News Quality and the Internet: An Economic Analysis

This thesis studies the impact of the Internet on the newspaper industry with special emphasis on quality. In pursuing this, I apply a model by Armstrong and Weeds (2007) where I compare the equilibrium outcomes when the competing newspapers are characterized by a mixed funding regime (e.g., printed newspapers) versus a pure advertising funding regime (online newspapers). Because costly investment in higher quality can be translated into higher prices to the consumer in the mixed funding regime, whereas this is not possible in a pure advertising regime, quality will, in this modelling environment, be higher for printed newspapers than for online newspapers. On the other hand, online newspapers will respond to more fierce competition by increasing quality, while printed newspapers will reduce price and keep quality unchanged. However, there are several limitations to the model. Perhaps most importantly, due to different reading behavior for online news relative to printed newspapers, online advertising has proven less effective compared to its printed counterpart. Hence, advertising revenues per reader is lower in online newspapers than in printed newspapers. Since the gain in advertising revenues by attracting more readers following an increase in quality is small, online newspapers will have weaker incentives to invest in costly quality. I also investigate how news diversity may be affected by going from a mixed funding regime to a pure advertising regime. It is clear that for a fixed quality level, online newspapers will have incentives to differentiate themselves minimally from their competitors. Printed newspaper (mixed funding) on the other hand will differentiate themselves to a larger degree as differentiation allows for setting higher prices. However, changing the assumptions, such as endogenous quality and allowing for more newspapers, may give different results. The main conclusion of this thesis is that news quality, measured as costly news production (e.g., ratio of self-produced content, use of multiple sources, investigative journalism), is lower online than in printed newspapers. An implication of this may be a reduction in positive externalities provided by quality news production