Question

Two equal-sized newspapers have an overlap circulation of 10% (10% of the subscribers subscribe to both newspapers). Advertisers are willing to pay $8 to advertise in one newspaper but only $15 to advertise in both, because they're unwilling to pay twice to reach the same subscriber. Suppose the advertisers bargain by telling each newspaper that they're going to reach agreement with the other newspaper, whereby they pay the other newspaper $7 to advertise.

According to the nonstrategic view of bargaining, each newspaper would earn $ ______ of the $7 in value added by reaching an agreement with the advertisers. The total gain for the two newspapers from reaching an agreement is $_____.

Suppose the two newspapers merge. As such, the advertisers can no longer bargain by telling each newspaper that they're going to reach agreement with the other newspaper. Thus, the total gains for the two parties (the advertisers and the merged newspapers) from reaching an agreement with the advertisers are $7.

According to the nonstrategic view of bargaining, each merged newspaper will earn $ _____ in an agreement with the advertisers. This gain to the merged newspaper is _____ than the total gains to the individual newspapers pre-meger.

Answer 1

1. $3.5

2. $7

3. $7.5

4. greater

Step-by-step explanation:

According to the nonstrategic view of bargaining, each newspaper would earn $3.5 of the $7 in value added by reaching an agreement with the advertisers. The total gain for the two newspapers from reaching an agreement is $7.

According to the nonstrategic view of bargaining, each merged newspaper will earn $7.5 in an agreement with the advertisers. This gain to the merged newspaper is greater than the total gains to the individual newspapers pre-merger.

Further Explanation:

Nonstrategic view of bargaining implies that any reasonable bargaining outcome would split the gains from trade.

If the advertisers are able to bargain and convince the newspapers of paying only $7, the gains of the trade will be split equally among the newspapers, that means $3.5 for each newspaper.

If the newspapers, after merging, are able to bargain and agree to a payment of $15 from the advertisers, the gains of the trade will be split equally among the newspapers, that means $7.5 for each newspaper. $7.5 gain for each merged newspaper is greater than the total ($3.5 + $3.5 = $7) to the individual newspaper before being merged.