In the article about the financial problems of USA Today, Newsweek reported that the paper was losing about $20million a year. A Wall Street analyst said that the paper should raise its price from 50 cents to 75 cents, which he estimated would bring in an additional $65 million a year. The paper’s publisher rejected the idea, saying that circulation could drop sharply after price increase, citing, The Wall Street Journal’s experience after it increased its price to 75 cents. What implicit assumptions are the publisher and the analyst making about price elastici
Take a shot. What do you think.
Hint: what elasticity value implies raising the price will raise total revenue? What elasticity value implies raising prices will lower total revenue?
The implicit assumptions that the publisher and the analyst are making about price elasticity are as follows:
1. The publisher assumes that increasing the price of USA Today from 50 cents to 75 cents will lead to a sharp drop in circulation. This assumption implies that readers are sensitive to price changes and may choose alternative sources of news if the price is increased. In other words, the publisher believes that the demand for USA Today is price elastic.
2. On the other hand, the analyst assumes that increasing the price will not significantly affect circulation. The analyst estimates that raising the price of the newspaper will result in an additional $65 million in revenue per year. This assumption suggests that the demand for USA Today is price inelastic, meaning that readers are willing to pay a higher price for the newspaper without significantly altering their purchasing habits.
Both assumptions stem from their respective experiences with other newspapers. The publisher references The Wall Street Journal's experience after it increased its price to 75 cents, suggesting that it faced a decline in circulation. Conversely, the analyst presumably based their estimation on the assumption that readers of USA Today may not respond similarly to a price increase, possibly due to different target demographics or market dynamics.
It should be noted that without specific data on the price elasticity of USA Today, these assumptions may not be accurate. Conducting market research or performing price sensitivity analyses would be necessary to determine the actual impact of a price increase on circulation and revenue.