Collusion and the political differentiation of newspapersMarco AntonielliMSc EconomicsUniversit degli Studi di FirenzeNMa trainee

February 28th 2011Research presentation

*My work Master thesis Two-sided markets Question: which is the effect of collusion on the political differentiation of the newspapers? is the advertising increasing or decreasing the likelihood of collusion?

Extension of a model of Gabszewicz, Laussel, Sonnac (2002) to study causes and implications of collusion in the newspapers markets

IntroductionMedia marketsTwo-sided market setting(Anderson and Gabszewicz, 2005) High concentration:collusion arising?theoretical analysis: Rhumer (2010), Dewenter, Haucap and Wenzel (2010)empirical analysis: Argentesi and Filitrucchi (2007) evidence of collusion in the Italian newspapers market*

*Ruhmer (2010) analyses platform collusion in a two-sided single-homing market: she finds that collusion is harder to sustain when network externalities between the market sides increase. Dewenter, Haucap and Wenzel (2010) study the effects that collusion can have in a newspapers market where firms compete for advertising as well as for readership: they show that semi-collusion (i.e. joint operations in the advertising market only) can increase total welfare.Argentesi and Filistrucchi (2007) carry out an empirical analysis of the newspapers market in Italy: they find evidence of collusion on the cover price but not on the advertising tariffs.Introduction (2)

Introduction, reasons of interest and theoretical frameworkDewenter, Haucap and Wenzel (2010) Semi-Collusion in Media MarketsSequential game played by two media firmsAdvertising market (on ad spaces quantity)Readers market (on price)Demand functions depend on network externalitiesNo market coverage conditionProduct and advertisments are differentiated but differentiation degrees are exogenous

Competition: subgame perfect equilibriaSemicollusion: joint max of profits before competing for consumersFull collusion: joint max of profits

Introduction, reasons of interest and theoretical frameworkDewenter, Haucap and Wenzel (2010) Semi-Collusion in Media Markets

Main results:In semi-collusion copy prices decrease and quantities increase while advertisements quantities decrease. Everyone is better off in respect with competition.In full collusion, results are ambiguos: total welfare can increase as well as decrease.Semi-collusion is always preferable to full collusion. Profits would be higher in full collusion than in semi-collusion

Introduction, reasons of interest and theoretical frameworkRhumer (2010) Platform collusion in two-sided marketsArmstrong (2006) two-sided single-homing model as stage game of an infinite repeated gameSimultaneous competition in prices in both the sidesGrim trigger strategiesHotelling world: both the sides are represented by unit intervals in which the players are permanently located at the endpointsMain resultsIncentive to collude increases as indirect network externalities become stronger: punishment profits decrease, collusive prices increaseIncentive to collude decreases as indirect network externalities become stronger: defection is more profitableOverall, the latter effect prevails: collusion is harder to be sustained when network externalities become stronger

Newspapers market:pluralism in the mediaIntroduction (3)reasons of interest and theoretical framework*Political orientation as a differentiation deviceGabszewicz, Laussel, Sonnac (2002)Collusive behavior + political differentiationin a two-sided setting

Model: outlineSequential game played by 2 editorial firms in a newspapers market Gabszewicz, Laussel, Sonnac (2002)

3 steps:publishers select the political orientation of their newspaper out of a unit interval representing the political spectrumpublishers compete for readership in pricepublishers compete in the advertising market in price

Hotelling spatial duopoly plus advertising*

Model: outline (2)Infinite repeated game:publishers repeadetly play the sequential gameAims of the model:Analyse the properties of collusive agreements, in terms of pluralism and in terms of welfareStudy the incentives to cooperate in such multiperiodic framework*

Collusive behaviour3 features of collusion in this model:Two kinds of collusion are considered, depending on which variables of the strategy are chosen in agreement: Political orientation and prices Prices only.*Collusion agreements and sharing rule: the publishers find an agreement among the Pareto optimal pairs of strategies of the stage game. Common price.Grim trigger strategies: each publisher is assumed to cooperate until the other publisher cooperates; if a publisher defects, the other will punish forever.

Grim trigger strategies: each publisher is assumed to cooperate until the other publisher cooperates; if a publisher defects, the other will punish forever. Publishers adhere to grim trigger strategies as long as:

Critical discount factor:

Collusive behaviour*

Stage gameReaders market Unit interval as the political spectrumReservation priceTransportation costDistance between favourite political opinion and political orientation of newspaper iPrice of newspaper i* Single-homing Market coverage condition

Stage gameReaders marketConsumers are assumed to have political opinions ranging from extreme left to extreme right and to care about the political orientation of the newspapers. Publishers convey such political orientation selecting a point out of a unit interval representing the political spectrum. Each consumer has utility (no advertising effects):

Reservation priceTransportation costDistance between favourite political opinion and political orientation of newspaper iPrice of newspaper i*

Stage gameMarket coverage condition + Single-homing=Each consumer of the market buys one copy of one newspaper in every acceptable stateRestriction of the parameters due to the market coverage condition*

Stage gameReaderships:

*

Stage game (2)is the marginal consumer = MARKET SHARE*

Stage game (3)Advertising marketAdvertisers have preferences depending on the price of ad spaces in a newspaper and on the readership of such newspaper; each of them can: advertise in one newspaper advertise in both newspapers do not advertise in any newspaperMulti-homing on the advertising side*

Stage game (3)Advertising marketAdvertisers have preferences depending on the price of ad spaces in a newspaper and on the readership of such newspaper.Each of them can advertise in:No newspaperOne newspaperTwo newspapers..and obtain respectively utility : Readership of newspaper iIntensity of the preference for an ad; with density 4kTariff applied by newspaper i

Stage game (4)Each publisher can charge its advertising tariff taking into account only its readership, i.e. act like a monopolist*

Profit function

Stage game (5)Profit of publisher iPrice of newspaper iAdvertising market dimension,here represents the advertising revenues per readerUnit costReadership of newspaper i (y for publisher 1)*

Gabszewicz, Laussel and Sonnac (2002) identify two subgame perfect equilibria for the stage game.*One-shot competitionMaximal differentiation equilibrium*Equilibrium prices:Parameters set:Equilibrium profits:

*One-shot competition (2)Minimal differentiation equilibriumParameters set:

Profits:

Equilibrium prices:

Collusion on prices and locationsFinding the collusion agreementPublishers cooperatively decide how to play the game: selecting a state among the Pareto optimaState = Pair of strategies

*Characterize the Pareto optimaSelect the one with common price (market sharing rule)

*Collusion on prices and locations (2)1) Pareto optima characterizationTouch states

*Collusion on locations and prices (3)1) Pareto optima characterizationComplete touch states

*Collusion on locations and prices (4)Intermediate opinion differentiation

State with:

Collusion on prices onlyFinding the agreementIn this case publishers can not bind their whole strategy (e.g. locations are not perfectely observable). They can decide to coordinate on prices but not on locations (political orientations). In other word, they compete on locations and collude on prices.

*Characterize the best common-price rule; a pricing rule takes locations as givenDoes it select Pareto optima?Subgame perfect equilibrium by using backward induction

*Collusion on prices only (2)1) Common-price ruleGiven a pair of locations, which is the best common-price? We have seen that if no consumer faces utility 0, the state can be improved only changing prices: publishers can therefore select the touch state with common price associated with the given pair of locations. Such a rule is uniquely identified as follows:I.II.III.

*Collusion on prices only (3)III. Case: example2) It can be shown that every state selected by the common-price rule is a Pareto optimum

3) Backward induction*Collusion on prices onlyIn every turn, each publisher independently selects the location taking into account: that they will collude on prices in the subsequent step following the common-price rule, and the expectation on the location chosen by the other publisher.

*The Nash equilibrium will be the one in which publishers locate in the middle of the unit intervalCollusion on prices onlySince prices will be equal, competition can only be made on the political orientation (location)Given the expectation on the location of the other, each publisher tends to locate as close as possible to the other in order to gain demand (as in common spatial competition models)3) Backward induction

*Collusion on prices only (4)Minimal differentiation

State with:

*DefectionFor collusion on prices and locations: it is assumed that the non-deviant publisher does not punish in the turn itself the deviant simply chooses the best reply to the collusion strategy:For collusion on prices only: the non-deviant locates at thus, whatever the location of the deviant, she will set a price = again, the deviant simply chooses the best reply: locates at and undercuts the price of the other

*DefectionCollusion on prices and locationsAs collusion involves the whole strategy, defecting means finding the optimal strategy in respect to the collusive strategy (as they are both the same).Punishement on the turn itself is not taken into condisideration.Best reply to collusive strategy:

*DefectionCollusion on prices onlyIn this case a publisher can defect on the price: when considering the location decision, he will take into consideration thatThe other publisher will set the price corresponding to the common-price ruleHe will not collude on price, i.e. he can set a price different (the optimal one) from the agreed one

Defection =Cutting the price

Incentives to colludeCritical discount factor depends on the parameters of the gameAdvertising market dimensionReservation priceUnit costTransportation costChanges in... ...affect:

Sustainability and profitability of collusion*

*Incentives to collude (2)Advertising market dimension: revenues per readerDifferent values of k mean different competitive equilibria, everything else being equalAfter calculations: the change in the critical discount factor depends on the punishment triggered and in turn on the starting value of k, no matter what kind of collusion is put into practiceThe punishment triggered depends on the starting value of k

*Incentives to collude (3)Graph: critical discount factor in respect to k(collusion on prices only)Maximal differentiation equilibriumMarket is not coveredMinimal differentiation equilibrium

*Incentives to collude (4)To conclude:If the one-shot equilibrium is a minimal differentiation equilibrium, an increase in the advertising market dimension makes collusion easierIf the one-shot equilibrium is a maximal differentiation equilibrium, an increase in the advertising market dimension makes collusion less easyInterpretation:The advertising revenues are passed to the readers in form of discount on the cover price when the newspapers are distant on the political spectrum: colluding would allow the publishers to retain the advertising revenues.In an opposite way, the advertising revenues are retained in case the newspapers are very close on the political spectrum: defecting would be more tempting

*Incentives to collude (4)Table 1: Collusion on prices and political orientations

Minimal differenentiationMaximal differentiationTransportation parameterpositive if negative otherwisepositiveAdvertising market dimensionpositivenegativeUnit costnegativepositiveReservation pricepositive if negative otherwisenegative

*Incentives to collude (4)Table 2: Collusion on prices only

Minimal differenentiationMaximal differentiationTransportation parameterpositivepositiveAdvertising market dimensionpositivenegativeUnit costnegativepositiveReservation pricenegativenegative

*Welfare analysis1) The results will be possibly be different as:It is two-sidedHotelling world2) Three categories of subjects in this gamePublishersReadersAdvertisersAlways same tariff paidAlways same potential customers reached by adsAlways same amount of ad spaces

*Welfare analysis (2)Readers welfareCollusion on prices and political orientationCollusion on prices onlyMaximal differentiation equilibriumMinimal differentiation equilibriumThe more competion, the more readers surplus

*Welfare analysis (3)Total welfareRedistribution onlyMarket is always entirely covered: shifts in prices only mean redistribution of welfare shifts in locations mean changes in the transportation costsMinimal differentiation equilibriumCollusion on prices onlyCollusion on prices and political orientationResults are ambiguos

*Welfare analysis (4)Maximal differentiation equilibriumFor the Maximal Differentiation Equilibrium it depends on the parameters Maximal differentiation equilibriumCollusion on prices and political orientationCollusion on prices onlyMaximal differentiation equilibriumCollusionIn its peculiar case: small advertising market dimension / large transportation parameter

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