Work in progress
Competition between
content distributors in
two-sided markets
Harald Nygård Bergh, Hans Jarle Kind,
Bjørn-Atle Reme, Lars Sørgard,
Norwegian School of Economics
1
Standard market structure in the literature
Advertisers
TV-channels
Consumers
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
Actual market structure – doesn’t fit
 TV channels set ad prices
Advertisers
 Distributors set prices to consumers
TV-channels
Þ Different agents set prices on the two
sides of the market
Distributors
Consumers
The focus of this paper
How is the two-sidedness of the market
taken care of?
 What characterizes the strategic game
between

 competing
distributors
 distributors 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
Advertisers
Each distributor sets two prices:
• Connection fee
• Program price
The TV-channel sets:
TV-channel
Distributors
Distributors
• Advertising priceying (locked in)
•Common advertising level
Consumers
The model (pay-per-view)

One content provider (not critical)

Two competing distributors, i = 1, 2.

Each consumer single-homes, and pays
 Fi
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
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
Consumers differ in preferences for distributor
 uniformely distributed over a unitary Hotelling line
Distr. 1




x
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:
1 ( si  s j )  Fj  Fi 
Ni  
2
2t
Distr. 2
The firms: Profits

Let f be the price per program per viewer that
the distributors pay to the content provider:
 i  Ni  pi  f ci  Fi 

Content provider:
P = f(N1c1 + N2c2) + rA

Advertiser k = 1,...,n
pk =Ak(N1c1 +N2c2) - rAk =>
n N1 1  p1   N 2 (1  p2 )  2r
A
n 1

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The game
1)
2)
3)
The content provider sets the wholesale
price f
The distributors compete for viewers by
setting connection fees F1 and F2, and the
consumers make their connection choices
The distributors set program prices (p1 and
p2) and the content provider sets ad price (r)
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Stage 3

Content provider’s reaction function (dP/dr = 0):
1  f  ( N1 p1  N 2 p2 )
r
4

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 f
 optimal to enhance the viewing time through
having less ads
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Stage 3, ctd

Distributor i’s FOC:

 i 
 ci 
pi 

 pi  f 


ci 
ci Ai
0
   pi  f 
A pi
pi 




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
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Stage 3, ctd

Distributor i’s reaction function:
pi 

1  2r  f  N j ( p j  f )
22  N i 
Remark: Program prices are strategic
complements through the effects they
have in the advertising market.
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Market outcome, stage 3
31  f   5 f N1  1 / 2
r

24
D
31  f   f
N 1/ 2
p1 
 1
1
6
D1  N1 
2
31  f   f
N1  1 / 2
p2 

1
6
D1  N1 

Lemma: A distributor's incentive to increase the
price in order to repress the advertising level is
increasing in his market share.
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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
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Stage 2

The distributors maximize profits with
respect to the connection fee (dpi/dFi = 0)
 31  f   f 
F t

12


t  31  f   f 
  

2 
24


2
2
Proposition: The distributors make profits
even if they are undifferentiated.
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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
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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.
Summing up

Analyzes strategic interactions between content
providers and distributors
 “The middleman” creates inefficiencies
 viewer 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


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
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
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 pk

= (Akc1 – Akr)N1 + (Akc2 – Akr)N2
Aggregate profits for the distributors and
the content provider are maximized by
setting
 pi
= 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)
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