a and/
pE
3 a: Consumers G1and G2will purchase from firm 1 and firm 2, respectively, and
consumer E will buy from firm 3. First, notice that since firm 1 has withdrawn from the E market, firm 3 will be the monopolist and hence the profit maximizing price will be pE
3 a:
Next, given pE
3 a in the E market, we need to demonstrate that consumers G1
and G2will follow the equilibrium and purchase product G from firm 1 and firm 2,
respectively. Notice first that if both of them deviate by purchasing product E, their utilities will be the same, i.e., agaB 0. This enables firm 1 and firm 2 to charge the profit maximizing prices, i.e., pG
1 p G
2 a; without worrying that consumers will
turn to product E and derive a negative utility.
In addition, we need to consider the following deviation where, say, firm 1 could charge a lower price so that even G2finds it beneficial to purchase from firm 1. To
attract G2, firm 1 must reduce the price to pG1 al; so that consumer G2will be
indifferent between purchasing from firm 1 and firm 2. In this case, firm 1 will have the payoff 2(al): This deviation will not be profitable, as 2(al) is less than firm 1’s equilibrium payoff a.
Finally, we can calculate each player’s payoff in this subgame. Since all three firms have charged the profit maximizing prices, i.e., pE
3 pG1 pG2 a; the utilities
for all consumers will be zero, that is, aa: Similarly, the equilibrium profits for each firm are p1 a; p2 a; and p3 a:
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Subgame perfect equilibrium of the game
Given the equilibrium profits for firm 1 in the two subgames, respectively, we now determine firm 1’s decision in the first stage. To do this, we can simply compare firm 1’s payoffs from these two subgames. Because the payoff to the firm from continuing in the E market (g) is smaller than that from withdrawing (a), firm 1 will choose to withdraw from the invaded E market.
To sum up, in the unique subgame perfect equilibrium, firm 1 will choose to withdraw from the E market. Then, all three firms will charge the same price pG
1
pG
2 a and p E
3 a: Consumers G1 and G2 will purchase from firm 1 and firm 2,
respectively, and consumer E will buy from firm 3. In this equilibrium, all consumers derive zero utility, and the equilibrium profits for each firm are/p1 a; p2 a; and/
p3 a: Proposition 1 summarizes the above discussion.
Proposition 1. In the unique subgame perfect equilibrium described above, the United Daily (firm 1) is better off withdrawing from the entertainment market (E) when faced with the competition from the Apple Daily (firm 3).
The intuition as to why firm 1 can benefit from withdrawing from the E market is that, after exiting the market, it will be able to raise its price in the general news market because the price of an imperfect substitute (entertainment-oriented news-papers) will increase. This can increase firm 1’s profit in the G market, where firm 2 will also benefit. Moreover, according to our analysis, after closing down the Min Sheng Daily, the entertainment news market will become a monopoly and such news will be provided by the Apple Daily only.
The extended model considering disruptive innovation
This section examines the situation where firm 3 is capable of innovating and developing new demand in the general news market. Our purpose is to see whether withdrawing from the entertainment news market is still an optimal decision for firm 1 in the long term. We extend the basic model to a four-stage game, in which firm 3 can develop new demand in the general news market through R&D financed from profits. We assume that only firm 3 will work on R&D, as this reflects an earlier observation that the Apple Daily is more aggressive and innovative than the incumbents. We will leave for a later discussion the cases where all firms have the R&D ability.
Subsequent stages of the extended game
The first two stages of the extended game are the same as the basic game above. That is, at stage 1, firm 1 first decides whether to continue or withdraw from the E market. Then, at stage 2, each of the firms competitively sets the price(s) of its newspaper(s). At stage 3, firm 3 decides how much to invest in an uncertain innovation to develop new customers (i.e., demand) in the general news market if the firm realizes a positive profit at stage 2. However, if firm 3 does not profit at stage 2, it will not invest in innovation and then do nothing but proceed to stage 4. At stage 4, each of the firms sets the price(s) of its newspaper(s) and competes with the other firms.
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R&D technology
Let x denote firm 3’s R&D investment and let p(x) denote the probability of being successful in creating enough heterogeneous demand (and hence loyal readers) in the general news market. p(x) is a nondecreasing convex function of x. To simplify the analysis, we assume 0 5 (p’)1( 1
2ag) 5a 9
, where -1 denotes the inverse of the first-order derivative p’(:):
If the innovation is successful, then there will be a new consumer G3who is loyal
to firm 3’s general news, and the utility received is defined in a similar way to Equation (1). Otherwise, if the innovation fails, there are two possibilities regarding whether film 3 enters the G market or not. If firm 3 does not enter the G market, there is no effect on the other incumbents’ pricing strategies at stage 4. If firm 3 does enter the G market, firm 3’s G product is homogeneous with products G1or G2(as a
result of the failure in creating a heterogeneous product). Therefore, firm 3’s entry to the G market will affect the other firms’ pricing decisions. A rigorous way of incorporating these two possibilities is to use a probability for each case to take place. However, in the first case, only firm 1’s decision about withdrawal will be affected and the other firms’ pricing strategies will remain unchanged. For analytical ease, we assume away the first possibility and presume by default a homogeneous competition in G between firm 3 and firms 1 and 2, if firm 3’s innovation is not successful.
Deriving the equilibrium
We now derive the subgame perfect equilibrium by solving backward the sequence of the stages. That is, we first derive the stage-4 subgame equilibria, respectively, given that firm 3 succeeds in its G-product innovation and that it fails. Then we decide firm 3’s R&D input. Finally, we characterize the equilibrium prices at stage 2, and then firm 1’s withdrawal decision.
Subgame equilibrium for stage 4
Remember that firm 3 will participate in the stage-4 market competition only if firm 1 has already withdrawn from the E market. If firm 1 stays in the E market, firm 3’s profit in the E market will be zero due to competition in homogeneous products (see the basic model). Firm 3 will not have the ability to invest in R&D and enter the general news market. Therefore, the equilibrium profits will be p1 p2 g and/
p3 0:
However, if firm 1 withdraws from the E market, so that firm 3 has a chance to make a positive profit, the equilibrium will depend on whether firm 3 is successful in R&D. First, if firm 3 can successfully develop new demand in the G market, then the calculation of the equilibrium prices of the G products will be similar to that in the basic model. That is, in this case, firm 3 will develop the loyal reader G3, whose
greatest benefit from reading firm 3’s general news will be a. There will be a reduction in utility g if she purchases the general news from firm 1 or firm 2. With the assumption that l B g B aB 2l; the equilibrium prices will be pG
1 pG2 pG3 a:
Since the general news firms all charge, there is no need to prevent consumer E from switching to the general news and hence firm 3 will charge the monopolistic price
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pE
3 a: To sum up, the equilibrium profit for each firm will be p1 a; p2 a; and
p3 2a:
Moreover, if firm 3 fails to create new demand for G, then the homogeneous competition will drive the prices down to pG
1 pG2 pG3 0: 10
Furthermore, to prevent consumer E from switching to the G market, pE
3 must be set at a level where
consumer E is indifferent between consuming products E and G, that is, apE 3/
ag0: Hence, pE
3 g: In this situation, the equilibrium profits will be p1 0;
p2 0; and p3 g:
Firm 3’s R&D decision at stage 3
Given stage 4’s market equilibrium as above, firm 3 needs to decide the level of R&D (i.e., x), given the probability p(x) for innovation success (thus firm 3 will have a profit of/2a at stage 4). Of course, the likelihood that the innovation fails is 1-/p(x);
and when this happens, firm 3 will have a profit of g at stage 4. Therefore, given a withdrawal decision already made by firm 1, firm 3 will maximize its expected profit as described below11:
max
x fp(x)2a(1p(x))gxg
subject to 0 5 x 5 a: (3)
Since g B 2a and p(x) is a non-decreasing convex function, the maximization problem is well defined and the optimal x will exist. Let x*denote this optimal R&D level. x*must satisfy p’(x)(2ag) 1;12
and firm 3’s optimal profit at stage 4 will be p(x)2a(1p(x))gx:However, we will eschew a more detailed discussion on
the optimal R&D level, as our focus is on the firm’s market choice. It is obvious from the first-order condition that, when a is greater or g is smaller, the R&D input is higher.
Subgame equilibrium at stage 2 and firm 1’s decision about withdrawal at stage 1 Notice that the subgame equilibrium profits from the E product competition at stage 2 of this extended game are the same as those in the basic game. That is, the equilibrium profits at this stage will be p1 a; p2 a; and p3 a if firm 1 withdraws
from the E market or p1 g; p2 g; and p3 0 if firm 1 stays in the E market. We
now can identify firm 1’s decision about withdrawal or not, after we have characterized the subgame equilibria at stages 2, 3, and 4. To this end, we compare firm 1’s total profits from the decisions to withdraw and to stay. As stated earlier, if firm 1 remains in the E market, then firm 3’s profit in the E market will be zero due to the homogeneous products competition. Then firm 3 will not invest in R&D and enter the G market. Therefore, firm 1’s profit from the G product sales at stage 4 is also p1 g: Its combined profits from stage 2 and 4 will be 2g.
However, if firm 1 withdraws from the E market, firm 1’s profit at stage 2 is a as derived. Meanwhile, firm 3 will have a positive profit, with which it can invest in developing new demand in the G market. If the innovation is successful, then firm 1 still has a profit of a from stage 4. If the innovation fails, then homogeneous product competition will drive firm 1’s profit down to zero. Given the optimal R&D level x* determined in Equation (3) and the probability of success p(x); the expected sum of
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By comparison, it follows that if1p(x)
2 a B g; then withdrawing from the E market
is no longer an optimal decision, when the invading firm can extend its entry to the G market by disruptive innovation. With this condition, the unique subgame perfect equilibrium of the whole game is that firm 1 stays in the E market competing with firm 3. The equilibria for stage 2 and 4 will be the same, i.e., pE
1 p E 3 0 and/ pG 1 p G
2 g: Hence, the firms’ total profits are p1 2g; p2 2g and p3 0:
Proposition 2 summarizes the above discussion.
Proposition 2. From the unique subgame perfect equilibrium derived above, given
1p(x)
2 aBg; if the Apple Daily (firm 3) is R&D-capable while entering the general news
market, the withdrawal of the United Daily (firm 1) from the entertainment news market will diminish its profit earned from the general news market and hence reduce its overall long-term profit.
Withdrawing from the invaded market is a short-term optimal decision for firm 1, but it can be non-optimal or even harmful in the long term. The intuition behind this is that, in the short term, firm 1 has ignored the fact that partially withdrawing can give the new entrant the opportunity to work on R&D and develop new demand in the higher-level market. Next, we will address some comparative statistics and provide several management insights to the incumbent news firms.
Discussion
If a positive operating cost is taken into consideration, then the competitive prices will be set at a higher cost (instead of zero). For example, it has been reported that the family that owned Min Sheng Daily was less efficient than the owners of the Apple Daily, and hence the operational cost was higher in the case of the Min Sheng Daily. When the Apple Daily entered the E market by charging an experimental low price of NT$5, most consumers switched to this new entrant, resulting in a reduction in demand for the Min Sheng Daily. This loss in demand and the comparatively higher operating costs drove the profits of the Min Sheng Daily down into negative figures. Even after the Apple Daily raised its price to the competitive price of NT$15, the long-term deficit forced the United Daily group to close the Min Sheng Daily.
Second, the results of the R&D can be expressed in terms of increasing the satisfaction of the existing (instead of new) consumers, so as to increase satisfaction from to a’( a) or to decrease the utility losses l and g. For example, a successful invention by the Apple Daily is the ‘focus group interviews,’ through which consumers’ suggestions are taken directly to ensure that the content of the news can provide more satisfaction. A counter example will be the fact that both the United Daily and the China Times have also invested in diversification, including issuing magazines, books, evening news, and even network news. However, since these inventions (by diversification) have not created enough heterogeneity and hence have not provided enough satisfaction to consumers, the small profits from only part of these subsidiary businesses are insufficient to cover the losses from their newspapers. Even worse, similar to their competition in newspapers, the two news firms are being confronted by each other in the diversified markets and between their nearly homogeneous newspapers are driving their profits down.
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Based on this line of reasoning, we can provide two possible expectations for the Liberty Times, which became fully Apple-ized following the Apple Daily’s launch. First, the Liberty Times and the Apple Daily will become more homogeneous in the general news market, and this will drive their profits down to competitive levels. Second, since the Apple Daily has pre-empted the entertainment news market, imitation by the Liberty Times will not create enough heterogeneity for consumers and, as a result, it is expected that Apple-izing the Liberty Times will cause it to lose its original demand.
Third, the results of R&D can also be broadly expressed so as to develop new markets. A successful example is the case where the China Times invested in cable television in May 2002, by acquiring CTI TV (Chen & Cheng, 2003).13The new owner turned the ‘money loser’ CTI TV into a profit-maker within 3 years and, in 2005, CTI TV had a profit of more than NT$100 million (Liao, 2005). Moreover, on December 26, 2005, the China Times bought the wireless China TV from the KMT, hoping to make a handsome profit like they did with CTI TV. Fourth, since the revenue from advertising will be positively related to market share, if we assume that each firm charges a competitive price for advertising space (denoted by A), then each firm’s unit revenue will be PG
i A or PEi A for i 1, 2, 3. Then, with minor modifications to the
equilibrium conditions, our main conclusions above will still apply.
Concluding remarks
Taiwan’s newspaper industry is now at a saturated stage. The popularity of cable TV and the Internet has attracted huge numbers of consumers who had previously been oriented toward newspapers, and the new entrant, the Apple Daily, has worsened the situation by attracting consumers with its fresher content and more efficient management. While most of the attention has focused on the concern expressed that newspapers will become more and more sensational, this study, starting with the United Daily’s decision to shut down the Min Sheng Daily, attempts to provide an economic interpretation for the current status of the industry. We first modified Judd’s (1985) model of multiple products by taking into account the heterogeneous products competition in Taiwan’s newspaper industry. Then we extended the basic model by considering disruptive innovations (Christensen & Raynor, 2003).
Our main conclusion is as follows. Closing the Min Sheng Daily is optimal in the short term but could lead to further reductions in profit in the general news market in the long term. The various diversifications will not necessarily result in profits if they cannot provide enough product diversity to consumers. Finally, since adver-tisements and networks have been very important topics in the mass media, we will leave their detailed discussion to further research. However, as demonstrated above, our model can still provide a simple analysis explaining how advertising or the Internet can change the news firms’ market choices.
Acknowledgements
We gratefully acknowledge the constructive suggestions made by Wayne Fu and one anonymous referee of this journal. The second author is grateful to Ping-Hung Chen, Chien-San Feng, Shih-Hung Luo, Kuo-Feng Tseng, and participants at the 2007 annual conference of the Chinese Communication Society.
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Notes
1. If this assumption is violated, two of our main conclusions still apply with slight modifications in the requirements for equilibrium.
2. Educating the public was a mission of the mainstream newspapers.
3. For example, see Baumol, Panzar, and Willig (1982) for more complicated multiple product setups.
4. Although there are in fact more than two competitors in each market, for example, there are three main newspapers in the general news market (the China Times, United Daily, and Liberty Times), the assumption of two firms is sufficient to describe the competitive environment.
5. If this assumption is violated, two of our main conclusions will still apply with slight modifications regarding the requirements for equilibrium.
6. Since this paper focuses on the news firms’ strategic choices for multiple markets, we do not consider advertising in our model. However, as the revenue from advertising is normally positively related with the readership (see Increasing newspaper revenue, 2005), our model can provide a simple analysis of advertising’s effect (see Discussion). Since the effect of advertisement has been an important issue in the media literature (e.g., Gabszewicz, Laussel, & Sonnac, 2001), we will leave detailed discussion to further research.
7. This is a standard price competition equilibrium.
8. Otherwise, we need to discuss the equilibrium for every possible range for a and l. 9. Otherwise, we need to discuss various cases of corner solutions.
10. Here, for modeling simplicity, the homogeneity among all of the three G products is assumed given the failure of firm 3 in the innovation. A more general or realistic assumption can be that firm 3’s G product becomes substitutable only to either firms 1 or 2 but not both, where firms 1 and 2 remain heterogeneous. It follows that with firms 3 and 1 substitutable, the competitive prices will be pG
1pG30 and pG2g: Otherwise, with
firms 3 and 2 substitutable, then the competitive prices will be pG 2p
G
30 and p G 1g:
Nonetheless, the results derived in the text still apply to these two situations with slight modifications to the condition that characterizes the results of the game.
11. 2a and g are derived as above. Notice that firm 3 will not deviate by reducing its price to al to generate a profit 3(al); since 3(al) is less than 2a (since lBaB2l): 12. The second-order condition will be p??(x)(2ag)B0:
13. CTI TV, originally named Chuan Hsun TV, was founded by Hong Kong businessman Ping Hai Yu, and later taken over by the Hsiang Shan group. The China Times is the third owner.
Notes on contributors
Shirley J. Ho is associate professor at the Department of Economics, National Chengchi University. Her research interests cover all topics in microeconomics and industrial organization.
Mine Ping Sun is associate professor at the Department of the Journalism, College of Communication, National Chengchi University in Taiwan. Her research interests cover the areas of media studies, newspaper industry of Taiwan and Malaysia, information commu-nication technology and family, media use of adolescents, and community commucommu-nication. Her works on the ICT and family, media and newspapers industry in Taiwan have appeared in Journal of Mass Communication Research (in Chinese), Journal of Radio and Television Studies (in Chinese), Chinese Journal of Communication Research, and Asian Journal of Communica-tion.
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表 Y04
98 年 8 月 10 日
報告人姓名
何靜嫺
服務機構
及職稱
國立政治大學經濟學系
時間
會議
地點
August 2nd – August 9st
2009,
Tokyo and Singapre
本會核定
補助文號
NSC 97-2410-H-004 -060
會議
名稱
1. (中文) 2009 年遠東及南亞經濟計量協會年會
(英文) 2009 Far East and South Asia Meeting of the Econometric Sciety,
2. (中文) 2009 年新加坡經濟評論會議
(英文) Singapore Economic Review Conference 2009
發表
論文
題目
(中文) 銀行產業下的資本結構與市場競爭：理論與實證
(英文) Capital Structure and Competition in the Banking Industry: Theory
and Empirics,
表 Y04
