News as a public good: cooperative ownership, price commitments, and the success of the Associated Press. (history of wire news services)

[paragraph] In this article Professor Shmanske examines the history of the

wire service industry with special attention to two economic peculiarities:

the "public good" nature of news dissemination and the different ownership

structures of the competing firms. By focusing on the interplay

of the nonprofit, cooperative organizational structure of the Associated

Press and the public good characteristics of news, the author provides

a new and economically sound explanation for the AP's relative success.

In addition, he demonstrates that many unusual institutions in the

news-providing industry, particularly pricing structures, can be

understood by analyzing the economic and marketing problems associated

with private-sector production of a public good.

When attempting to understand the history of the wire service industry, one is confronted with an economic conundrum. Why has the Associated Press (AP), a nonprofit cooperative, consistently gained the upper hand in an industry in which the competition consisted of profit-maximizing, free-market firms? The following analysis attempts to address this question by focusing on an aspect of the industry that has been overlooked in both the historical and economic literature, namely, that the product of the wire service industry--news--can usefully be characterized as a public or collective good, An analysis of the special problems of marketing a public good, in conjunction with the differences in ownership structure between the AP and its rivals, provides an economically valid explanation for the AP's success. Moreover, such a perspective also permits a more complete understanding of many other particularities of the industry than does traditional analysis. (1)

An investigation of some of the possible reasons for the AP's dominance of the wire service industry reveals that the standard, straightforward explanations are significantly lacking in power. They are either economically flawed, as applicable to the AP's rivals as to the AP itself, or, in relying on a specific historical setting, not general enough to provide guidance for social or legal institutions or private decision making. The consistent, economic explanation for the AP's success relies on the cooperative ownership structure of the AP and the collective characteristics of the firm's product.

OWNERSHIP STRUCTURE

Rival news agencies in the United States generally have developed along two different organizational lines. The AP is a nonprofit cooperative of its newspaper firm members, while United Press International (UPI) and its forerunners have been privately owned, profit-seeking enterprises. The cooperative form of organization has been the more successful: the AP historically has captured the largest market share, while the profit-seeking agencies have done more seeking than profiting.

Although one would not ordinarily expect a higher performance from a nonprofit organization, a lower performance should not automatically be assumed. The AP and UPI do essentially the same things: they gather and distribute news to newspapers and broadcast stations for final sale to the consumer. The difference between the two firms may be characterized as one of ownership structure. In the case of UPI, newspapers pay for the news and, if the prices are high enough, the owners of UPI keep the profit. In the case of the AP, if the newspapers paid high prices, the profits would be divided among the newspapers themselves. Rather than, in effect, charging themselves high prices, the newspapers agree to shoe the costs and have the AP report no profits. This minor change in the flow of funds resulting from cooperative ownership does not lead to any obvious superiority in the performance levels of one organizational form over the other. Indeed, we normally believe that whoever "owns" productive assets has incentive to use them in the most profitable manner. Subtle differences, however, may develop between the way a nonprofit and a for-profit firm set prices and account for and share costs--differences that lead to different performance levels of the competing wire service firms.

At first glance, it may seem that the imposition of the extra nonprofit constraint must lead to a lower performance level on the part of the AP. Normally in any constrained maximization problem, the achieved level of the participants is lower when constraints are binding than when they are not. In some cases, however, a narrowly irrational act, such as subjecting oneself to an extra constraint or making a certain commitment restraining one's reaction, may be globally rational. Common examples of this may be found in game theory, in the prisoner's dilemma, in the possibility of tacit collusion, and in the waging of a price war to discourage future entry. Sometimes a strategy may appear to be detrimental in the short run, but maximizes profits in the long run. In the ease of wire services, the cooperative, nonprofit form of the AP implies a certain commitment that gives the AP an advantage in the marketing of its news.

NEWS AS A PUBLIC COMMODITY

Public goods, also called collective goods, are goods for which there is no rivalry in consumption. (2) That is, if one person consumes the good it is still available for everyone else to consume; the lighthouse and national defense are the textbook examples. If everyone can consume the public good after it is produced, then the free-rider problem will be severe, since each potential consumer hopes that someone else will pay for the good. The situation does not exist fur private goods, because only the person who pays for the good gets to consume it. Because of the free-rider problem, private enterprise is often unable to raise the revenue to produce the public good, and the good's provision is left to the public sector. If a private-sector supplier can withhold the product from nonpayers, however, then the possibility of private provision arises. The issue of exclusion is therefore crucial in such a situation.

In the news-providing industry the news is the public good, and the wire service firm must be able to exclude from using the news those newspapers which do not pay for it. Several legal institutions and marketing arrangements in the wire service industry are thus best understood as attempts to deal with the exclusion problem.

The ability to exclude nonpayers from the benefits of the good is not the only requirement for effective private-sector provision of a public good. Setting the prices that the wire service firm will charge is difficult, because the value of the news produced will not be the same to any two customers (a large city daily and a college newspaper represent the extremes). If a single price were charged and it were too high, the college or small-town newspaper could not afford it, and the wire service would lose revenue. If the common price were too low, then the large city daily would prosper, but the wire service firm would be forgoing revenue that might be required to cover costs. To market a public good effectively requires high prices where the market will bear them and a series of lower prices elsewhere--in short, the practice of price discrimination.

Effective price discrimination is not easily instituted. Customers will try, to bluff the supplier and understate or reduce their desires for the good in order to obtain a lower price. A newspaper might reduce its demand for the output of any one wire service by finding an alternative news supplier. The wire service must devise some method that requires the newspaper firms to reveal how much they are willing and able to pay for the news. This problem, known as the price discrimination or demand revelation problem, is central in any market for public goods. This article argues that the method employed by each wire service firm to solve the price discrimination problem is the major factor explaining the consistent success of the AP over its rivals.

THE SUCCESS OF THE AP

In searching for an explanation for the success of the AP over its competitors, one might rely on randomness, asserting that there is really nothing to explain. In an industry with decreasing costs, one firm's domination may be the equilibrium outcome, and which firm succeeds is simply a matter of chance. That the AP is the dominant firm therefore requires no special attention. This explanation fails to satisfy for several reasons. First, although the products of the AP and its competitors are similar and substitutable, they are, nevertheless, differentiated. A natural monopoly situation with only one solvent enterprise need not be the outcome of competition in such a differentiated goods market. Second, the AP has buried four or five rivals in the past, always with one notable difference between the victor and the vanquished: the AP is a cooperative and its rivals were private, for-profit firms. (3)

Another standard explanation of a business firm's success emphasizes certain advantages that incumbent firms may hold over potential competitors. The issue of incumbency may have been an important consideration in some of the early …