February 28th 2011
Research presentation
Collusion and the political
differentiation of newspapers
Marco Antonielli
MSc Economics
Università degli Studi di Firenze
NMa trainee
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
2
Introduction
Two-sided market setting
(Anderson and Gabszewicz,
2005)
Media
markets
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
3
Introduction (2)
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.
4
Introduction (3)
reasons of interest and theoretical framework
Newspapers market:
pluralism in the media
Political orientation
as a differentiation device
Gabszewicz, Laussel, Sonnac (2002)
Collusive behavior + political differentiation
in a two-sided setting
8
Model: outline
Sequential game played by 2 editorial firms in a
newspapers market
Gabszewicz, Laussel, Sonnac (2002)
3 steps:
1)publishers select the political orientation of their
newspaper out of a unit interval representing the political
spectrum
2)publishers compete for readership in price
3)publishers compete in the advertising market in price
Hotelling spatial duopoly plus advertising
9
Model: outline (2)
Infinite repeated game:
publishers repeadetly play the
sequential game
1) Location
2) Readers
3) Advertising
1) Location
2) Readers
3) Advertising
1) Location
2) Readers
3) Advertising
...
Aims of the model:
1) Analyse the properties of collusive agreements, in
terms of pluralism and in terms of welfare
2) Study the incentives to cooperate in such
multiperiodic framework
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Collusive behaviour
3 features of collusion in this model:
•Two kinds of collusion are considered, depending on
which variables of the strategy are chosen in agreement:
a)Political orientation and prices
b)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.
11
Stage game
Readers market
• Unit interval as the political spectrum
Reservation
price
Price of
newspaper i
Transportation
cost
Distance between favourite political opinion
and political orientation of newspaper i
• Single-homing
• Market coverage condition
13
Stage game (2)
is the marginal consumer = MARKET SHARE
17
Stage game (3)
Advertising market
Advertisers have preferences depending on the price of ad spaces
in a newspaper and on the readership of such newspaper.
Tariff applied by
newspaper i
Readership of
newspaper i
Intensity of the preference for an ad;
Each of them can
advertise in:
No newspaper
One newspaper
Two newspapers
with density 4k
..and obtain respectively utility
:
Stage game (4)
Multi-homing on
the avertising side
Single-homing on
the readers side
Each advertiser considers the decisions to
advertise in the two newspapers
separately
Each publisher can charge its advertising
tariff taking into account only its
readership, i.e. act like a monopolist
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Stage game (5)
Profit function
Profit of
publisher i
Price of
newspaper i
Readership of
newspaper i (y
for publisher 1)
Unit cost
Advertising market dimension,
here represents the advertising revenues per reader
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One-shot competition
Gabszewicz, Laussel and Sonnac (2002) identify two
subgame perfect equilibria for the stage game.
Maximal differentiation equilibrium
Parameters set:
Equilibrium profits:
Equilibrium prices:
22
One-shot competition (2)
Minimal differentiation equilibrium
Parameters set:
Profits:
Equilibrium prices:
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Collusion on prices and locations
Finding the collusion agreement
Publishers cooperatively decide how to play the
game: selecting a state among the Pareto optima
State = Pair of strategies
1) Characterize the Pareto optima
2) Select the one with common
price (market sharing rule)
24
Collusion on prices and locations (2)
1) Pareto optima characterization
Touch states
25
Collusion on locations and prices (3)
1) Pareto optima characterization
Complete touch states
26
Collusion on locations and prices (4)
Intermediate opinion differentiation
State with:
27
Collusion on prices only
Finding the agreement
In 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.
1) Characterize the best common-price rule;
a pricing rule takes locations as given
2) Does it select Pareto optima?
3) Subgame perfect equilibrium by using
backward induction
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Collusion on prices only (2)
1) Common-price rule
Given 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.
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Collusion on prices only (3)
III. Case: example
2) It can be shown that every state selected by the commonprice rule is a Pareto optimum
30
Collusion on prices only
3) Backward induction
Since 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)
The Nash equilibrium will be the one in which
publishers locate in the middle of the unit interval
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Collusion on prices only (4)
Minimal differentiation
State with:
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Defection
For 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 ½
• thus, whatever the location of the deviant, she will set a
price =
• again, the deviant simply chooses the best reply:
 locates at ½ and undercuts the price of the other
34
Incentives to collude
Critical discount factor depends on the parameters of the game
Changes in...
Advertising market
dimension
Reservation price
Unit cost
...affect:
Sustainability
and profitability
of collusion
Transportation cost
37
Incentives to collude (2)
Advertising market dimension: revenues per reader
Different values of k mean different competitive equilibria,
everything else being equal
The punishment triggered depends on the starting value of k
After 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 practice
38
Incentives to collude (3)
Graph: critical discount factor in respect to k
(collusion on prices only)
Market is
not
covered
Maximal differentiation equilibrium
Minimal differentiation
equilibrium
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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 easier
If the one-shot equilibrium is a maximal differentiation
equilibrium, an increase in the advertising market dimension
makes collusion less easy
Interpretation:
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
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