Ad-valorem taxes, prices and content diversification in the news market

In this paper, we look at two research questions. First, can lower ad-valorem taxes, on the selling of news and on the selling of advertising, conduce to lower prices in the media sector? Second, can lower ad-valorem taxes stimulate firms to increase the diversity of content that they offer? The purpose of this work is to give tax political guidelines to policy makers for the media sector. This is important for a sector that has seen the reduction in payment subscriptions by readers (due to competition from free news from the Internet), and reduction of advertisement revenues due to competition from media giants like Google and Facebook. With this purpose we build on the Hoteling product competition model, which is the workhorse model in media economics. We show that ad-valorem taxes on the selling of advertising are preferable to ad-valorem taxes on the selling of news because the former conduce to reduction in prices of newspaper. However, both ad-valorem taxes on the selling of news and on the selling of advertisement reduces media diversity, because they reduce revenues that media firms can use to invest in media content.