Price Elasticity Of Demand

Keeping up with the times

�In September 1993 the owners of The Times newspaper unilaterally lowered the price of The Times by one-third. Initially all the major competing newspapers kept their prices constant and carried on as if nothing had happened. Only later did a price war break out.’

The table compare prices and sales of the four major national newspapers- The Times, the Guardian, the Daily Telegraph, and the Independent. The data suggest that tastes didn’t change significantly, since the sales of all the newspapers held constant at around 2.5 million copies daily.

The other table shows that the cut in the price of The Times shifted the Independent’s demand curve to the left. As you can see from table 1 a 40% price reduction of the price of The Times led to a 17.5% increase in its sales. This indicates a price elasticity of demand for The Times of-0.44 (percentage change in quantity demanded 17.5/-40 percentage change in price). As a result, The Times’ daily revenue fell from €169,576 to €134,689. Only if the price elasticity had been greater than 1 would total revenue have increased. The Independent suffered most, so it means it was the closest substitute for The Times. The cross-elasticity of demand implied by these figures was -15.2/-40=0.38. The cross-elasticity for the Guardian was -4.5/-40=0.11, and the cross-elasticity for the Daily Telegraph was -1.95/-40=0.05.

Rival newspapers may not have followed The Times` decision because they believed that their demands would prove as inelastic as those for The Times. If so, they would have lost more revenue by cutting their prices rather than they did by leaving prices unchanged.

Why could The Times have done that?

One possibility is that the increased circulation led to an increase in advertising revenue. It is obvious that newspapers` advertising rates are related to their circulation. If The Times increased its advertising revenue by more than about Ð'Ј35,000, the price reduction would have increased its profit.

Had the Independent went out of business, high proportion of the Independent readers would have moved over to The Times, since the cross-elasticities show that