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News as a Public Good: Cooperative Ownership, Price Commitments, and the Success of the Associated Press

Published online by Cambridge University Press:  11 June 2012

Stephen Shmanske
Stephen Shmanske
Affiliation:
Stephen Shmanske is associate professor of economics atCalifornia State University, Hayward.
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Abstract

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.

Type
Articles
Information
Business History Review , Volume 60 , Issue 1 , Spring 1986 , pp. 55 - 80
Copyright
Copyright © The President and Fellows of Harvard College 1986

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References

1 The examination of a real-world example of competitive private-sector public good provision also helps to illuminate and resolve certain theoretical controversies in the economic literature. This possibility is explored in Stephen Shmanske, “Price Commitments and the Private Supply of a Public Factor: The Case of the Associated Press,” California State University, Hayward, School of Business and Economics Faculty Working Paper No. 19 (Feb. 1985).

2 There is a vast literature in economics on the topic of public goods, especially with respect to the feasibility of private-sector production of public goods. See Buchanan, James M., “Public Goods in Theory and Practice,” Journal of Law and Economics 10 (Oct. 1967): 193–97CrossRefGoogle Scholar; Harold Demsetz, “Joint Supply and Price Discrimination,” ibid. 16 (Oct. 1973); 389–405; Demsetz, “The Private Production of Public Goods,” ibid. 13 (Oct. 1970): 293–306; Demsetz, “Reply to Professor Thompson,” ibid. 16 (Oct. 1973): 413–15; Robert B. Ekelund and Joe R. Hulett, “Joint Supply, the Taussig-Pigou Controversy, and the Competitive Provision of Public Goods,” ibid.: 369–87; Head, John G., “Public Goods: The Polar Case Reconsidered,” The Economic Record 53 (June 1977): 227–38CrossRefGoogle Scholar; Minasian, Jora R., “Television Pricing and the Theory of Public Goods”, Journal of Law and Economics 7 (Oct. 1964): 71–80CrossRefGoogle Scholar; Oakland, William H., “Joint Goods,” Economica 36 (Aug. 1969): 253–68CrossRefGoogle Scholar; Oakland, , “Public Goods. Perfect Competition, and Underproduction,” Journal of Political Economy 82 (Sept. 1974): 927–39CrossRefGoogle Scholar; Samuelson, Paul A., “Contrast between Welfare Conditions for Joint Supply and for Public Goods,” Review of Economics and Statistics 51 (Feb. 1969): 26–30CrossRefGoogle Scholar; Samuelson, , “Pitfalls in the Analysis of Public Goods,” Journal of Law and Economics 10 (Oct. 1967). 199–204CrossRefGoogle Scholar; Samuelson, “Public Goods and Subscription TV: A Correction of the Record,” ibid. 7 (Oct. 1964): 81–83; Samuelson, , “The Pure Theory of Public Expenditure,” Review of Economics and Statistics 36 (Nov. 1954): 387–89CrossRefGoogle Scholar; and especially, Earl A. Thompson, “The Perfectly Competitive Production of Collective Goods,” ibid. 50 (Feb. 1968): 1–12; Thompson, , “The Private Production of Public Goods: A Comment, Journal of Law and Economics 16 (Oct. 1973): 407–12.CrossRefGoogle Scholar

3 Specific historical circumstances can also be seen to account for the predominance of the AP. See, for example, Harlow, Alvin F., Old Wires and New Waves (New York, 1936), 197–98, 415Google Scholar; and Rosewater, Victor, History of Cooperative News-Gathering in the United States (New York, 1930), 148–71Google Scholar, who document how the AP's agreements with Western Union, which in the 1870s and 1880s controlled two-thirds of the transmission capacity, helped the AP substantially in its competition with its rivals. Eventually, however, the AP could not keep out competitor news service interests, which always seemed to find available telegraph lines. Such an argument does not shed any light on the UPI's current problems. Another historical example is detailed in pp. 67–69 below, which explain the problems that the United Press and the International News Service had in obtaining foreign news. While the problem helped to cause the bankruptcy of the UP, the INS survived the incident. Finally, see Gramling, Oliver, AP: The Story of News (New York, 1940), 123–35Google Scholar, who documents how the AP, on the verge of bankruptcy in 1893, survived largely because the personal persuasive efforts of Melville E. Stone, Victor Lawson, and Charles Diehl were superior to those of their counterparts at the United Press, in terms of raising extra capital, keeping old customers, and securing new ones. These historical events are of course relevant, but they do not comprise a consistent story or provide a model that can be applied over time.

4 One theoretical explanation for the possibility that nonprofit firms may dominate has been presented in the economics literature. David Easley and Maureen O'Hara derive conditions under which a nonprofit enterprise will be superior to a for-profit organization. The conditions, however, require the unobservability of the amount or quality of the output of the firm. Since the newspaper firms directly receive the output of the wire services, this unobservability does not appear to be a factor in the news-providing industry. See Easley, and O'Hara, , “The Economic Role of the Nonprofit Firm,” Bell Journal of Economics 14 (Autumn 1983): 531–38.CrossRefGoogle Scholar

5 Mott, Frank Luther, The News in America (Cambridge, Mass., 1952), 98.CrossRefGoogle Scholar

6 Rosewater, History, 30–32.

7 Gramling, AP, 12.

8 Rosewater, History, 83.

9 Ibid., 100.

10 Gramling, AP, 74.

11 Rosewater, History, 120.

12 Ibid., 148–50, 151; Desmond, Robert W., The Information Process: World News Reporting to the Twentieth Century (Iowa City, 1978), 360Google Scholar; Reick, William C., “Presentment to Attorney General,” 5 Feb. 1914, U.S. Dept. of Justice files, Washington, D.C.Google Scholar

13 Morris, Joe Alex, Deadline Every Minute: The Story of the United Press (Garden City, N.Y., 1957), 14, 76.Google Scholar

14 Mott, News, 100.

15 Associated Press v. Taft Ingalls Corp., 340 F. 2d 753, 765–67 (6th Cir.), “cert, denied,” 382 U.S. 820 (1965). See Stephen Grover, “Scripps Sells UPI Wire Service to New Concern,” Wall Street Journal, 3 June 1982; Wall Street Journal, 29 April 1985, 1; “UPI's Sale for $41 Million Wins Clearance by Judge,” Wall Street Journal, 11 June 1986, 48.

16 Rosewater, History, 88.

17 See Inter Ocean Publishing Co. v. Associated Press 184, 111.

18 By-Laws of Associated Press of New York (1900); F. W. Gregory, letter from Attorney General to James M. Beck, Esq., 12 March 1915, U.S. Dept. of Justice files; Reick, “Presentment.”

19 Gregory, letter, 12 March 1915.

20 Gramling, AP, 91.

21 Ibid., 112.

22 Ibid., 133.

23 Associated Press v. International News Service (1917) 240 Fed; 245 Fed; 248 U.S.

24 Rosewater, History, 358.

25 See Shmanske, “Price Commitments.”

26 See Rosewater, History, 130, who mentions these four items that went into the determination of the assessment. The last three are obviously associated with the value of the news to a newspaper in a particular area. The first item has more to do with the ownership share accorded to the members in any particular city. Ibid., 170.

27 Ibid., 133.

28 Once A was set, F could be set by (5) and some estimate of the profitability of the industry. A formula method for setting F was established later and will be discussed below.

29 There may even be tax benefits here, but this point cannot be pursued here.

30 United States v. Associated Press (1943) 52 F. Supp. 362.

31 See Rosewater, History, 320–27.

32 As quoted in Rosewater, History, 325.

33 See ibid., 323.

34 Ibid., 171.

35 Associated Press et al. v. United States (1945) 52 F. Supp. 362. The numbers are derived from information given in the text of the decision, and on comparison with other figures, probably apply to the year 1943. See Roberts, Keith, “Antitrust Problems in the Newspaper Industry”, Harvard Law Review 82 (Dec. 1968); 332.CrossRefGoogle Scholar

36 Rosewater, History, 328 (emphasis added).

37 Morris, Deadline, 76, 108.