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

Numerical example; t = 0

Profits,content provider

Profits,distributors

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

pk = (Akc1 – Akr)N1 + (Akc2 – Akr)N2

Aggregate profits for the distributors and the content provider are maximized by settingpi = 0 for g < 1/3 (purely ad-financed)

pi > 0 and A > 0 for 1/3 < g < 1

A = 0 for g > 1 (only viewer payments)

22