Promoting Pluralism and Readership in Digital News: New Lessons for Tax Policy
Abstract: I study competitive forces that determine the impact of a value added tax (VAT) reduction for digital newspapers on readership and supply of digital news. First, I formulate a model of digital newspaper demand and entry in which newspapers compete for both readers and advertisers. A VAT reduction raises readership if the price competition, market expansion and matching effects from additional entry outweigh the direct pricing effect on consumers. Second, I calibrate the model parameters using Norwegian data on digital newspaper readership, prices, and revenues. The calibrated model implies that the VAT rate reduction by Norway in 2016 has increased consumer surplus and has reduced the news under-supply in the market. Finally, I explore alternative policies: by accounting for the two-sidedness of digital news, a value added advertising subsidy is more effective than a VAT reduction in increasing readership since it leads to a direct price decrease as well as additional entry.