When Competition Increases Sales

You’re in a market and a competitor arrives. Should you be worried? Not always.

Record labels were petrified of radio, when it arrived, but it only drove their

sales upwards. Small coffee shops generally see their sales rise, not fall,

when a Starbucks opens up nearby. And in the blog world, a new blog in your

space is all but certain to increase your own traffic.

The same thing can happen even when the competitor is yourself. Most big newspapers

today put all of their content online for free. What does that do to sales of

the print product? Publishers have been generally reluctant to embrace the internet,

and have often done so only because they have to, and not because they want

to. It seems obvious that if your newspaper’s content is available for free

online, then people are less likely to pay money for it in paper form. But the

obvious is not always true, and so Matthew Gentskow, of the

University of Chicago’s business school, actually bothered to run

the numbers, using the Washington Post as his object of study.

Both reduced-form OLS regressions and a structural model without heterogeneity

suggest that the print and online editions of the Post are strong complements,

with the addition of the post.com to the market increasing profits from the

Post print edition by $10.5 million per year. In contrast, when I estimate

the full model with both observed and unobserved heterogeneity, I find that

the print and online editions are significant substitutes. I estimate that

raising the price of the Post by $.10 would increase post.com readership by

about 2 percent, and that removing the post.com from the market entirely would

increase readership of the Post by 27,000 readers per day, or 1.5 percent.

The estimated $33.2 million of revenue generated by the post.com comes at

a cost of about $5.5 million in lost Post readership. For consumers, the online

edition generated a per-reader surplus of $.30 per day, implying a total welfare

gain of $45 million per year.

In English, this means that the publishers’ intuition is true, in a narrow

sense. Without the website, the readership of the paper would go up. But it

wouldn’t go up very much: just 1.5%. And of course the website reaches many

more readers than the print edition ever will, quite aside from making money

itself.

Elsewhere, I’m quite sure that the readership of the print version of the Onion

increases with the popularity of the website: if the website had never been

launched, the print version would be nowhere today, or at least certainly not

in New York. Similarly, smart magazines like Wired and Portfolio

put all of their content online for free because they know (or at least suspect)

that it drives print sales, rather than cannibalizing them.

Whether the entertainment industry is going to wake up to this paradigm, however,

remains very doubtful.