Content, Advertising, and Circulation in an Optimizing Model of the Media Firm

Abstract

The paper determines the effects of different influencing variables on the media company’s optimal subscription and advertising prices and editorial content. The company maximizes profit consisting of subscription and advertising revenue, minus the costs of content, advertising, and circulation, by setting the subscription and advertising prices and the amount of editorial content. Subscription demand is a function of the subscription price, the media’s editorial content, and advertising, and advertising demand a function of the advertising price and circulation.

The condition for the circulation spiral to be finite is derived. It is shown that an increase in a variable or a parameter (e.g. circulation demand) causes the respective price to increase only if the demand for the other product (advertising) is elastic enough, the price declining if the other product’s demand is less elastic. Moreover, the increase leads to an increase in editorial content if advertising demand is elastic, and to a decrease in the advertising price. An increase in advertising demand leads to an increase in the advertising price if subscription demand is elastic enough, and to a decrease in the subscription price and editorial content. An increase in the marginal effect of editorial content on subscriptions leads to an increase in editorial content without affecting the prices.