undergraduate thesis - bias and competition in the market for news
TRANSCRIPT
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Bias and Competition in the Market for News
Diego Daruich, Toms Hamudis, Nicols Kiguel,
Universidad Torcuato di Tella (UTDT)
Presented to the Department of Economics in fulllment of the requirement
for a Final Graduating Thesis
August 6th 2010
Abstract
We study the interaction and competition in the market for news under
two basic assumptions on how this particular market works: (i) people have
certain beliefs which they like to see conrmed and (ii) newspapers, or any news
provider, can slant news towards any beliefs in a similar fashion to Shleifer and
Mullainathan (2005). The households buy news in order to obtain information
and the news providers have to choose where to locate themselves in a left-
right spectrum in order to maximize their prots. We show that when the
news providers decide both weather or not to enter the market and where to
locate afterwards, they rely almost exclusively on competitive issues, giving less
importance to how the readers are distributed in the horizontal space. Finally,
we nd that the revenue from advertising, the market size and the xed costs
are the main sources of bias in the market for news.
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1 Introduction
"Fair and balanced, as always."Fox News slogan
Media outlets have always played a key role in modern societies. These
outlets produce news that people hear, read or watch, which for most of them
are the one and only source of information regarding economics, politics, sports,
entertainment and many other issues. While these media outlets do seek to max-
imize prots, the same news often carries dierent weights among the dierent
providers. They contain some sort of bias directed to catch people with a de-
ned position in the left-right ideology spectrum (which is often assumed to
contain hippies, liberals, radicals and conservatives). In the United States, con-
servatives complain about the liberal slants on the big three networks1 , CNN,
and MSNBC. Similarly, the left complains about the conservative slant on FOX
News.
In spite of these complaints, Josh Harper and Thom Yantek (2003) argue
that the mass media is still providing its democratic input in its attempt to pro-
vide citizens with the necessary news and views on political aairs. However,
the signicant question might be: even if the bias is, in fact, present in the news,
what can we do about it? People can probably do little directly, but they can
certainly encourage governments to set policy regarding competition. While
nowadays questions regarding public media policy are arising internationally,
we will make an attempt to discuss the matter and examine it theoretically.
Our purpose in this paper is to provide an explanation to why media outlets
behave the way they do, and what the motivations are for dierent newspa-
pers to publish various angles when discussing the same issue. We believe this
understanding is the rst necessary step to improve the public media.
Our market of news analysis is based on the two typical sides: supply and
demand. While the former is represented by prot maximizing media outlets,
1 The big three television networks are the three traditional commercial broadcasters (over
the air) television networks in the United States: ABC, CBS and NBC.
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the latter is conformed by the readers or buyers of news.
Research in psychology and behavioral economics strongly supports thatpeople - far from being passive in their role of news receivers - consume news
from media outlets whose ideological positions are close to their own (Chan and
Suen, 2007). Individuals behave with conrmation bias, which is a tendency for
people to prefer information that conrms their preconceptions or hypotheses,
independently of their truthfulness (Maria Lewicka, 1998). Quoting Thomas
Jeerson2 , The moment a person forms a theory his imagination sees in every
object only the traits which favor that theory." This conrms that engagement
in conrmation bias has always been part of the psychological mechanism which
shapes behavior.
Another feature of this market, regarding the supply side, is that rms are
able to slant news. To slant means "to distort (information) by rendering it
unfaithfully or incompletely, in order to reect a particular viewpoint."3 Factual
reporting often gets an additional view or angle that each journalist adds to
capture the taste of his or her audience. For example, as shown by Gentzkow
and Shapiro (2006), when, in 2003, American troops fought a battle in the Iraqi
city of Samarra, there was a signicant dierence in the coverage oered by Fox
News, The New York Times and the Al Jazeera network.Fox News began its story on the event with the following paragraph:
In one of the deadliest reported reghts in Iraq since the fall of
Saddam Husseins regime, US forces killed at least 54 Iraqis and
captured eight others while fending o simultaneous convoy ambushes
Sunday in the northern city of Samarra.
The New York Times article on the same event began:
American commanders vowed Monday that the killing of as manyas 54 insurgents in this central Iraqi town would serve as a lesson
2 American 3rd U.S. President (1801-1809) and author of the Declaration of Independence.3 Slant. (n.d.). The American HeritageR Dictionary of the English Language, Fourth
Edition. Retrieved April 13, 2010, from Dictionary.com website.
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to those ghting the United States, but Iraqis disputed the death toll
and said anger against America would only rise.
Finally, the English-language Web site of the satellite network Al Jazeera
(AlJazeera.net) began:
The US military has vowed to continue aggressive tactics after say-
ing it killed 54 Iraqis following an ambush, but commanders admit-
ted they had no proof to back up their claims. The only corpses
at Samarras hospital were those of civilians, including two elderly
Iranian visitors and a child.
This reects how three dierent outlets can, in fact, report, on the same
issue, dierent stories by ommiting facts and choosing dierent words.
It is easy to nd further examples of slanting just by comparing how any
given fact is treated by dierent media outlets. For instance, in the United States
there has been polemic regarding the liberal bias of some newspapers. Quoting
a journalist in response to an accusation on The New York Times liberal bias
Of course it is....These are the social issues: gay rights, gun control, abortion
and environmental regulation, among others. And if you think The Times plays
it down the middle on any of them, youve been reading the paper with youreyes closed.4
Therefore, our work consists of analyzing the market under both assumptions
of media outlets slanting news and rational readers seeking information close to
their priors or beliefs5 . In this sense, our consumers are rational and biased.
These two characteristics of consumers will result into a utility function which
has also been widely used in the literature.
To investigate how prot and news content are related, we consider a media
market in which media outlets are facing dierent market structures. We build
4 Daniel Okrent, New York Times Public Editor, in a July 25 th , 2004 column asking, Is
The New York Times a Liberal Newspaper?5 Vast amount of research on the market for news has been based upon these assumptions,
including Dyck and Zingales (2002), Shleifer and Mullainathan (2005) and Gentzkow and
Shapiro (2006).
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up on the Hotelling model framework, where rms choose a location in the
horizontal space as a result of xed costs. Under the classic example of theHotelling model, rms were located in a linear city and consumers preferred to
buy from the rms nearer to where they lived; if they bought from a rm not
located in the point where they lived, they had to incur in a transportation
cost, a loss in utility. Thus, consumers priors regarding their ideology can be
interpreted as transportation costs when purchasing the newspaper (they incur
in a loss of utility if they do not consume their ideologically identical newspaper).
The principle of dierentiation implies that rms do not want to locate at the
same place in the product space, since goods are perfect substitutes and they
are only dierent from each other because they lie in a dierent place on a
continuum. In our case, facts are always the same and media outlets slant on
them to capture the fact that people have priors or beliefs which they like to
see conrmed.
We use a more complex version of the Hotelling model, as in our case rms
entrance is sequential and endogenous to the model. If a rm decides to enter
the market, it will have to choose a slanting strategy to maximize prots. Entry
stage will hold until a potential player decides not to enter the market. After the
entry stage is completed, price competition takes place. When there is more thanone media outlet in the market, they all announce prices simultaneously (after
all newspapers have revealed their slanting strategy). The slanting strategies
are public and, thus, common knowledge for all market participants.
Our research starts with the monopoly case, where we determine a measure
for the slant and we solve for price charged, market share and rm benets
to fully characterize a partial equilibrium. Although the monopoly case seems
trivial, we introduce a second rm to model both competition and the rms
strategies to deter the entrance of other media outlets into the market. More
precisely, given an existing rm operating in the market, we allow for a second
rm to enter the market. Then, we describe whether or not it is optimal for
this rm to enter and why (i.e. under which parameters). Lastly, we introduce
a third rm which will also seek to enter the market. This will provide the
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theoretical framework to analyze how this threat changes the bias of the news
providers and give an insight of the barriers to entry in this particular industry.To have a meaningful discussion on the implications of sequential competi-
tion in this market, we analyze the output of our model with special attention
to the diversity of the news (where rms are located in the left right or liberal-
conservative spectrum) and the degree of competition (how many rms are in
the market).
Our work is related to dierent strands of literature. With regards to how
rms engage in competition and how this determines bias, Shleifer and Mul-
lainathan (2005) propose a two rms model with dierent types of readers, in
which - for topics where readers beliefs diverge, such as politically divisive is-
sues - the news outlets tend to segment the market and slant towards extreme
positions. Using this result, they conclude that reader heterogeneity is more
important for diversity and accuracy of the news than competition. On the
contrary, we assess more importance to competition, since our model allows for
several rms to enter the market. Even though we assume readers are distrib-
uted with a uniform function, we conclude that, when competition is increased,
slant is reduced. Furthermore, since we use the conservative assumption of uni-
formly distributed beliefs, we can expect our results to be even stronger withthe more usual idea of normally distributed beliefs. Finally, since media outlets
tend not to express extreme positions, our ndings seem more realistic.6
The remainder of this paper is organized as follows. Section 2 highlights the
role of our model in accounting for some qualitative stylized facts and issues
that motivated our interest in this area of research. In section 3, we formally
6 Regarding the ndings of our model we reckon that it is worth mentiontiong that we are
just proposing a new model that gets dierent results from previous work showing the lack
of robustness of other peoples conclusions. Though valid, our model is not the only way to
endogenize the number of rms in market with this characteristics and although it can explain
some qualitive observations, we are not sure what will happen if we chose other way (equally
valid) of modelling this market.
Of course this a eld that is not well explored and further research may come up with
stronger conclusions.
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introduce our model and describe the market behavior. Section 4 presents our
basic results. Finally, section 5 contains some concluding remarks and we alsointroduce some unsolved issues that may be key in future research and in the
understanding of the industrial organization of the market for news.
2 Regularities of the media industry
In recent years, the literature regarding media economics has expanded consid-
erably. Although this paper focuses mainly on theoretical aspects of the media
market, the following section summarizes the results of dierent studies in order
to present some regularities which will then try to be explained.
First of all, the literature includes a large number of studies reporting a
positive correlation between the degree of competition and the diversity of the
contents oered by the media outlets. A study by Albarran et al. (1991) exam-
ined the entrance of Fox News in the television industry and its consequence on
programming diversity. The results showed that the entrance of a new rm pro-
vided a wider oer of views to the audience thus resulting in a positive relation
between competition and media diversity. Similar results were found by Dim-
mick and McDonald (2001) while studying the radio industry. Their research
used network dissimilarity of contents in order to account for diversity. They
concluded that competition in the radio market has also a positive relation with
the diversity of views. Moreover, another study by Johnson and Wanta (1993)
gets the same results in the newspapers industry.
Secondly, a positive correlation is often seen between the size of the market
and the diversity of contents. As the xed costs of the media industry tend to
be considerably high, the size and wealth of the market seem to be essential
in determining whether this market can operate in equilibrium as a natural
monopoly, duopoly or any other form of oligopoly.
Research carried out by Gentzkow and Shapiro (2006) regarding the amount
of time spent talking about the dierent candidates during the 2000 national
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elections in the U.S. highlighted how important the size of the demand is. Their
study concluded that the correlation between the populations log and the num-ber of news broadcasts was about half a point. This result illustrates the fact
that the size of the demand plays an important role in dening the number of
rms that operate in the market.
The comparison of dierent European countries can serve as a less rigorous
but still interesting example of this pattern. Countries with stronger nancial
backgrounds such as the United States, Germany, England or France oer a
great opportunity for media rms to develop and thus oer greater diversity. On
the other hand countries such as Ireland or Hungary present the exact opposite
scenario, resulting in a less developed media industry and being the consumers
the ones who most suer this lack of variety (Doyle, 2000).
Thirdly, recent developments of the media industry regarding mainly
the advances of the internet seem to support the idea that lower xed costs
encourage competition and therefore increase the diversity. Although no major
studies have been carried out to test for this hypothesis probably due to the lack
of information available regarding private costs- the technological advances of
the last decade serve the purpose of what could have been a planned experiment
in this direction.Nowadays, the media industry, which has classically been one of high xed
costs and strong barriers of entry, is evolving into a dynamic and massively
diversied market. The main cause for this phenomenon is the Internet. Along
with the online publication of most newspapers and the online broadcasting of
radios, the appearance of blogs, forums and websites has created a new genera-
tion of media suppliers; with lower xed and variable costs.
As the xed costs were reduced, the media industry has experienced a highly
signicant expansion in recent years. This granted small rms the opportunity
to enter the market, gain their share of readers and make a prot. Thus, the
evolution of the media industry into a digitalized and less expensive one results
in a wider range of views available to the public, whether it is in the form of an
online newspaper, a blog or an online radio.
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These regularities will serve as a benchmark to test for our models validity.
3 The Basic Framework
In order to facilitate comparability, we use Shleifer and Mullainathans (2005)
setup. Readers are interested in some underlying variable d, regarding certain
controversial issue such as health care or education, which is distributed uni-
formly over the segment [1; 1]. The density and the total population is M.
As each consumer has a unit demand, M is also a measure of the market size.
Since readers hold beliefs about d that are distributed uniformly over the same
segment [1; 1], they are potentially biased about the real value of d:
Media outlets make prots from reporting news about t. They receive some
data d = t, where, since E(t) = 0, we know that E(d) = 0: We assume that they
then report the data with a slant s(d), so the reported news is n = d + s(d):
3.1 Reader utility
Suppose readers are rational but biased. On the one hand, they want informa-
tion and they dislike slanting because it is costly both in eort and the time
it takes to read the slanted news and understand the truth. Therefore, a
rational readers utility should be decreasing in the amount of slanting. On the
other hand, a biased reader gets disutility from reading news inconsistent with
his beliefs. We model consistency as the distance between the news and the
readers beliefs, b, measured as (n b)2. Therefore, if reader i with beliefs bi 2
[1; 1] decides to read the newspaper j, his utility is:
(1) u sj (d)2 (
nj z }| {d + sj (d) bi)2 pj
where > 0 and > 0: Moreover, it is assumed that > , in order to model a
situation where the population is heterogenoues and their beliefs are signicant.Otherwise, if > ; the model would reect a situation where the population
is more similar to homogeneous one, since they would dislike the slant so much
that their beliefs could become less important.
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3.2 Newspaper Strategy
Before seeing the data d, a newspaper decides whether to enter the market or
not and announces its reporting strategy n, which implies an slanting strat-
egy s(d), and the price p it charges. Potential readers will buy the paper if
the price p is lower than the expected utility (gross from the price) associated
with reading the paper, Ed[U(s(d))]: To form expected utility, expectations are
taken over d. As explained by Shleifer and Mullainathan (2005), this approach
crudely captures the idea that this is a long-run game. Readers get a general
sense of how much pleasure the paper provides them and make their purchasing
decisions accordingly. Moreover, this also captures the idea that if the mediaoutlets were capable of changing their slanting policy frequently, they would
suer from a reduced reputation. A newspaper is expected to report on many
news before both building a reputation and selling enough papers to make a
prot. For instance, if a right winged newspaper changed its slanting policy to
become a liberal newspaper, we would expect that both liberals and conserva-
tives would dislike the paper, either because of its past or its present slanting
reputation. Quoting Benjamin Franklin, It takes many good deeds to build a
good reputation, and only one bad one to lose it.
In this paper, we analyze a variation of Hotellings model of dierentiated
products where rms locate sequentially in the product space and subsequently
all choose prices simultaneously. This is a model of Stackelberg leadership in
the choice of locations, followed by a stage of simultaneous price choice. Since,
in most cases, prices can be revised after the entry of a new rm, a simultaneous
Nash equilibrium seems indeed to be appropriate to model price competition.
Moreover, since pricing and production decisions are taken simultaneously, a
rm that locates rst does not have the possibility to sell rst or capture con-
sumers. However, such a rm can choose to position itself in the product spacemost advantageously. Depending on the ideological location and the price each
newspaper chooses, newspaper j sells mj papers, where mj 2 [0; M]:
Moreover, we also take into account the eect of advertising. Since more than
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75% of newspapers income comes from advertising (Donica Mensing, 2007), we
know that this should be a very relevant factor in this industry. Since we usuallyconsider the advertising value to be related to number of people who see that
advertisement, it is important that the advertising revenue for the newspaper
is positively related to the amount of readers. Taking this into account, we
include this element by multiplying the sales revenue by a, which will make the
advertising revenue positively related to the amount of readers
Finally, rms endure a xed cost, f; in order to enter the market. Although
this cost is not analyzed internally, it could include both the infrastructure
required to print and distribute the papers, as well as the money spent to build
a reputation. Once they pay the entrance cost, marginal costs are normalized
to cero. Consequently, newspaper js prot function, if it enters the market, is
j = apj mj f
On the other hand, if newspaper j decides to stay out of the market, its
prot will be cero.
Timing of the full game is as follows:
(a) The newspapers go through a sequential and endogenous entry game
to decide whether to enter the market. If they do enter the market, they also
commit to a reporting strategy (and, consequently, to a particular slanting strat-egy). In other words, a rst potential newspaper evaluates whether to enter the
market or not and chooses its slanting strategy. Afterwards, a second potential
rm goes through the same process and then a third rm, and so on. Entry
occurs as long as a rm can realize a non-negative post-entry prot. It is im-
portant to notice that every rm considers the entrance of further rms (and
possible strategies to discourage their entrance) when it chooses its own slanting
strategy. The number of rms that enter the market will be hereafter known as
J:
(b) After the entry stage is completed, price competition takes place.
When there is more than one newspaper, they all announce prices simultane-
ously, after every newspaper has revealed its reporting and slanting strategy.
(c) Individuals decide whether to buy the newspaper based on the aver-
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age utility given by its slanting strategy s(d) and price p. It is assumed that
every individual buys one and only paper.(d) Newspapers receive the data d and each of them reports news nj =
d + sj (d), with j = 1; : : : ; J : Moreover, it is assumed that there are no marginal
costs for reporting or selling the news.
(e) Individuals buy the paper, they read the news and receive utility.
Since we seek subgame perfect Nash equilibrium, we solve the game by back-
ward induction. Moreover, as newspapers locate sequentially, the ideological
choices of the newspapers that act earlier inuence the locational choices of
subsequent actors. Taking this into consideration, newspapers that locate early
in the game carve their locational niche anticipating the subsequent choices of
locations. We are particularly interested in the game where rms can use their
reporting positioning (by choosing a strategy with reduced expected slant) to
deter the entry of subsequent rms. With ideological location as the strategic
variable, newspapers prot from participating in entry deterring activity.
By separating the price choice to a later stage, we assume that prices are
more exible than entry and slanting strategy. Once again, this can be explained
by the fact that building a reputation as a conservative or liberal newspaper
takes a long time, which translates into money because of periods of reducedsales (though this is not shown in our model). If they were able to change their
ideological opinion frequently, they could suer from a poor reputation which
would reduce their sales.
3.3 Cases Considered
We consider three dierent cases regarding the possible number of rms. Al-
though we let the market endogenously determine the number of newspapers,
we limit our analysis to three potential rms. First, we study the monopoly
situation. Secondly, we study the case when two rms decide to enter the mar-
ket. As we will later show, the monopoly has no possible strategy to dissuade
the second rms entrance, so this case is not particularly interesting for our
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objective. Finally, we study the case when a third rm threatens to enter the
news market. This will make the rst rm that entered the market consider thepossibility of dissuading the third rms entrance by choosing a slanting strategy
with reduced expected slant (and taking into account the second newspapers
slanting strategy).
We assume that beliefs are distributed uniformly in the segment [1; 1],
and potential reporting strategies are distributed over the same segment. This
will capture a case where there is substantial disagreement regarding the issues
analyzed by the papers.
As mentioned earlier, this style of industry structure is similar to a Hotelling
model. Firstly, readers beliefs resemble consumers locations. Their dislike
of ideologically distant news resembles transportation costs. Secondly, rms
choice of a slanting rule resembles a location choice. Therefore, our utility
function, as well as the one used by Mullainathan and Shleifer (2005), implies
quadratic transportation costs and our distribution of reader beliefs is equivalent
to a uniform distribution of consumers.
3.4 Dening Bias
Media bias usually refers to the bias of journalists and news producers within
the mass media, in the selection of which events and stories are reported (and,
thus, which are omitted) and how they are covered. We can think of omission
as being news that should have been reported but is left out of the news we
read, see and hear. When important news is omitted, we get a skewed per-
spective. Obviously no news organization can cover every newsworthy story
from every possible perspective. But news organizations and their reporters do
have an obligation to seek the truth and be reasonably comprehensive in their
reporting. The information citizens need to make informed decisions comes, to
a signicant extent, from news organizations. If important stories are ignored,
are reported incompletely, or present facts that are not adequately veried, then
the obligation to seek the truth is undermined. Given its importance, we are
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focusing our interest in the degree of newspaper bias in the market.
Denition 1 Letni be the news read by reader i 2 [1; 1 ]. The average reader
bias is then dened as:
ARB =
Zi
Ed[(ni d)2]
This sums the bias of every newspaper weighted according to their market
share. Therefore, this measure considers both the amount of expected bias of
each newspaper and the size of the audience would receive their biased report.
For instance, even if a media outlet is extremely biased its eect in the ARB
could be very insignicant if its audience is small enough. On the other hand, amedia outlet with less bias could be more signicant in the ARB if its audience
is bigger. Thus, the ARB measures the average bias met by the readers
4 Results
4.1 Solutions
Since readers dier in their beliefs, newspapers must decide which one of the
dierent reader groups is its target audience. For all the following results, and
most importantly for the monopolist case, it will be assumed that the utility
gained by the readers from buying any paper is high enough so that the market
will be completely covered by the newspapers. Even though we use a sequential
entry model and Shleifer and Mullainathan (2005) use a simultaneous entry one,
our rst two propositions are compatible with the results they nd.
Proposition 1 Supposing there is only one newspaper, then this monopolist
will report without any expected slant.
Suppose the entry cost is high enough (f > am(5)2
36)to prevent a second
newspaper from entering the market. Therefore, the monopolist maximizes
prots by choosing:
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(4) nm = Ed [sm (d)] = 0
(5) pm = u
Proposition 2 Supposing there are only two newspapers, they will maximize
the dierence between their expected slants.
Since the entry cost decreases enough (f < am(5)2
36) in order to allow a
second rm to enter, the rst rm already knows that a second rm can enter
if he chooses the monopolist slanting strategy (which is also the best one to
dissuade the second rms entry). Therefore, the rst rm should change its
optimal strategy. If there is only one more rm that can enter the market, the
optimal strategy for the second rm will be the following:
(6a) n2 = Ed [s2 (d)] =6
(+) n1
However, since 6(+) > 3; for every n1 2 [1; 0] we know that the second
rms best reporting strategy will be the right extreme (assuming, without loss
of generality, that rm 1 slants toward the left and rm 2 slants toward the
right),
(6b) n2 = Ed [s2 (d)] = 1
Consequently, the rst rms optimal reporting strategy will be the opposite
extreme:(7) n1 = Ed [s1 (d)] = 1
Each duopolist positions himself as far away from the other as possible.
This is analogous to the standard Hotelling result with uniform distributions
and quadratic transportation costs (Tirole, 1998). As in the standard Hotelling
model, the monopolist caters to both audiences, while duopolists maximally
dierentiate. This occurs because the more dierentiated the duopolists, the
higher the prices they can charge. In other words, dierentiation softens price
competition because the temptation to undercut each other diminishes as the
rms move farther away from the marginal consumer (who is located between
them).
Mullainathan and Shleifer (2005) use these results to conclude that compe-
tition increases the bias, making the news sources as extreme as possible. In
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this sense, competition would tend to polarize the news. However, we take the
study one step farther to take into account that leaving the ideologically centrallocation free would increase the incentives for a third rm to enter the market.
Moreover, if this third rm actually entered, this would signicantly reduce the
benets of the two previous rms. Since the rst rm can anticipate this situ-
ation, it should choose a more central location either to prevent the other rm
from entering or, even if this rm does enter, in order to be the newspaper to
have the most valuable ideological position in the market.
Proposition 3 Supposing there is a third newspaper threatening to enter the
market, the rst newspaper will reduce its slant policy in order to dissuade thisrm from entering (under some parameter conditions).
If a third rm can threaten to enter the market, the rst rm to enter the
market has the chance to dissuade the third rms entry. By taking into account
how the second rm will respond, the rst rms optimal strategy will compare
the possibility of dissuading the third rms entry from allowing it. Therefore,
its optimal strategy will depend on how high the entry deterrence benet is
compared to the entry deterrence cost.
For f >am(3+)2
18 ; entry is blocked since the optimal duopoly slantingstrategy considered earlier would make the third rm unprotable if it decided
to enter the market.
For f < am(3+)2
36 ; entry cannot be dissuaded, since no matter what the
rst newspaper does, the third rm will prot from entering the market. In
this situation the rst rm takes a central reporting strategy (with no expected
slant), while the other two rms take extreme and opposite reporting strategies.
For am(3+)2
36< f 3; for every n1 2 [1; 0] we know that the second
rms best reporting strategy will be the right extreme (assuming, without lossof generality, that rm 1 slants toward the left and rm 2 slants toward the
right)
(8b) n2 = Ed [s2 (d)] = 1
Taking into account how the second rm will respond, the rst rm will
maximize its benet subject to limiting the benet of the third rm -if it decided
to enter- to a non-positive value. There is one implicit solution for this problem
(9) n1[n2; n3 (n1; n2) ;m ;a ;f ]
which follows the expected pattern of slant reduction with reduced entry costs,
increased market size and, increased advertising revenues. In other words, the
reporting strategy of the rst rm becomes more central with lower entrance
costs, bigger market or higher advertising benets, until a point where the ex-
pected bias is reduced to cero and the entrace of the third media outlet becomes
impossible to dissuade.
The rst rm could have allowed the second rm to be the one to actively
dissuade the third rm from entering. However, this was not the optimal strat-
egy. By comparing the alternatives of actively dissuading and of letting the
second rm do so, the rst rm prefers the rst one. Given that some rm hasto reduce its slant, it is better to be the one that does so since it allows it to
charge a higher price and have a bigger audience.
Finally, there is no entry cost for which the rst rm prefers to allow the
entry of the third one (having the possibility to block it), since once it gets
to the center of the market (because the entry costs are lower) all it can do to
dissuade the entry is stay in that location. Moreover, that location is its optimal
one if a third rm actually enters in the market, since it is the best location in
terms of the amount of potential buyers.
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4.2 Corollaries
Corollary 1 Competition reduces the average reader bias of the market.
ARBwith threat < ARBwithout threat
Once we allow for other rms to threaten to enter, the rst rm has to reduce
its bias in order to reduce the benets from entering. Therefore, the average
reader bias in the market is reduced.
Although we only considered the case with two rms actively selling in the
market and one more threatening, it is reasonable to extend this idea to further
number of rms. Economides et al. (2002) nds out that once we allow for a
rm to threaten to enter the market, the rms already in the market tend to
locate closer to the center. Moreover, since they use a utility function that does
not decrease with the distance from the center (as ours does), we believe that our
utility function would actually increase the results found by them. Therefore,
it is reasonable to expect that, given an amount of rms in the market, if a new
rm is introduced to threaten to enter, the average reader bias of the market
will be reduced.
Corollary 2 A bigger market reduces the average reader bias of the market.
@ARBwith threat@m
0
A bigger market increases the benets of entering the market. Since the
population is bigger, every newspaper can increase its sales (ceteris paribus).
This forces the rst rm to enter to reduce its bias in order to dissuade the
entrance of new rms.
Corollary 3 Higher entry costs increase the average reader bias of the market.
@ARBwith threat@f
0
Opposite to market size, the higher the entry costs the lesser the benets
from entering. Therefore, the menace of the entrance of further rms is reduced,
which allows the rst rm to take a more biased position (in order to reduce
price competition). Since this industry is one of particularly high xed costs, not
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only in terms of infrastructure but also in terms of reputation, higher nancial
costs could, actually, be a possible source of bias. For instance, higher interestrates could make the investments necessary to enter the market unprotable
(Copeland, Koller and Murrin, 2000), assuring the rst rms to enter that no
other newspapers will ever enter. This could allow them to have a bigger bias.
Once again, although we only tested this for the case with two rms actively
selling in the market and one more threatening, it is reasonable to extend this
idea to further number of rms. Economides et al. (2002) uses a numerical
analysis to prove that when the xed costs are reduced, the rms already in the
market tend to locate closer to the center. Moreover, since they use a utility
function that does not decrease with the distance from the center (as ours does),
we believe that our utility function would actually increase the results found by
Economides et al. (2002). Therefore, it is reasonable to expect that given an
amount of rms in the market, if the entry costs are reduced (or become more
nancially accessible), the average reader bias of the market will be reduced.
Corollary 4 Higher advertising benets reduce the average reader bias of the
market.
@ARBwith threat@a 0
The higher the revenue generated from advertising, the greater the benets
for other rms to enter the market. Given an amount of rms in the market, this
increases the threat of other rms entering. Taking this into account, the rst
rm should reduce its bias to prevent this new rm from entering the market.
Therefore, the average reader bias of the market is reduced.
5 Concluding Remarks
We have examined the role of competition in promoting accuracy in the media.
In contrast to Shleifer and Mullainathan (2005), we have found that this is a
very signicant force toward accuracy. Having a xed number of competitors,
competition might increase the bias since the rms use this to dierentiate
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themselves and lighten price competition. However, we nd that allowing for
further competitors induces exactly the opposite. Our model of the market fornews with endogenous and sequential entry provides a new way to understand
media bias. Bias arises from the barriers to entry and from the factors that
inuence the prot once inside the market.
We nd that the revenue generated from entering the market is negatively
related to the bias in the market. Firstly, the greater the population, the greater
the amount of potential readers. Corollary 2 shows that this increases the
threat of new rms entering the market and, consequently, reduces the benet
of dierentiation through increased bias. If the previous level of bias were held,
a new rm could enter and take a highly protable slanting policy. Secondly, the
greater the benets from advertising, the greater the benets from entering the
market. Corollary 4 shows that this, once again, forces the rst media outlets
to reduce their bias, in order to prevent a new rm from entering.
With regards to the barriers to entry, the higher they are, the higher the
optimal level of dierentiation through bias for the media outlets. We nd that
higher entrance costs or, possibly, higher nancial costs could induce a higher
bias in the news. Since this is an industry with highly signicant entrance
costs due to the infrastructure required to report, print, and distribute thenews, higher entrance costs -or the unavailability of credit- would lessen the
threat of new media outlets telling the truth. Similarly, since building a
reputation takes time, an extended period of negative prots can be expected
before reaching the required break-even number of readers. Higher risks -or
higher nancial costs- could cause a signicant increase in the discount rate
(Copeland, Koller and Murrin, 2000). This could turn the uncertain and distant
benets of entering the news market unsatisfying when evaluated against the
certain and earlier long period of losses.
In the current international debate of media regulation, the main argument
in favor of limits on consolidation has been the importance of independent
voices in news markets. Governments are, nowadays, considering the possibility
of interfering directly in this market, either by creating new media outlets or
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by forcing the current ones to reduce their participation. Corollary 1 conrms
the idea that if we allow new rms to enter the market, new voices will beheard and the bias will be reduced. However, given the elevated entrance costs
of this industry, it is important that we actually make the entrance of new
media outlets possible. Corollary 3 shows that reducing infrastructure costs is
essential to reduce the bias. Internet has provided a private-market solution
for this problem, since new voices can now participate through blogs -and other
forms of online journalism- without major costs. Nevertheless, for the traditional
mass medias still high start-up costs -including the negative prots during the
periods with reduced number of readers- credit opportunities and risk reduction
are fundamental. These would ease the discount rate the media outlets take
into account when comparing the distant income with the earlier costs.
Further research should allow for a better understanding of the media. For
instance, building an analytical model with a bigger number of rms could be
interesting to prove the extension of our results. Moreover, introducing other
distributions to the peoples beliefs and/or the data, could result in dierent
conclusions regarding the inuence of these variables in the media bias. We
believe that introducing normal distributions for these variables could actually
strengthen our results, but further research is necessary to prove that. Finally,analyzing the cost of starting a new media -paying important attention to the
period of losses until the break-even is reached- would be essential to understand
the barriers of entry.
However limited our study might be, we wish to highlight the policy impli-
cations of our results. Governments trying to reduce the bias in the market,
could concentrate their eorts in some of their more typical objectives. Reduc-
ing both country and market risks, through trustworthy and reliable policies,
would reduce the risk of entering the news market and force media outlets to
be more consistent with the truth.
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Appendix
PROOF OF PROPOSITION 1:
Consider the monopolists maximization problem. Readers utility from reading
this paper is
u sm(d)2 (
nm z } | { d + sm(d) b)2 pm
Since the monopolist can extract all surplus, he maximizes expected utility
(gross from the price),
maxs
m(d)
u Zd
sm(d)2 Z
d
[d + sm(d) b]2
From nm = d+ sm(d); we know that
sm(d) = nm d
which, since E[d] = 0; implies that the strategy of monopolist is to bias around
point nm: Therefore,
maxnm
u
Zd
[nm d]2
Zd
[d + nm d b]2
Using that E[d] = 0 and E
d2
= vd, we reach
maxnm
u
n2m + vd
n2m + b2 2nmb
Dierentiating with respect to nm produces the rst order condition2 ( + ) nm + 2b = 0
Since we assume that every person buys the newspaper, the expected utility
from buying the newspaper must be non-negative for every person. Moreover,
we know that if the expected utility from the person whose beliefs are most
dierent from newspaper is non-negative, everyone elses must also be non-
negative at least. Therefore, we should consider the cases where monopolists
reporting strategy is biased to one side and maximize the expected utility of the
person in the opposite extreme.
Using the rst condition previously found, if the monopolists reporting strat-
egy is biased to left side (nm 0), we should maximize the utility of the person
farthest to the right (b = 1) :
2 ( + ) nm + 2 = 0
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Using that > 0 and > 0; this can be transformed into:
nm =
+ > 0which, since nm 0, results in the corner solution nm = 0:
Similarly, if the monopolists reporting strategy is biased to right side ( nm
0), we should maximize the utility of the person farthest to the left (b = 1) :
2 ( + ) nm 2 = 0
Using that > 0 and > 0; this can be transformed into:
nm =
+ < 0
which, since nm 0, results in the corner solution nm = 0:
Therefore, the optimal reporting strategy for the monopolist is
nm = 0
Moreover, taking into account that sm(d) = nm d and E[d] = 0;
Ed [sm(d)] = nm = 0
The optimal strategy is therefore to completely reduce the expected slant.
In other words, since readers only dislike slanting and E[d] = 0, a newspaper
gets no benet from slanting and only pays costs. Therefore, increasing the
expected slant makes no sense for the monopolist.
PROOF OF PROPOSITION 2:
We proceed by backward induction in several steps.
1. We calculate x, the bias of the reader who is indierent between reading
the two papers if paper j charges pj and has bias sj (d): This allows us to
determine the market share of each rm for that location and price pair.
2. We then calculate p1 and p2, the best response functions for rms 1 and 2,
respectively. These are the best price responses of each rm to the others
price (given the biases which are chosen earlier). We then calculate the
equilibrium prices and market shares.
3. Using these prices and market shares, we calculate the best reporting and
slanting strategy for the second rm given the rst rms strategy.
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4. Given all these information, the rst rm chooses its optimal reporting
and slanting strategy.
5. Calculating the minimal entrance cost that blocks the second rm from
entering.
Step 1: Calculating x.
A reader with bias x receives the utility:
u sj (d)2 (
nj z }| {d + sj (d) x)
2 pj for j = f1; 2g
from reading paper j. Taking into account that the actual value ofd is unknown,
we solve by using the expected utility:
u
Zd
sj (d)2
Zd
[d + sj (d) x]2 for j = f1; 2g
Since nj = d+ sj (d); we know that sj (d) = nj d;which, as E[d] = 0;
implies that the strategy of paper j is to bias around point nj . Therefore, the
expected utility from reading the paper j is
u
n2j + vd
n2j + x2 2nj x
for j = f1; 2g
If the reader with bias x is indierent between papers 1 and 2 -and takinginto account that E[d] = 0-, then the utilities from reading the two papers are
equal:
un21vd
n21 + x2 2n1x
p1 = un
22vd
n22 + x
2 2n2x
p2
This equality can in turn be simplied to:
x =p1p2+n
21n
22+n
21n
22
2(n1n2)
Step 2: Calculating price best response functions pj (pk; nk; nj ).
Since the indierent reader is located at x, rm js prots -if it enters the
market- are given by
j = aM pj (pj pk + (nj nk)((2+ nj + nk) + (nj + nk))) f for
j;k 2 f1; 2g and j 6= k
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The rms best price response can be derived by dierentiating prots with
respect to its own price. For rm j, this rst-order condition is@ j@pj
=aMpj
4(njnk)+1
2aM
1+pjpk+n
2j n
2k+n
2j n
2k
2(njnk)
forj;k 2 f1; 2g
and j 6= k
So the best response function is
pj (pk; nk; nj ) =2(njnk)
am2
amn2j
4(njnk)+
amn2k
4(njnk)+
ampk4(njnk)
amn2
j
4(njnk)+
amn2k
4(njnk)
aMfor
j;k 2 f1; 2g and j 6= k
Finally, the Nash equilibrium of prices can be calculated from the best re-
sponse functions by solving
pj = pj (pk; nk; nj ) for j; k 2 f1; 2g and j 6= k
where we reach the equilibrium prices
pj =13
(nj nk) [(6 + nj + nk) + (nj + nk) ] for j; k 2 f1; 2g
and j 6= k
and the equilibrium market share
mj =M[(6+nj+nk)+(nj+nk)]
12 for j; k 2 f1; 2g and j 6= k
Step 3: Calculating the slanting strategy by rm 2.
These prices and market share allow us to backward induct and examine the
rms decision in stage 2. Taking the rst rms bias as given, they can be usedto calculate the second rms prots for each bias chosen. Specically, prots
by rm 2 in stage 2 are
2 =aM(n2n1)[(6+n1+n2)+(n1+n2)]
2
36 f
Dierentiating with respect to its own slanting strategy, the rst-order con-
dition for this problem, @2@n2
; is found. However, we are interested in the sign of
this derivative. Dene sign(x) to be the function that equals +1 if x > 0 and
1 if x < 0. Assuming that 1 n1 0 n2 1, the function results in
sign( @2@n2
) = +1
Using the boundary conditions we know that, for every n1 2 [1; 0],
n2 = Ed [s2(d)] = 1
is the optimal strategy. Therefore, the slanting strategy, once the real data is
revealed, will be
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s2(d) = 1 d
so that the news reported is the one that maximized the expected utility.
Step 4: Calculating the slanting strategy by rm 1.
Using the prices, market share and best slanting response by the second rm,
the rst rm chooses its optimal slanting strategy by dierentiating its benet
with respect to its own slanting strategy. Its benet function is given by
1 =8aM[(3n1)+n1]
+ f
Dierentiating this with respect to n1 results in
@1@n1
= 8aM
Once again we are interested in the sign which, with the previously usedassumption that 1 n1 0 n2 , results in
sign( @1@n1
) = 1
Therefore, the rst rms optimal slanting strategy will be so that this rms
report is on the opposite extreme.
n1 = Ed [s1(d)] = 1
Consequently,
s1(d) = 1 d
will be the optimal slanting strategy for rm 1.
The resulting average reader bias from this situation is
ARBwithout threat = 1
since all the market buys from newspapers located at the extremes of the market
and Ed [d] = 0.
Step 5: Calculating the minimal entrance cost that blocks the second rm
from entering.
Taking the results from proposition 2 we calculate the minimal entrance costs
that could support the monopoly in the market. The monopolists slanting
strategy is optimal as long as no other rm nds it protable to enter this
market given the monopolist slant. Therefore, the minimal entrance cost that
could support this result would be the benet (gross from xed costs) from
entering in this market.
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As we have just proved, if a rm decided to enter, its optimal slanting
strategy would be to locate in one of the extremes of the market. Using theoptimal pricing policy we can nd that the benet (gross from xed costs) from
entering would be:
aM(5)36
Therefore, for
f aM(5)36
the second rm will stay out of the market and the rst rm will remain a
monopolist.
PROOF OF PROPOSITION 3:
Similarly to the proof of proposition 2, we proceed by backward induction in
several steps. The dierence will be that the rst rm will have to choose
between dissuading the entrance of the third rm and allowing it. Moreover, if
it is optimal to dissuade its entrance, it will have to choose between being itself
the one that changes its slanting strategy to do so or letting the second rm be
the one that does so. Since it is better to locate in the center of the market, the
rst rm will be the one to actively dissuade the third rm from entering (sincethis would bring her closer to center of the market, instead of being the second
rm the one that does so).
1. We calculate x1 and x2, the bias of the two readers who are indierent
between reading the papers i andj if paper i charges pi and has bias si(d)
and paper j charges pj and has bias sj (d). This allows us to determine
the market share of each rm for that location and price pair.
2. We then calculate pj (pk; pl; nk; nj ; nl), the best response functions for
rms 1, 2 and 3. These are the best price responses of each rm to the
others prices (given the biases which are chosen earlier). We then calculate
the equilibrium prices and market shares.
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3. Using these prices and market shares, we calculate the best slanting strat-
egy for the third rm given the rst and second rms slanting strategy.
4. Given all the previous information, the second rm chooses its optimal
slanting strategy.
5. Given all the information, the rst rm chooses its optimal slanting strat-
egy.
6. We then calculate the rst rms optimal slanting strategy if it decides
to dissuade the third rms entrance. This will be similar to the proof of
proposition 2, with the only dierence that a new constraint is added: the
third rms benet (if it decides to enter), given the slanting strategies of
rms 1 and 2, should be non-positive.
7. Finally, we compare the benets of the rst rm if it decides to dissuade
the third rm from entering the market to the one where it allows it.
Evidently, the one with the bigger benet will be the optimal choice.
8. Calculating the minimal entrance cost that blocks the third rm from
entering.
9. Calculating the maximal entrance cost that allows dissuasion of the third
rm from entering.
Step 1: Calculating x1 and x2.
A reader with bias x1 receives utility:
u sj (d)2 (
nj z }| {d + sj (d) x1)2 pj for j = f1; 2; 3g
from reading paper j. Taking into account that the actual value ofd is unknown,
we solve by using the expected utility:
u Zd
sj (d)2
Zd
[d + sj (d) x]2 for j = f1; 2; 3g
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Since nj = d+ sj (d); we know that sj (d) = nj d;which, as E[d] = 0;
implies that the strategy of paper j is to bias around point nj . Therefore, theexpected utility from reading the paper j is
u
n2j + vd
n2j + x2 2nj x
for j = f1; 2; 3g
If the reader with bias x1 is indierent between the papers j and k -and
taking into account that E[d] = 0-, then the utilities from reading the two
papers are equal:
u n2j vd (n2j + x
21 2nj x) pj = u n
2k vd (n
2k + x
212nkx1)
2
pk for j; k = f1; 2; 3g and j 6= k
This equality can in turn be simplied to:
x1 =pjpk+n
2j n
2k +n
2j n
2k
2(njnk)for j; k = f1; 2; 3g and j 6= k
Similarly, taking the other paper, if the reader with bias x2 is indierent
between the papers j and l (assuming j is the paper in the middle of the location
spectrum), the indierent reader with bias x2 will be
x2 =pjpl+n
2j n
2l +n
2j n
2l
2(njnl)for j; l = f1; 2; 3g and j 6= l
Step 2: Calculating price best response functions, pj (pk; pl; nk; nj ; nl).
Since the indierent readers are located at x1 and x2, rms prots -if they
enter the market- are given by
1 =aMp1fp3(n1n2)+p2(n1+n3)+(n2n3)[p1+(n1n2)(n1n3)(+)]g
4(n1n2)(n1n3) f
2 =aMp2fp1+p2(n1n2)[(2+n1+n2)+(n1+n2)]g
4(n1n2) f
3 =aMp3fp1+p3(n1n3)[(2+n1+n3)+(n1+n3)]g
4(n1n3) f
The rms best price response can be derived by dierentiating prots with
respect to its own price. For rm 1, this rst-order condition is
@1@p1
= aMf2p1(n2n3)+p2(n1+n3)+(n1n2)[p3+(n1n3)(n2n3)(+)]g4(n1n2)(n1n3)
while for the other two rms is,
@2@p2 =
aMfp1p2+(n1n2)[(2+n1+n2)+(n1+n2)]g4(n1n2)
@3@p3
= aMfp12p3+(n1n3)[(2+n1+n3)+(n1+n3)]g4(n1n3)
So the best response function for the rst rm is
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p1 (p2; p3; n1; n2; n3) =p2(n1n3)(n1n2)[p3+(n1n3)(n2n3)(+)]
2(n2n3)
while for the other two rms is,p2 (p1; p3; n1; n2; n3) =
12 fp1 + (n1 n2) [(2 + n1 + n2) + (n1 + n2) ]g
p3 (p1; p2; n1; n2; n3) =12
fp1 + (n1 n3) [(2 + n1 + n3) + (n1 + n3) ]g
Finally, the Nash equilibrium of prices can be calculated from the best re-
sponse functions by solving
pj = pj (pk; pl; nk; nj ; nl) for j;k;l = f1; 2; 3g and j 6= k 6= l
where we reach the equilibrium prices
p1 =(n2n1)(n1n3)[(4+n2n3)+(n2n3)]
3(n2n3)
p2 =(n1n2)f[(2+n2)(2n1+3n2)2(5+n1+n2)n3n23]+(n2n3)(2n1+3n2+n3)g
6(n2n3)
p3 =(n1n3)f[n22+2n1(2+n2n3)3n3(2+n3)+2n2(5+n3)]+(n2n3)(2n1+n2+3n3)g
6(n2n3)
and the equilibrium market share
m1 =M[(4+n2n3)+(n2n3)]
12
m2 =M[(2n2)(2n1+3n2)+2(5+n1+n2)n3+n23]M(n2n3)(2n1+3n2+n3)
24(n2n3)
m3 =M[n22+2n1(2+n2n3)3s3(2+n3)+2n2(5+n3)]+M(n2n3)(2n1+n2+3n3)
24(n2n3)
Step 3: Calculating the slanting strategy by rm 3.
Knowing that rm 1 will prefer to take a more central location if rm 3
enters, we know that rm 3 should locate in the left side of the market. These
prices and market share allow us to backward induct and examine the rms
decision in stage 3. Taking the rst and second rms bias as given, they can
be used to calculate the third rms prots for each bias chosen. Specically,
prots by rm 3 in this stage are
3 =aM(n1n3)f[n22+2n1(2+n2n3)3n3(2+n3)+2n2(5+n3)]+(n2n3)(2n1+n2+3n3)g
2
144(n2n3)2
Dierentiating with respect to its own slanting strategy, the rst-order con-
dition for this problem, @3@n3
; is found. However, we are interested in the sign of
this derivative. Dene sign(x) to be the function that equals +1 if x > 0 and
-1 if x < 0. Assuming that 1 n3 < n1 0 n2 1, the function results in
Sign( @3@n3
) = 1
Using the boundary conditions and assumptions, we know that
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n3 = Ed [s3(d)] = 1
is the optimal reporting strategy. Therefore, its slanting strategy should bes3(d) = 1 d
so that the news reported is, in fact, the one that the readers expected when
they agreed to buy the paper.
Step 4: Calculating the slanting strategy by rm 2.
These prices, market share and optimal slanting strategy by rm 3 allow us
to backward induct and examine the rms decision in stage 2. Taking the rst
rms bias as given, they can be used to calculate the second rms prots for
each bias chosen. Specically, prots by rm 2 in this stage are
2 =aM(n2n1)f[11+2n1(1+n2)+n2(4+3n2)]+(1+n2)(1+2n1+3n2)g
2
144(1+n2)2
Dierentiating with respect to its own slanting strategy, the rst-order con-
dition for this problem, @2@n2
, is found. However, we are interested in the sign of
this derivative. Applying the function sign(x) and assuming that 1 n3 allowing
10; dissuading1 <
allowing1
The resulting average reader bias from the situation where a third rm is
dissuaded from entering is
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ARBwith threat < ARBwithout threat = 1
since most of the market buys from a newspaper located with a slant policy closerto the expected value of the true data. Therefore, the competition brought
from the menace of entrance of the third rm reduces the average reader bias
in the market.
Step 8: Calculating the minimal entrance cost that blocks the third rm from
entering.
Taking the results from proposition 3 we calculate the minimal entrance costs
that could support the duopoly in the market without any entry deterrence
activity. The duopolistic slanting strategy is optimal as long as no other rmnds it protable to enter this market given the duopolistic slant. Therefore,
the minimal entrance cost that could support this result would be the benet
(gross from xed costs) from entering in this market.
As we have just proved, if a rm decided to enter, its optimal reporting
strategy, given the slanting strategy of the duopoly, would be to locate in the
center of the market since this is the most protable location. Using the optimal
pricing policy we can nd that the benet (gross from xed costs) from entering
would be:
aM(3+)218
Therefore, for
f aM(3+)2
18
the third rm will stay out of the market without any entry deterrence activity.
Step 9: Calculating the maximal entrance cost that allows dissuasion of the
third rm from entering.
On the other hand, also taking the results from proposition 3, we calculate
the maximal entrance cost for which the entrance of the third rm can be
dissuaded by the rst rm. This is reached by calculating the benet (gross from
xed costs) from entering the market when the rst rm has such a reporting
policy that prevents the third rm from entering in the center of the market but
cannot prevent it from entering in the left side of the market. Therefore, using
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the pricing policy and the slanting policy in this case, the third rms benet
from entering would be:aM(3+)2
36
Therefore, for
f aM(3+)2
36
the third rm cannot be dissuaded from entering in the market.
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