GROUP PROJECT II: NEWSPAPER WARS1 Since Rupert Murdoch took over the archrival New York Post, a series of price cuts and retaliatory moves have taken place. These events have severely affected industry profits. Leonard N. Stern, formerly owner of The Village Voice, summarized the situation as follows: The Daily News is the dominant tabloid of the city, and it is now under challenge for its life. This is it. I believe the battle has been joined. When it's over, things are not going to look the way they do today. And referring to Rupert Murdoch's willingness to take losses, he added: I've been in many businesses, including publishing. I can tell you categorically: I don't want to be in any business where I have to compete with Rupert Murdoch. You have been hired by the Daily News as a strategy consultant. During your first meeting with the management of the Daily News, the situation was summarized as follows: Everything was fine until Murdoch took over the Post. Currently, we are both pricing at 25, down from our normal 50. True, circulation and advertising revenues have gone up, but the problem is that our net profit is down by a lot. You can look at it from two points of view. One is: with low prices we are leaving a lot of money on the table. The other one is: we are playing the game against a fellow named Murdoch. At the meeting, you were provided with circulation and revenue data for both papers, which is available in the dailynews.xlsx spreadsheet. You'll see there that newspapers have two important sources of revenue: sales and advertising. Advertising is tied to circulation, so a lower price that generates higher circulation may raise advertising revenue. At the meeting with the Daily News, you were also told that overhead costs are in the order of $525,000 per week for both firms. Marginal costs are estimated to be 12 per copy for the Post and 13 per copy for the News. Also, for both papers, depreciation of equipment (printing presses, trucks, computers, etc.) averages at about 8 a copy (although it is higher when circulation is lower and vice versa). All of this information is common knowledge throughout the industry. The senior management of the Daily News wants a short report that addresses the following questions with respect to the pricing of newspapers:

(a) Suppose that each firm's newspaper price is set only once and must be either 25 or 50. What price should the Daily News charge? Explain.

(b) Suppose that prices are set only once but each newspaper has complete flexibility as to what price to charge (rounded off to the nearest penny). What price should the Daily News charge? Explain.

(c) Provide a week-by-week "dynamic" strategy for pricing that the Daily News' management can continue to implement after your consulting engagement has ended. In essence, you must give them instructions for what price (50 or 25) to set at the beginning of every week (starting with week 1), based on whatever information you believe is relevant from the history (experience) of prices and pricing in previous periods at each weekly decision point. You should use a 52-week time horizon. You should also justify your strategy.