Solution for Managerial Economics 4th Edition Chapter 16, Problem 1

by Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
147 Solutions 23 Chapters 104021 Studied ISBN: 9781305259331 Economics 5 (1)

Chapter 16, Problem 1 : 16-1 Newspaper Bargaining Two equal-sized newspapers...

16-1 Newspaper Bargaining

Two equal-sized newspapers have overlap circulation of 10% (10% of the subscribers subscribe to both newspapers). Advertisers are willing to pay $10 to advertise in one newspaper but only $19 to advertise in both, because theyre unwilling to pay twice to reach the same subscriber. Whats the likely bargaining negotiation outcome if the advertisers bargain by telling each newspaper that theyre going to reach agreement with the other newspaper, so the gains to reaching agreement are only $9? Suppose the two newspapers merge. What is the likely post-merger bargaining outcome?


Step-By-Step Solution

16-1 The Nash bargaining outcome tells us that parties split the gains from agreement.  Pre-merger, each newspaper splits the gains to agreement, which are $9.  So each newspaper receives $4.50.  After the merger, the newspapers bargain together and split $19.  So the merged newspaper gets $9.50, an increase of $0.50.


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