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Competition between content distributors in
two-sided markets
Harald Nygård Bergh, Hans Jarle Kind,
Bjørn-Atle Reme, Lars Sørgard,
Norwegian School of Economics
1
Work in progress
Standard market structure in the literature
Typical results: A “low” advertising
volume => this increases the viewers’ wtp
A “low” viewer price to attract a large audience => this increases the advertisers’ wtp
Advertisers
Consumers
TV-channels
Actual market structure – doesn’t fit
Advertisers
Consumers
TV-channels
Distributors
TV channels set ad prices
Distributors set prices to consumers
Þ Different agents set prices on the two
sides of the market
The focus of this paper How is the two-sidedness of the market
taken care of? What characterizes the strategic game
between competing distributorsdistributors and content providers
Seems like distributors pay a linear wholesale price or a two-part tariff in most cases (imperfect contracts).
4
Assumptions in this paper
Each distributor sets two prices:
• Connection fee
• Program price
The TV-channel sets:
• Advertising priceying (locked in)
•Common advertising level
Advertisers
TV-channel
Distributors
Consumers
Distributors
The model (pay-per-view) One content provider (not critical)
Two competing distributors, i = 1, 2.
Each consumer single-homes, and paysFi as a fixed fee (connection fee)
pi per program he watches
6
The consumer side ci denotes a representative consumer’s
consumption level
Consumer surplus from watching TV:
si = ui (ci) – (pi+gA)ci
A is the ad level in the programs g is the disutiliy of ads
7
Consumers differ in preferences for distributoruniformely distributed over a unitary Hotelling line
Distr. 1 Distr. 2
Connection fee: Fi
Net utility if connecting to distributor 1:
U1 = v -tx +s1 – F1
If connected to 2: U2 = v –t(1-x) +s2 – F2
Market share distributor i: t
FFssN ijjii 2
)(
2
1
x
The firms: Profits Let f be the price per program per viewer that
the distributors pay to the content provider:
Content provider:
P = f(N1c1 + N2c2) + rA
Advertiser k = 1,...,n
pk =Ak(N1c1 +N2c2) - rAk =>
9
rpNpN
n
nA
2)1(1
12211
iiiii FcfpN
The game
1) The content provider sets the wholesale price f
2) The distributors compete for viewers by setting connection fees F1 and F2, and the consumers make their connection choices
3) The distributors set program prices (p1 and p2) and the content provider sets ad price (r)
10
Stage 3 Content provider’s reaction function (dP/dr = 0):
Advertising price decreasing in pi
a higher program price reduces the size of the audience (and thus advertising demand)
Ad price increasing in the wholesale price foptimal to enhance the viewing time through
having less ads
11
4
)(1 2211 pNpNfr
Stage 3, ctd Distributor i’s FOC:
12
0
i
iii
i
i
p
A
A
cfp
i
iiip p
cfpc
Proposition: Program prices are higher with an endogenous ad level than if it is fixed at zero.
Lemma: The distributors do not compete at this stage; for a fixed A, dpi/dpj = 0
Stage 3, ctd
Distributor i’s reaction function:
13
ijj
i N
fpNfrp
22
)(21
Remark: Program prices are strategic complements through the effects they have in the advertising market.
Market outcome, stage 3
Lemma: A distributor's incentive to increase the price in order to repress the advertising level is increasing in his market share.
14
1
1
12
11
11
21
1
2/1
6
13
1
2/1
6
13
2/1
24
513
ND
Nffp
ND
Nffp
D
Nffr
Stage 3: size and profitability
Proposition: A distributor’s profits per viewer is decreasing in his market share, and more so the greater is the viewers' disutility of ads.
=> a small distributor “free-rides” on a larger
15
Stage 2
The distributors maximize profits with respect to the connection fee (dpi/dFi = 0)
16
2
12
13
ff
tF
2
24
13
2
fft
Proposition: The distributors make profits even if they are undifferentiated.
Stage 1 Determination of the wholesale price f
Recall: Content provider receives ad revenue Ads ”damage” the good sold by the distributor
Assume that the content provider sets f f = argmax{rA + f(N1c1 +N2c2)}
Equilibrium: chooses f such that A = 0 if g > 0.34
17
Advertising regulation Let the regulated volume be  = A* (eq. ad volume)
Distributors take  as given and set lower program
prices.
Tougher competition between distributors: Lower
distributor profit (equals t/2).
TV-channel’s profit higher: Higher advertising prices
due to higher consumption in equilibrium.
but also TV channel harmed if tougher regulation
Summing up Analyzes strategic interactions between content
providers and distributors“The middleman” creates inefficienciesviewer prices too high, ad volume too low
The distributors might make positive profits even if they are undifferentiated
Regulating the ad volume harms the distributors but may increase profits for the content provider
At least the results from stage 2 and 3 survive also if fixed price per channel
20
The distributors might make positive profits even if they are undifferentiated
Regulating the ad volume harms the distributors but may increase profits for the content provider
At least the results from stage 2 and 3 survive also if fixed price per channel
21