Two-sided Markets: Current State of
Research in Media and Advertising
Bachelors Thesis
Isabel Rath
Spring Term 2015
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Advisor:
Daniela Schmitt
Chair of Quantitative Marketing and Consumer Analytics
L5, 2 - 2. OG
68161 Mannheim
www.quantitativemarketing.org
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Table of Content
Abstract .................................................................................................................................. III
1 Introduction ............................................................................................................................. 1
2 Theoretical Background .......................................................................................................... 2
2.1 Definition of Two-sided Markets ..................................................................................... 2
2.2 Pricing in Two-Sided Markets ......................................................................................... 6
3 Literature Review on Two-Sided Markets in Media and Advertising .................................... 8
3.1 Network Externalities in Media Markets ......................................................................... 9
3.2 Optimal Pricing Structure in Media Markets ................................................................. 11
3.3 Implications of Advertisers’ Demand ............................................................................ 16
4 Discussion ............................................................................................................................. 21
4.1 Critical Evaluation.......................................................................................................... 21
4.2 Managerial Implications ................................................................................................. 22
4.3 Limitations and Future Research .................................................................................... 23
Appendix ................................................................................................................................. 29
References ............................................................................................................................... 50
Affidavit................................................................................................................................... 55
List of Tables
Table 1: Two-sided Market Examples ..................................................................................... 26
List of Figures
Figure 1: Interdependence in Two-sided Markets................................................................... 27
Figure 2: Singlehoming, Competitive Bottleneck and Multihoming...................................... 28
III
Abstract
Media markets that are financed by advertising revenues naturally appear as two-sided
markets. By applying the fundamental theory of two-sided markets to media markets, new
insights in the context of indirect network externalities, the optimal price structure, as well as
the impact of advertisers’ demand, emerge. Firstly, in this two-sided market particularly,
authors possess varying views on the existence of positive indirect network externalities
between the two market sides: audience and advertisers. Some authors regard advertising as a
nuisance for the audience. Secondly, depending on whether advertising is regarded positively
or negatively, it influences the trade-off media firm’s face when deciding on how to finance
activities: with advertising revenues or fees for the content levied on the audience. Lastly, the
extent to which media firms are financed by advertising revenues has great impact on the
concentration level in media markets, the diversity and accuracy of media content. Although
opinions concerning these aspects clearly differ, the theory of two-sided markets not only
provides useful insights, but additionally highlights the importance of future research.
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Introduction
To air a 30-second advertising commercial during the Super Bowl broadcast in 2015,
advertisers had to pay 4.5 million U.S. dollars. An enormous audience (114.4 million viewers
in 2015) characterizes the annual championship game of the National Football League in the
United States (Statista 2015). The advertising fees are used by the broadcaster to pay for the
content, the football game, that is presented to the audience (Bolt & Tieman 2005, p. 2). Thus,
the viewers have the chance to consume the content of the broadcaster for free while
advertisers have to pay an excessive amount of money. This phenomenon suggests that media
markets naturally appear as two-sided markets, characterized by indirect network externalities
between the two market sides: audience and advertisers. In this context, consumers’ utility of
one market side depends on how many consumers are present on the other market side,
creating demand interdependencies in such a market. As a consequence, two-sided markets
can realize profits from advertisers while the audience is subsidized.
The literature on two-sided markets has been evolving since the beginning of this
millennium through the analysis of the credit card market, in which this “skewed pricing structure” (Bolt & Tieman 2005, p. 11) was ascertained. As a result of this research, many
other markets have been identified as being two-sided such as the market for video games,
shopping malls, operating systems or even dating clubs. Regarding media markets, in
particular, there has been a recent surge of interest, as they are somewhat different from other
two-sided markets. The key issue of research in this field explores the trade-off for media
firms between raising money from advertisers, the audience or completely different revenues
sources. Media constitute an essential role in the distribution of news and information in
today’s modern society. Thus, the exploration of the impact that advertisers’ demand has on
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the concentration level in media markets and the diversity and accuracy of media content is of
major importance.
The thesis is structured as follows: In section 2, theoretical foundations of two-sided
markets are laid out, providing overview on several different definitions and price setting.
Section 3 presents insights of recent research on two-sided media markets financed by
advertising revenues. Specifically, the thesis focuses on literature on the so-called “traditional
media”, mainly consisting of television, radio and newspaper. Section 4 discusses the main
findings and derives implications for the media industry. Moreover, the section highlights
research limitations and concludes the thesis with an outlook of what future research needs to
focus on.
Theoretical Background
Various definitions of two-sided markets have been proposed in the economic literature in the
last decade, but a uniform definition has not yet emerged. This chapter will provide an
overview of the existing definitions and specific characteristics of two-sided markets.
Furthermore, the pricing in two-sided markets will be outlined.
Definition of Two-sided Markets
A key element shared by all definitions of two-sided markets is that they involve three
participants: a platform, offering two distinct products to two groups of customers with
distinct needs. Even though the aspect of serving two products to two groups of customers is
not sufficient to distinguish two-sided markets from all others, it is a first indication of a twosided market (Li 2015, p. 100).
Furthermore, researchers agree that indirect network externalities arise in two-sided
markets (Caillaud and Jullien 2003, pp. 309/310; Evans and Schmalensee 2007, p. 152;
Gabszewicz, Resende and Sonnac 2015, p. 3; Roson 2005, p. 144). In general, it needs to be
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distinguished between direct and indirect, positive and negative network externalities, for
both sides of the market respectively. Direct positive network externalities exist when the
value that a user derives from consuming a certain product increases with the number of other
users consuming the same product. In contrast, indirect positive network externalities arise
when consumer utility increases with the number of agents consuming a complementary
product or participating in a related market. Consequently, the utility of the one market group
depends on the size of another, related market group, and vice versa (Katz and Shapiro 1985,
p. 424).
Usually, in two-sided markets, both market sides exhibit positive indirect network
externalities.1 An example is the credit card market, in which the card issuer serves as a
platform for the interaction between the cardholder and the merchant. Cardholders are more
likely to subscribe to a certain credit card that is accepted by more merchants for payment.
Similarly, merchants are more likely to accept a certain card that is carried by more
cardholders (Armstrong 2006, p. 668). Figure 1 illustrates this example [Insert Figure 1 about
here]. However, some two-sided markets also exhibit negative indirect network externalities,
which signifies that consumer utility decreases with an increase of the network size in the
related market.
While researchers agree on the existence of indirect network externalities, there is
disagreement about whether and to what extent those indirect network externalities are
necessary for a two-sided market to be defined as such. Thus, Li (2015, p. 100) identifies
three different categories of definitions for two-sided markets: (1) two groups of customers
exert bilateral indirect network externalities, (2) only one group of customers exerts unilateral
indirect network externalities on the other; and (3) the existence of indirect network
externalities is not necessary in order to define two-sided markets.
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Bilateral indirect network externalities. These kinds of indirect network externalities arise
when both sides of the market are able to benefit “from the increasing size of the other”, and vice versa (Li 2015, p. 101). Rochet and Tirole (2003, pp. 1017-20) define a market with
network externalities between the two market sides as a two-sided market, in which there is
an intermediary that internalizes those network externalities. According to the authors, it is
necessary that the two sides of the market are not able to coordinate their interactions
themselves, which makes the intermediary platform necessary (p. 1018). In this definition, the
network externalities between the two market sides are bilateral (Li 2015, p. 101). Similarly,
Anderson and Coate (2005) define a two-sided market as “one where the participants on each side care directly about the number of participants on the other,” (p. 950) which also indicates the existence of bilateral indirect network externalities.
Unilateral indirect network externalities. These kinds of network externalities already exist
when “only one side of the market benefits from the increasing size of the other” (Li 2015, p. 101). Armstrong (2006) states that whether unilateral or bilateral indirect network
externalities are necessary to define two-sided markets, depends on how platforms levy fees
from the two market sides. Platforms can either charge consumer fixed fees or per-transaction
fees. In case of fees levied per transaction, bilateral indirect network externalities become less
important. As the platform only charges fees in the event of an accomplished interaction,
consumers’ utility from one market side does not necessarily depend on how many consumers are present on the other market side. Accordingly, not necessarily bilateral but at least
unilateral indirect network externalities are essential for two-sided markets (p. 669).
No need of indirect network externalities. Some authors define two-sided markets as not
requiring either bilateral or unilateral indirect network externalities (Li 2015, p. 102). As
discussed above, Rochet & Tirole (2003, p. 1018) initially considered the existence of indirect
network externalities to be necessary. However, they later redefine two-sided markets in a
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more restrictive way: indirect network externalities are not sufficient to define a two-sided
market, but rather the price structure in terms of the decomposition of the price level between
the two sides (p. 647). In this context, the platform must be able to “affect the volume of transactions by charging more to one side of the market and reducing the price paid by the
other side by an equal amount” (Rochet & Tirole 2006, p. 665). Consequently, the price level
must be allocated in a non-neutral way between the two sides (p. 649). Hence, varying the
price structure and, therefore, the allocation of price levels between the two sides, has to have
an impact on the “volume of transactions” (p. 665) and on how many agents are present on
each market side. A contrasting example of a neutral allocation of the price level is the valueadded tax. Here, it is irrelevant which side of the market (merchant or consumer) is charged
because the transaction price “adjusts accordingly” (p. 648).
The review of the existing definitions shows that they suffer from “ambiguity, overinclusiveness and/or under-inclusiveness” (Li 2015, p. 111). However, one must be aware that the authors use the term “two-sided markets” to refer to different industries or businesses. For example, whereas Rochet and Tirole (2003) focus on the credit card market, Anderson and
Coate (2005) investigate the market of commercial broadcasting.
For an overview of the different two-sided markets, Evans and Schmalensee (2007, pp.
154-8) classify them into four distinct groups: (1) Exchanges (e.g. auction houses or financial
exchanges); (2) Advertiser-supported media (e.g. newspapers or television); (3) Transaction
devices (e.g. payment cards or cash); and (4) Software platforms (e.g. video game consoles or
digital media platforms). According to this classification, it can be observed that two-sided
markets occur in various industries that encounter somewhat different characteristics. Those
differences induce the difficulty of finding one uniform definition for two-sided markets that
fits all industries.
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However, Li (2015, p. 111) argues that the necessity of unilateral indirect network
externalities seems to be the most influential definition. Rysman (2009, p. 127) suggests not
trying to find one uniform definition of two-sided markets, as nearly any market can be seen
as two-sided to some extent. Rather, he recommends concentrating on understanding the main
characteristics of two-sided markets and their effects that differentiate them from all other
markets. As a result, for this thesis, it is assumed that in a two-sided market there are
(unilateral or bilateral) indirect network externalities between the two market sides. Those
imply a pricing structure for the platform, which differs from all other markets without
indirect network effects (Hildebrand 2011, p. 1). Accordingly, the next section is concerned
with setting prices in two-sided markets.
Pricing in Two-Sided Markets
In two-sided markets, the crucial aspect for platforms is determining the price correctly in
order “to get both sides on board” (Rochet & Tirole 2006, p. 665) because the price level charged on each market side has a significant impact on the number of consumers joining
each side (Hagiu and Hałaburda 2014, p. 2). Hence, besides the overall price level that the
platform is charging, the price structure needs to be considered in terms of the allocation of
the price level on both market sides (Rochet & Tirole 2006, p. 647). Thus, standard pricing
policies (of one-sided markets) usually cannot be applied (Rochet & Tirole 2004b, p. 40).
In contrast to one-sided markets, a heavily “skewed pricing structure” towards one market side can be observed in two-sided markets (Bolt and Tieman 2005, p. 11). One market side is
treated as a “profit center” (Rochet & Tirole 2003, p. 991) with high prices where surplus is
subtracted, while the other side is treated as a “loss leader” (p. 991) with low, zero or even
negative prices and is heavily subsidized. Charging a low price on the more elastic market
side is used to create maximum demand. Through the existence of a positive indirect network
externality, the increased participation on this side encourages the other market side to follow.
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As the other market side is less price-elastic and/or indirect network externalities from the
first market side may be stronger, the platform is able to extract high prices and realize a
profit (Bolt & Tieman 2005, p. 3; Rysman 2009 pp. 129-31).
Thus, the price level charged on both sides is determined by the price elasticity of demand
as well as on the relative sizes of the indirect network externalities. To understand this
concept, the “Super Bowl” example from the introduction can be reconsidered. Here, the
broadcaster serves as the platform enabling the interaction between advertisers, market side 1,
and the audience, market side 2. Since the audience is more price-elastic, the broadcaster
charges low or zero fees to the audience for watching the Super Bowl game in order to attract
viewers. The result is a high viewership that exerts a strong positive network externality on
advertisers. Consequently, they are willing to pay high prices to place a commercial on the
Super Bowl game since they are less price-elastic and extremely value the increased audience.
To illustrate this phenomenon in other industries, compare Table 1 where the market side that
is subsidized is highlighted [Insert Table 1 about here].
Another important aspect of pricing that needs to be considered is that market participants
on one or both sides of the market often use more than one platform (Rochet and Tirole 2003,
p. 991). This phenomenon was first noticed and termed as “multi-homing” by Rochet and Tirole (p. 992). Accordingly, they refer to market participants who use only one platform as
“single-homing” (p. 1001). In general, if market participants have the possibility to “multihome”, their price elasticity of demand increases as a result of a greater amount of available
platforms that are seen as substitutes. Thus, two-sided platforms are forced to lower their
prices as competition intensifies (p. 993).
However, Armstrong (2006) distinguishes three cases for consideration: (1) both sides
single-home, (2) one side single-homes, one side multi-homes, and (3) both sides multi-home
(p. 669). In fact, Armstrong (2006) states that two-sided markets often seem to evolve toward
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the second case, which he refers to as a “competitive bottleneck”. For instance customers who
shop at a single supermarket even though suppliers sell products in many different
supermarkets. In this case, the platform, the supermarket, has monopoly power to provide the
multi-homing suppliers’ access to the single-homing customers. Consequently, the platform is
able to charge higher prices to the multi-homing side (pp. 669/670, 677-86). Thus, profits are
maximized for a platform when having a strong position on the market lacking multi-homing
customers (Dewenter 2015, p. 126). (See Figure 2) [Insert Figure 2 about here]
In conclusion, the right allocation of fees charged on both sides of the market and the
factors that need to be taken into account when setting prices are essential for the survival of
two-sided markets. Mispricing can have major implications for two-sided markets. For
instance, the company Yahoo, which in 2001 was the second-largest auction website after
eBay, started charging fees to its sellers, which caused its listings to drop by 90 percent.
Sellers switched to eBay, which had a bigger audience of consumers and without charging
fees to the sellers (Hansell 2001, p. 3).
Literature Review on Two-Sided Markets in Media and Advertising
Media markets embody one of the most accurate examples of two-sided markets
(Gabszewicz, Resende and Sonnac 2015, p.7). According to the classification of Evans and
Schmalensee (2007, pp. 154-158), they belong to the category of advertiser-supported media
markets. In this chapter, the theory of two-sided markets will be applied to media markets
financed by advertising revenue. In section 3.1, the specific nature of network externalities in
media markets will be outlined, showing what distinguishes media markets from other twosided markets. In section 3.2, the parameters that determine the optimal pricing structure in
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media markets will be described while in section 3.3 the implications of advertisers’ demand on media markets are demonstrated.
Network Externalities in Media Markets
Advertiser-supported media markets require three necessary participants: a media firm, which
represents the platform and the two market sides, consisting of the audience and the
advertisers. The two market sides have varying needs, which are harmonized by the platform
to enable interaction between them. Thus, the media firm delivers two products to two groups
of customers: the media content to the audience and the attention of the audience to
advertisers (Anderson and Gabszewicz 2006, p. 38). The audience, which can be readers,
viewers of television, listeners of radio etc., wishes to consume the media content in terms of
entertainment or information offered by the media company. In contrast, advertisers want to
promote their offerings in different media outlets (Gabszewicz, Laussel and Sonnac 2001, p.
642).
Moreover, indirect network externalities create interdependence between the two market
sides: audience and advertisers. On the one hand, the audience creates a positive indirect
network externality for the advertisers, which occurs in most two-sided markets (See section
2.1). Hence, the larger the audience of a certain advertisement, the higher advertisers’ expected payoff (Gabszewicz, Resende and Sonnac 2015, p. 26). On the other hand,
advertisers also have some influence on the audience. However, it is not clear whether this
influence, and thus the network externality, is of a positive or negative nature (Gabszewicz,
Resende and Sonnac 2015, p. 7). Assumptions regarding this issue depend on the media
market in particular (Bagwell 2007, p. 1824). For broadcasting markets such as television or
radio, it is generally accepted in the literature that advertisers impart a negative network
externality onto the audience (Anderson and Coate 2005, p. 950; Gal-Or and Dukes 2003, p.
292; Resende 2008, p. 2). Here, the audience perceives advertisements as a nuisance since the
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program is interrupted by the advertisement and reduces the time available to consume the
media content, e.g. a television show (Anderson and Gabszewicz 2006, p. 3). Thus, authors
such as Gal-Or and Dukes (2003) incorporate a nuisance parameter in their models, which
measures “the extent to which consumers dislike the interruptions caused by commercials” (p. 297). In case of broadcasting, this parameter is high.
In the case of printed media, however, the readers’ attitude towards advertising is
ambiguous. In fact, some readers value advertising in newspapers or magazines. As a result,
advertisers exert a positive network externality onto the audience (Resende 2008, p. 3).
Resende (2008) suggests two explanations for the positive attitude of audiences toward
advertisements. First, she argues that in contrast to television or radio, readers can easily skip
the advertisements and thus go directly to the content they are interested in. Therefore, the
audience must be “at least neutral” (p. 3) regarding advertisements in the press. Second, since
a large proportion of advertisements in newspapers tend to be informative, consisting of
information about the availability or characteristics of the advertised product or service,
readers might benefit from the advertising content (p. 3).
Empirical findings confirm Resende’s (2008) theory: Rysman (2004) estimates the
existence of positive indirect network externalities for the Yellow Pages directories. In fact,
readers value the advertisements in directories as information. In this case, an increase in
advertising would induce a larger audience as well, caused by the positive indirect network
externality between both sides of the market (p. 483). Additionally, Kaiser and Wright (2006,
p. 2) analyzed the German magazine market during the period 1972-2003 and empirically find
that advertising in magazines is regarded positively by readers.
In contrast, Sonnac (2000) assumes a country-specific difference in readers’ attitude toward advertisements in the press. American readers tend to regard advertising positively
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and are characterized as “ad-lovers”. By comparison, most Europeans are “ad-adverse”, meaning that they dislike advertising (Sonnac 2000, p. 250).
Nevertheless, it can be concluded that for two-sided media markets advertisers always
desire a larger audience, whereas the attitude of the audience towards advertising remains
ambiguous. Thus, the effect of advertising and whether consumers like or dislike advertising
plays an essential role for media markets when it comes to setting the optimal price structure.
Optimal Pricing Structure in Media Markets
Due to the negative effect of advertising introduced above, pricing in two-sided media
markets is somewhat different from what is described in section 2.2 for other two-sided
markets not financed by advertising revenues.
Revenue in traditional media markets is either raised from the audience, advertisers or
both. Usually, increasing revenue from one side (e.g., subscription from the audience) reduces
revenue from the other side (e.g., advertising revenues). Thus, analyzing the trade-off between
raising revenue from readers or advertisers of media platforms becomes a complex but
important task (Lambrecht et al. 2014, p. 332). Media platforms need to determine an
equilibrium where revenues are maximized by setting optimal prices for advertisers as well as
the audience (Gabszewicz, Resende and Sonnac 2015, p. 8).
To assess this question, one needs to differentiate between monopolistic media markets
and competitive media markets. Godes, Ofek and Sarvary (2008) were the first to further
distinguish between competition within the same medium and competition between two
different media (p. 20). Thus, they classify their analysis of the optimal price structure
according to the respective market structure: no competition, with-in medium competition,
and across-media competition.
No competition. Within a monopolistic market structure, without competition, pricesetting depends on the relative size of indirect network externalities and the price elasticity of
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demand. If the nuisance parameter of advertising is moderate, a media firm has an incentive
to charge lower prices for the audience to increase demand while making profits from
advertisers who value the increased audience. It is, therefore, consistent with the general
observation about pricing from other two-sided markets where one market side tends to be
subsidized (Kaiser and Wright 2006, p. 23). Newspapers are a good example of a two-sided
media market as the advertising market values higher circulation and hence more readers.
Consequently, the readership exerts a positive network externality on advertisers and,
therefore, will be subsidized by the advertising market. However, by setting higher prices for
advertisers, the newspaper will be able to maximize its profits (Dewenter 2006, pp. 4-11).
As discussed in section 3.1, media platforms need to take into account the size of the
nuisance effect of advertising, in contrast to other two-sided markets when setting prices and
choosing revenue streams. As the nuisance parameter and thus the disutility consumers
endure from advertising increases, a monopolist media firm has two choices in order to attract
readers and ensure that their demand does not decline. It can either lower the price levied on
the audience to compensate it for “the displeasure of having to endure” (Godes, Ofek and
Sarvary 2008, p. 25) the advertisings or it can reduce to overall amount.
With-in medium competition. Media platforms compete for the content sold to the
audience, and simultaneously for advertisers who seek the attention of the audience (p. 20).
Godes, Ofek and Sarvary (2008) provide a first analysis of the effects of competition from
other media platforms belonging to the same industry (p. 20). They compared the situation of
a monopolistic media firm to a media firm in a duopolistic market structure. For reasons of
simplicity, however, they do not introduce more than one competitor, which would be the
case for other oligopolistic market structures.
In one-sided markets, the introduction of competition generally decreases prices. However,
this assumption does not hold for two-sided media markets (p. 21). Competition in the
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advertising market forces each media platform to reduce the quantity of advertising. At the
same time, the overall advertising quantity of all media platforms increases, which in return
reduces the “advertising price per customer impression” (p. 25). As a result, the “margin per impression” (p. 26) from the advertising market in a duopoly is certainly lower than in a
monopoly, which impacts media platforms’ “incentives to underprice content” (p. 32) in order to increase demand on the audience side of the market.
With the introduction of competition in the audience market, two forces have an
impact on content prices. First, there is an “upward force” because of the reduced “margin per impression” (p. 26) in the advertising market, which reduces media platform’s willingness to underprice content. Second, the general impact of competition
that reduces the advantages associated with raising prices suggests a “downward force”. The extent to which the content of the two media platforms is seen as substitutable
determines which force dominates. If the substitutability of contents is low, the “upward force” dominates, and content prices for the audience will be higher in the duopoly. In
contrast, if the substitutability of contents is high, the “downward force” dominates, leading to lower prices in the duopoly (p. 26).
Across-medium competition. Godes, Ofek and Sarvary (2008) argue that a further
distinction between competition within the same medium and competition between two
different media is crucial. In reality, media platforms face rivalry from different media
industries as well, which stems from the fact that advertisers usually spread their marketing
budget across various media (Dolan 2000, pp. 1/2).
However, across-media competition is especially relevant in the advertising market. Here,
different media industries (television, radio, magazines, the web) compete for a share of a
company’s advertising budget. Conversely, they do not compete in the respective audience markets since the audience is not able to watch television, read a newspaper, browse the Web
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or listen to the radio simultaneously (p. 28). In other words, the audience “single-homes” whereas advertisers can “multi-home” by placing advertising on different media outlets.
Consequently, Godes, Ofek and Sarvary (2008) examine the effect of two media platforms
competing within a medium (e.g. the television market) that also face competition in the
advertising market from a single media platform belonging to another media industry (e.g. the
press market) (p. 28). In order to do so, it is necessary to determine whether the media
platforms of the different media industries are seen as substitutes or complements in the “eyes of the advertisers” (p. 21). The latter would mean that placing advertisements on two media
outlets from different industries (e.g. on television and the radio) would be more profitable
than only on one medium whereas substitutes represent the opposite outcome.
Thus, if media platforms from two different industries are seen as substitutes for
advertising, the competition between the two media platforms decreases the return on
advertising. As a consequence, the media platform that is more competitive will rely on
advertising revenues to finance activities rather than on revenues generated from the audience.
The media platform, where competition is weaker, will rely on revenues from the audience
since it still has monopoly power in the audience market. If the two media industries are seen
as perfect substitutes for advertisers, a monopolistic media firm might even leave the
advertising market entirely. In contrast, if media platforms from two different industries are
seen as complements for advertising, the more competitive medium will charge higher prices
to the audience. The return on the advertisement market increases, which further increases the
incentive to underprice the audience side for the monopolist (p. 21).
Kind, Nilssen and Sorgard (2009) provide a complimentary analysis of how competitive
forces in a media industry impact the media platform’s trade-off between raising revenues
from the audience or advertisers (pp. 1112/3). They make a distinction between two
competitive forces: On the one hand, the extent of revenues charged from the audience is
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related to whether other media firms offer close substitutes. On the other hand, the extent of
revenues charged from advertisers depends on the number of media firms in the industry.
Moreover, their analysis is not limited to just monopoly and duopoly, but also involves even
more competitive market structures (p. 1114).
Their main observations are as follows: If media firms offer close substitutes, meaning that
they are less differentiated, they will not be able to charge a large extent of revenues from the
audience, and vice versa. Hence, they become reliant on income from advertisers. On the
contrary, an increasing number of media firms competing in an industry reduce the extent of
revenues that can be charged from advertisers and vice versa. As a result, the more media
platforms in the industry compete, the more important revenues streams from the audience
become (p. 1123).
In conclusion, there are many different factors that need be taken into account when
evaluating the optimal price structure. The models introduced above suggest that the market
structure (monopoly, duopoly or an even more competitive market) matters, but so does
whether media platforms face within-medium competition or across-media competition
(Godes, Ofek and Sarvary 2008). Moreover, it is important to evaluate the substitutability as
well as the total number of media platforms (Kind, Nilssen and Sorgard 2009).
Furthermore, as introduced in section 2.1 for two-sided markets, in general, it is necessary
to attract both sides of the market through strong indirect network externalities and “reach the critical mass” (Gabszewicz, Resende and Sonnac 2015, p. 8) of audience and advertisers. This
requirement is another factor that helps to distinguish the optimal allocation of price levels
between both sides of the market. If media platforms already make use of a large audience
generating strong network externalities for the advertisers, it is beneficial to charge fees from
for content. The consequence would be a “paid content” business model. In contrast, if media platforms need to increase their audience since strong indirect network externalities do not yet
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exist, the business model of “free content” is more advantageous. Here, media content is
provided for free while the platform relies on revenues from advertising. However, combining
the two business models seems to be the best solution in most situations. Business models
with mixed revenue streams allow the platform first to rely only on revenues from advertising
and thereby offer the content for free. The platform can thus increase its audience and
generate network externalities. Once this is achieved, revenues are generated by charging the
audience for content through a subscription (Gabszewicz, Resende and Sonnac 2015, p. 21).
The two most common business models relying on mixed streams of revenue are so-called
“freemium” and “customer selected sampling”. In the “freemium” model, a firm provides
access to “a low-end version” (Halbheer et al. 2014, p. 193) for free while consumers need to
pay for the premium version with exclusive contents, e.g. recent movies (Gabszewicz,
Resende and Sonnac 2015, p. 22). In contrast, “customer selected sampling” does not distinguish between a basic and a premium version and thus differentiate the exclusiveness
and quality of the content. Instead, the consumer can sample a limited amount of content for
free, whereas for the access to the complete content on the platform, a fee has to be paid
(Halbheer et al. 2014, p. 193). An example of “customer selected sampling” is the “metered model”, in which a newspaper offers a limited set of free articles while charging for the rest
(p. 192).
Implications of Advertisers’ Demand
Advertising revenues that are used to, at least partly, finance two-sided media markets have
an impact on the market structure as well as on the media content and diversity (Gabszewicz,
Laussel and Sonnac 2006, p. 2).
Concentration. Media markets, in general, are characterized by an increasingly high degree
of concentration (Dewenter 2003, p. 11). Thus, only a few media platforms provide media
content for the majority of the audience (Gabszewicz, Resende and Sonnac 2006, p. 12). The
literature on media markets finds two determinants for the trend toward concentration. First,
17
high fixed and low marginal production costs can be observed in media markets, resulting in
large economies of scale for the production of media contents. While the production of the
first copy is very expensive, the marginal costs of an extra copy are nearly zero. As a result,
high barriers to enter lead to highly concentrated media markets. (Dewenter 2003, pp. 4/19;
Gabszewicz, Resende and Sonnac 2015, p. 12)
Second, authors suggest that the indirect network externalities between the audience and
the advertisers arising in two-sided media markets cause demand interdependencies that lead
to the elimination of minor media platforms. This phenomenon was first observed by Furhoff
(1973) and later extended by Gabszewicz, Garella and Sonnac (2007). Furhoff (1973), in his
analysis of the newspaper market, concluded that this interdependence induces a so-called
“circulation spiral” (p. 7). According to whether the audience likes or dislikes advertising, this
spiral can be interpreted from two perspectives: First, if the audience regards advertising
positively, a higher level of advertising will lead to an increased readership, which in return
leads to an even higher level of advertising, and so on. Second, if the audience dislikes
advertising, the idea is that having a larger audience generates more advertising revenue
(Gabszewicz, Garella and Sonnac 2007, p. 406). In return, the advertising revenues are spent
to improve the quality of the media content, which consequently makes it more attractive to
readers compared with newspapers of competitors. Thus, the spiral favors a concentrated
newspaper market with a large audience because newspapers with a narrower audience are
unable to generate the same quality (Furhoff, 1973, p. 7). However, both interpretations come
to the same conclusion. The high concentration level in media markets can be seen as a
consequence of the interdependence between advertising and audience market.
Diversity of media content. The high degree of concentration observed in two-sided media
markets raises the question whether this affects the diversity of media content positively or
negatively. Moreover, the exploration of the direct impact of advertisers’ demand on the 18
diversity of media content is of major importance (Gabszewicz, Resende and Sonnac 2015, p.
13).
Steiner (1952, p. 194) was the first one investigating whether radio channels financed
through advertising revenues provide more diversified radio shows either in a monopoly or
under competitive conditions. He found that monopolists have a greater incentive to produce
more diversified radio shows, whereas two competing radio channels will excessively
duplicate popular shows beyond what would be socially optimal (Gabszewicz, Laussel and
Sonnac 2006, p. 2; Steiner 1952, p. 206). This paradoxon stems from the fact that a
monopolist media platform will not duplicate its radio show once no more consumers can be
reached, but will rather choose different types of content on each channel to serve all
consumers in the market. Competing radio shows, in contrast, that aim to increase audiences
will always choose the show that maximizes their profits. The consequence is that they will
provide the same radio show and thus duplicate content (Gabszewicz, Resende and Sonnac
2015, p. 14; 1952, p. 206).
Hence, the range of content that media firms financed by advertising revenues provide is
guided by advertisers’ willingness to pay (Anderson and Gabszewicz 2006, p. 3). Thus, a
small group of consumers that creates a higher willingness to pay off the advertisers can
strongly influence the chosen content (Dewenter 2011, p. 21; Einstein 2004, p. 146).
Nevertheless, advertisers’ demand most often leads to content catered to mass audiences.
In light of the recent findings on two-sided markets, some authors have revised Steiner’s theory of program duplication caused by advertisers’ demand. Arguing that the model of
Steiner relies on some fixed preferences of the audience, they highlight that need for adoption
of the model. For example, the extent to which advertising regarded as a nuisance by the
audience needs to be incorporated when measuring diversity of content. In this context,
Gabszewicz, Laussel and Sonnac (2004, p. 658) consider the diversity of programs for private
19
television broadcasters that offer free programs to the viewers. Since commercials in
television cannot be skipped, in contrast to advertising in magazines, they can be regarded as
“an opportunity cost related to the time devoted to watching” advertisings (p. 658).
Accordingly, viewers will watch channels with a low level of advertising. Consequently,
competition among channels that try to reach as many viewers as possible while holding
advertising levels high evolves. This competition is higher the lower program diversity is.
Thus, Gabszewicz, Laussel and Sonnac (2004) argue that channels have an incentive to at
least differentiate programs to some extent in order to lower competition and raise advertising
revenues. A related study of Anderson and Coate (2005, p. 970) finds that advertising level
may be below what would be socially optimal.
By comparison, Gabszewicz, Laussel and Sonnac (2001, p. 644) studied the diversity of
content in advertising-financed media markets by analyzing the press market in light of the
diversity of political content. They found that a newspaper only maximally differentiates its
content if readers highly value differentiated political content and if the market for advertising
is relatively limited. Otherwise, newspapers will provide similar political views and opinions
and thus offer minimal diversity, leading to “la pensée unique, which can be translated as
“one single thought” or “mainstream thinking”. The tendency towards lower content diversity and “la pensée unique” due to the
interdependence of advertisers and consumers occurring in media platforms is also expressed
by other authors: Gal-Or and Dukes (2003, p. 292) show that television stations in the
broadcasting market are able to command higher advertising revenues when minimally
differentiating their programming offerings. Moreover, Peitz and Valletti (2008, p. 950)
observe that for advertising financed television, free-to-air television, the incentive to provide
differentiated content depends on the nuisance parameter of advertising on the viewers, on
the disutility of advertising, so to speak. A decrease in the nuisance parameter and thus in
20
viewers’ disutility of advertising leads to less differentiated the content. Furthermore, they find that while advertising-financed television always provides less diversity of contents,
“pay-TV” maximally differentiates content.
Einstein (2004, pp.145/155) presents empirical research on the diversity of the major
television channels in the United Stated between 1955 and 2003. She finds that with the
introduction of commercials as revenue sources for broadcasters, the diversity of content
declined steadily.
In conclusion, authors are divided about the impact of advertisers’ demand on the diversity
of media content. Most authors, however, agree on the reduction of content diversity when
advertising revenues are used to finance media firms.
Media Bias. One question that is closely connected to the concern of diversified media
content is the question whether media markets financed by advertising revenues result in
biased media coverage. Indeed, advertisers’ demand impacts the accuracy of the content media markets provide (Gabszewicz, Resende and Sonnac 2015, p. 16). Again, it is necessary
to consider that a media platform financed by advertising revenues is guided by advertisers’
willingness to pay to contact viewers of particular demographics that generate most revenues
for them (Anderson and Gabszewicz 2006, p. 3).
Ellman and Germano (2009, p. 1) studied how and why advertisers in two-sided media
markets may influence media content and thus create media bias. In particular, they looked at
the newspaper market, where they found two different views on the effects of advertising on
the content delivered by media companies. The “liberal view” suggests a positive effect of
advertising on the media because advertising revenues make the newspaper companies
independent from the government and political parties. In contrast, the “regulatory” view highlights that advertising distorts media coverage as platforms seek to accommodate to the
21
concerns of advertisers (p. 1), for instance, by targeting the readers most valued by advertisers
(p. 5).
In media markets without advertising financing, newspapers provide independent, accurate
news (p. 3). This is no longer the case when advertisers finance media markets and those are
able to withdraw advertising from a newspaper that reports on topics sensitive to them (p. 2).
Polluting firms, for example, may withdraw advertising from newspapers that report on topics
related to environmental issues such as global warming. Therefore, this situation supports the
regulatory view of advertising, as media platforms tend to accommodate to the concerns of
advertisers (p. 1), which leads to a reduced coverage of relevant issues. Especially for topics
such as “health, environment or even voter participation” (p. 28) this tends to have serious
consequences.
To summarize, the high level of concentration in media markets can certainly be regarded
as a consequence of advertisers’ demand. Additionally, the diversity and accuracy of media content is negatively impacted under advertising financing. The extent, though, depends on
the media market in particular as well as on the parameters that are incorporated in the models
of researchers.
Discussion
The final chapter provides a critical evaluation of the varying views on two-sided media
markets as well as the resulting implications for the whole media industry. Finally, limitations
of current research will be outlined proposing focus for future research.
Critical Evaluation
The reviewed literature provides a non-exhaustive overview of the varying perspectives of
authors concerning two-sided media markets. Opinion is clearly divided. On the one hand,
22
this holds especially true for the trade-off between raising money from the audience versus
advertisers. On the other hand, for advertisers’ impact on the market structure in terms of
more or less concentrated markets and on the diversity and accuracy of media content, the
literature provides no consensus.
However, the diversity, the pluralism and the accuracy of the media content are considered
to be essential for modern, democratic societies. The media is a powerful tool for distributing
cultural principles, news on politics and public issues, thereby considerably shaping public
opinion, values and norms (Gabszewicz, Resende and Sonnac 2015, p. 13).
Managerial Implications
Given the crucial role of media markets in the distribution of information and the shaping of
opinion in modern societies, traditional media markets in Europe tend to be heavily regulated.
Among other things, existing regulations thus “restrict the amount of advertising displayed by
the media platforms” (Gabszewicz, Resende and Sonnac 2015, p. 15). Regulators, therefore,
define the length as well as the content of commercial advertisements of several media outlets
(Anderson 2007, p. 2). However, a distinction has to be made between public and private
media providers since public institutions are more heavily regulated.2
While regulating the amount of advertising has been seen as necessary to ensuring that
consumers have access to a variety of opinions and accurate information; it also reduces
profits for the advertiser. Paradoxically, the regulation may cause a reduction in the diversity
and quality of media content provided (Anderson 2007, p. 24). Gabszewicz, Laussel and
Sonnac (1999, p. 3) found that minimal diversity in television content occurs when
advertising commercials are strictly regulated. Thus, regulating advertising in order to ensure
more diversity of media content would be inefficient.
One possible solution to ensure that content is free from advertisers’ constraint could be
that some public media firms are completely financed by the government. However, there are
23
other market parameters that need to be evaluated for a final decision (Dewenter 2011, p. 1618). Furthermore, private media outlets could rely more heavily on revenues streams such as
subscription fees from the audience. Hence, it would not be advertisers’ willingness to pay
that determines the type and range of media content provided, but consumers’ willingness to
pay. Consequently, subscription pricing might be helpful in catering to minority’s preferences (Anderson and Gabszewicz 2006, p. 3).
Apart from the possibly negative influence of advertising-financed media on the diversity
and bias of media content, there are other factors that suggest that the media industry should
concentrate on other revenues streams. As discussed above, Kind, Nilssen and Sorgard (2009,
p. 1123) for example, demonstrate that the more media platforms in the industry compete, the
more important the audience becomes as a source of revenue. Moreover, Godes, Ofek and
Sarvary (2008, pp. 31/32) have shown that greater competitive intensity increases profits from
the audience through subscriptions in contrast to advertising revenues. One step in this
direction is provided by the presented business models and financed by a mixture of
advertising and subscription revenue: “freemium” and “ customer selected sampling”.
Even though, as shown in the literature review, opinions clearly differ on the effects of
media platforms using advertising to finance activities, there is one clear-cut implication from
the analysis of two-sided markets. When considering decreasing revenue from a particular
source of one side of the market, it is necessary to recognize the effects on the other side of
the market and thus the interdependence of demand between both sides in such a market
(Anderson 2007, p. 26).
Limitations and Future Research
Two-sided markets are a young and relatively unexplored field of research. Therefore, one
limitation of the cited papers is that they all relate to different markets and industries. There
are some generalizations that can be drawn for all two-sided markets. However, especially
24
when considering network externalities and pricing structures in media markets, the
assumptions and empirical analyses of researchers are more plausible in some media markets
than in others, for instance, that advertising is considered to be a nuisance (Bagwell 2007, p.
1824). Furthermore, most of the existing literature on two-sided media markets focuses on
“traditional media” such as television, radio, and newspapers. However, the digital revolution
has drastically changed media markets.
Gabszewicz, Resende and Sonnac (2015) provide an overview of the changes taking place
in two-sided media markets caused by the introduction of the Internet and digital media, the
so-called “new media”. A completely new category of agents has emerged, such as huge
Internet providers (e.g. Google), platforms enabling consumers to stream videos “on demand” (e.g. Netflix) as well as social networks (e.g. Facebook) (p. 17). According to Gabszewicz,
Resende and Sonnac (2015) media platforms are evolving from two-sided to multi-sided
platforms by not just serving advertisers and the audience, but by serving multiple agents and
enabling multiple types of interactions among them. At the same time, new kinds of media
devices, such as tablets, computers and smartphones are constantly emerging which is
attended by an ever-increasing consumption of media content (p. 17).
Furthermore, as consumers are able to participate in media markets by (self-) “producing and diffusing information” (p. 18), network externalities are becoming more and more
complex. Consider, for example, websites that enable consumers to recommend products or
services to others, creating direct network externalities among themselves, but also indirect
network externalities to the other side of the market (p. 19).
These developments also affect the advertising market considerably. They allow
advertisers to target their message to different consumers while collecting personal data from
them (Anderson 2012, p. 1; Gabszewicz, Resende and Sonnac 2015, p. 24). But it is not only
the advertising market that is affected. New applications, apps, also exist for selling content
25
online, thus enhancing business models of media firms. In light of these recent developments,
the new “online landscape” also provides completely new revenue streams for media firms.
Lambrecht et al. (2014) introduce several revenue models for “selling digital content online”
(p. 331). Apart from the conventional models of selling content or showing advertising, they
suggest that firms can also broker consumer information by selling personal data, “typically
consisting of consumers’ identities, habits, needs, and/or preferences“ (p. 335). This data can
be sold, for instance, directly to marketing companies, which again use it for targeted
advertising.
Given these recent changes, future research needs to investigate this challenging
environment as many parameters of the fundamental findings of two-sided media markets
need to be adjusted. Reconsidering existing business models of traditional media markets by
revising the optimal price structure and thus the trade-off between different revenue steams by
integrating the specific characteristics of new media markets is of major importance.
However, considering the three revenue streams introduced by Lambrecht et al. (2014) in the
context of new media markets, further questions arise. Regarding the reliance on content
models, research has to assess the question about how much content should be provided for
free and how much to charge for the paid content. For business models aiming to sell
information, what prices to charge on each side is a difficult question. Last but not least, for
advertising financing, the questions raised in traditional media markets, such as the impact of
consumers utility or disutility and the impact of advertising itself on concentration, diversity
of content and media bias, are becoming even more complex. Hence, many questions
regarding two-sided media markets remain unresolved. However, understanding the
fundamental characteristics of two-sided markets “opens a new avenue of research for media
economists” (Gabszewicz, Resende and Sonnac 2015, p. 27).
26
Tables
Table 1: Two-Sided Market Examples (Parker and Van Alstyne 2005, p. 1495)
27
Figures
Figure 1: Interdependence in Two-sided Markets (self-provided)
Adapted to the Credit Card Market from “Das Konzept der zweiseitigen Märkte am Beispiel
von Zeitungsmonopolen,” (Dewenter 2006, p. 3)
28
Figure 2: Singlehoming, Competitive Bottleneck and Multihoming (self-provided)
Adapted from „Optimale nichtlineare Preise für zweiseitige Märkte“ (Hagemeister 2009, p. 70)
Singlehoming:
Competitive Bottleneck:
Multihoming:
Appendix: Literature Review Tables
Author/s
(Year)
Anderson and
Coate (2005)
Title
Journal/Source Research Focus
Market
Review of
provision of
Economic
broadcasting: A Studies
welfare analysis
Market of commercial
television broadcasting;
Two competing
broadcasting firms
Analyzes whether
programming and
advertising levels in the
commercial television
market are above or below
what would be socially
optimal
Assumptions: no
competition in advertising
market, only for viewers;
single homing audience,
multi homing advertisers;
advertising is a nuisance
for the audience in the
commercial broadcasting
market; advertisers exert
negative externalities onto
the audience
Main Findings
Finds that concentration in the
broadcasting industry may increase
advertising levels or reduce
programming, but this may be socially
desirable
Relevancy
+++
Advertising levels in equilibrium can
either be below or above the socially
optimal one, dependent on the nuisance
parameter of advertising, the
substitutability of contents, benefits that
advertisers expect from contacting
consumers
In the equilibrium, the number of
programmes may be below or above
what would be socially optimal
29
Author/s (Year)
Anderson and
Gabszewicz
(2006)
Title
The Media
and
Advertising:
A Tale of
Two-Sided
Markets.
Journal/Source Research Focus
Main Findings
Handbook of
Broadcasting industry
The type and range of media content
the Economics
(television and radio)
provided by media firms are determined
of Art and
by the advertisers’ willingness to pay;; Culture
media firms do not consider the tastes of
Examines the impact that
the audience
advertisers’ demand has on media markets
Television programs are targeted to those
demographics where the highest profits
Fundamental
can be realized, leading to media bias
characteristics of two-sided
media markets
Using subscription pricing may help to
cater to the taste of minorities
Relevancy
+++
If advertising demand is weak, program
diversity is high because broadcasters try
to avoid competition for subscription
prices
If advertising demand is high, competition
for viewers leads to minimum diversity of
content/programmes
30
Author/s (Year)
Bagwell (2007)
Title
The
Economic
Analysis of
Advertising
Journal/Source Research Focus
Handbook of
Discusses and summarizes
Industrial
recent work on media
Organization
markets concerning
advertising
Explores and shows
different opinions
regarding the direction
(positive or negative) of
indirect network
externalities of advertisers
on the audience in different
media markets
Author/s (Year)
Dewenter (2003)
Title
The
Economics
of Media
Markets
Journal/Source Research Focus
University FAF
Literature Review on
Economics
characteristics of media
Discussion
markets, especially price
Paper, No. 10
setting
Main Findings
Different views on advertising:
informative, complementary and
persuasive
Relevancy
++
Whether the audiences regards
advertising as a nuisance depends on from
media market to media market
Main Findings
Media markets are highly concentrated
because of high barriers to entry such as
large economies of scale and high fixed
costs; consequently they are often
regulated
Relevancy
+
31
Author/s (Year)
Dewenter (2006)
Title
Das
Konzept der
zweiseitigen
Märkte am
Beispiel
von
Zeitungsmonopolen
Journal/Source
Working Paper
No. 53, HelmutSchmidtUniversität
Hamburg
Research Focus
Discusses pricing aspects
for the newspaper market
in light of the theory on
two-sided markets
Main Findings
Prices for advertising and content are lower,
the stronger the indirect network
externalities are on the respective market
side
Relevancy
++
The market side where the stronger indirect
network externalities arise is subsidized by
the other market side
Prices below marginal costs are possible on
the subsidized market side, as profit is made
on the other market side
32
Author/s
(Year)
Dewenter
(2011)
Title
Journal/Source Research Focus
Der
Mediensektor
zwischen
Wettbewerb
und
Regulierung:
Aktueller und
zukünftiger
(De-)
Regulierungsbedarf
Gute Regeln
oder
Wirtschaftslenkung Vol.
333
Examines the question
whether the media sector
in Europe should be de/regulated concerning the
theory of two-sided
markets
Discusses the impact of
concentration in media
markets on the diversity of
media content
Especially focuses on the
broadcasting industry
Main Findings
Summarizes different opinions in the
literature and concludes a positive
impact of competition in media markets
on the diversity of media content
Relevancy
++
It is not the audiences’ willingness to
pay what determines the
programmes/media content offered but
advertisers’ willingness to pay
Regulating public broadcasters may
help to solve concerns about content
diversity, but other markets factors
needs to be considered as well
33
Author/s
(Year)
Dolan (2000)
Title
Journal/Source Research Focus
Integrated
Harvard
Marketing
Business School
Communication Note 9-599-087
s
Discusses different
marketing communication
approaches: Media, Direct
Response, Consumer,
Trade and Personal Selling
Evaluates criteria for an
effective Integrated
Marketing Communication
Main Findings
Media advertising is used to set a
foundation for a purchase by impacting
consumers’ knowledge, behavior and
attitude
Relevancy
+
Budget for media advertising is spread
across various media and overall
marketing budget across various
communication vehicles
Companies communication strategy
should not only rely on advertising in
media, but also e.g. sales promotion
(due to pressure for short-term sales)
Author/s
(Year)
Einstein
(2004)
Title
Journal/Source Research Focus
Broadcast
The Journal of
Network
Media
Television,
Economics
1955-2003: The
Pursuit of
Advertising and
the Decline of
Diversity
Empirical research on the
diversity of the major
television channels (ABS,
CBS and NBC) in the
United Stated between
1955 and 2003
Main Findings
Diversity of content declined steadily
over the years
Relevancy
++
The introduction of advertising as a
revenue source for broadcasters dictated
catering to a mass audience
34
Author/s
(Year)
Ellman and
Germano
(2009)
Title
Journal/Source Research Focus
What do the
papers sell? A
model of
advertising and
media bias
Economic
Journal
Examines for the
newspaper market the
impact of advertisers on
the accuracy of media
content
Main Findings
Newspaper provide accurate news if
not financed by advertising revenues
Relevancy
+++
Monopoly underreports on all topics
sensitive to advertisers
High competitive intensity leads to
maximum accuracy of media
content/news
If advertisers are able to commit to
withdraw advertising, newspaper will
underreport on topics sensitive to
advertisers
35
Author/s
(Year)
Furhoff, Lars
(1973)
Title
Journal/Source Research Focus
Some
Reflections on
Newspaper
Concentration
Scandinavian
Economic
History Review
Main Findings
Concentration tendencies
and elimination of minor
media firms in media
markets
High concentration level in newspaper
and media markets, in general, can be
explained with the “theory of the circulation spiral”
Focus on newspaper
market in Sweden
Concentration is direct consequence of
interdependent demand in media
markets between audience and
advertisers
Relevancy
+++
Having a larger audience generates
more advertising revenue; those can be
spent again by the newspaper to attain a
higher quality, which makes it more
attractive to the audience compared to
the newspapers of competitors
This becomes a “virtuous circle” between advertisers and audience
because economically weaker
newspaper are evicted from the market
as they are not able to match the quality
36
Author/s
(Year)
Gabszewic,
Laussel and
Sonnac (2001)
Title
Journal/Source Research Focus
Press
advertising and
the ascent of
the “Pensée Unique“
European
Economic
Review
Focus on political content
presented by the press
industry when financed
with advertising revenues
Implications of advertisers’ demand on the diversity of
political media content
,
Main Findings
Newspaper provide similar political
content and “sell tasteless political messages” because they have to sell a
large audience to the advertisers;
leading to “la pensée unique”
Relevancy
++
Newspapers only differentiate content if
readers highly value differentiated
political content and if the market for
advertising is relatively limited
37
Author/s
(Year)
Gabszewic,
Laussel and
Sonnac
(2004)
Author/s
(Year)
Gabszewic,
Laussel,
Sonnac
(2006)
Title
Journal/Source Research Focus
Programming
and advertising
competition in
the broadcasting
industry
Journal of
Economics and
Management
Strategy
Competition between two
private television
broadcasters financed by
advertising and providing
programs for free to the
viewers
Title
Journal/Source Research Focus
Competition in
the media and
advertising
markets
The Manchester
School
Diversity of media content;
explicitly taking into
account the
interdependence between
advertising and audience
market
Main Findings
Television channels have an incentive
to differentiate programmes to some
extent when advertising is seen as a
nuisance by the audience
Relevancy
+++
Reason: Viewers that dislike advertising
watch programmes with low levels of
commercials; leading to competition
between channels that try to capture
shares of rivals’ audience by varying
the amount of advertising; as
competition is more intense when
channels are minimally differentiated,
they, at least to some extent,
differentiate programmes
Main Findings
Media market structure and media
content are depended on advertisers
Relevancy
+
38
Author/s
(Year)
Gabszewicz,
Garella,
Sonnac
(2007)
Title
Journal/Source Research Focus
Newspapers’ market shares
and the theory of
the circulation
spiral
Information
Economics and
Policy
Dynamic model of the
“circulation spiral” by Furhoff; two
competing newspaper
Focus on concentration
level in newspaper market
financed by advertising
revenues
Main Findings
According to theory of circulation
spiral: the newspaper with more
advertising becomes more appealing,
because (1) readers like advertising or
(2) newspaper invests advertising
revenue to improve quality; through the
increased readership, more advertisers
are attracted etc.
Relevancy
+++
Weaker newspaper with narrower
audience cannot match the quality
standards and becomes eliminated;
leading to concentration
Other conditions are necessary to
evaluate to find whether the weaker
newspaper is eliminated when the
circulation spiral arises; conditions:
advertising in the utility function of
readers and size of minority readership
39
Author/s
(Year)
Gabszewicz,
Resende and
Sonnac
(2015)
Title
Journal/Source Research Focus
Media as multisided platforms
Handbook on
the economics
of the media
General characteristics of
media markets seen as
two-/multi-sided platforms
Distinguishes between
traditional media
(television, newspaper,
radio) and “new media”(based on the Internet)
Main Findings
Relevancy
Summarizes main findings on two-sided +++
media markets: existence of network
externalities; disagreement whether
advertising is a nuisance for the
audience; asymmetric price structure;
challenges media markets face when
facing the trade-off between different
revenue streams (revenue from the
audience, advertisers or elsewhere)
Different business models for mixed
revenues streams (advertising revenue
and subscription) available: e.g.
“freemium”
Existence of the Internet makes network
externalities more complex, as more
participants become involved; media
markets evolve from two-sided to
multi-sided markets; new business
models arise because of the
convergence of the media outlets to one
single medium
40
Author/s
(Year)
Gal-Or and
Dukes
(2003)
Title
Journal/Source
Minimum
Differentiation
in Commercial
Media Markets
Journal of
Economics and
Management
Strategy
Research Focus
Programming duplication
in the American
commercial media market
Main Findings
When information from advertising is
substracted, advertising is seen as a
nuisance by the audience; advertisers
exert a negative network externality on
the audience
Relevancy
++
Nuisance parameter measures “the
extent to which consumers dislike the
interruptions caused by commercials“
Television stations can charge higher
advertising revenues when minimally
differentiating their content
41
Author/s
(Year)
Godes, Ofek
and Sarvary
(2008)
Title
Journal/Source
Content vs.
Advertising:
The Impact of
Competition on
Media Firm
Strategy
Marketing
Science
Research Focus
Impact of competition on
media firm decisions,
especially regarding the
trade-off between raising
revenues from content or
advertising
Main Findings
Assumption of declining prices due to
competition does not hold in two-sided
media markets
Differentiates between no
competition, competition
within the same media and
across two different media
outlets
No competition: If disutility consumers
endure from advertising is moderate,
general observations for pricing in twosided markets can be applied; if
disutility of advertising is high, media
platforms are forced to either lower
prices for content or reduce amount of
advertising to avoid a decline in demand
Monopoly versus Duopoly;
do not study more
competitive market
structures
Within-medium competition: media
firms competing in a duopoly may set
higher content prices than a monopolist
media firm
Relevancy
+++
Across media: greater complementarity
may result in higher content prices
charged in the more competitive
medium
42
Author/s
(Year)
Halbheer,
Stahl,
Koenigsberg,
Lehman
(2014)
Title
Journal/Source
Choosing a
digital content
strategy: How
much should be
free?
International
Journal of
Research in
Marketing
Research Focus
Comparison between paid
content and free content
strategies in media markets
Focus on digital content
Optimal size of sample and
price of paid content
Main Findings
Relevancy
++
Publishers have three choices: “free content strategy”,”paid content strategy” or “sampling strategy”
If advertising effectiveness is high,
media platforms shall offer content
completely for free
Hybrid sampling strategies: Consumer
selected sampling and “freemium”
Trend towards mixed revenues streams
(subscription and advertising) and away
from solely relying on advertising
revenues
Sampling also serves for disclosing
content quality from the free content;
thus consumers prior expectations are
affected
Offering free samples and relying on
advertising revenue can be optimal,
even when sampling decreases „prior
quality expectations and content
demand“; In contrast, if advertising
effectiveness is low and content quality
high, it may be better to not offer free
samples
43
Author/s
(Year)
Kaiser,
Wright
(2006)
Title
Journal/Source
Price structure in
two-sided
markets:
Evidence from
the magazine
industry
International
Journal of
Industrial
Organization
Research Focus
German magazine market
during the period of 19722003; focus on pricing in
two-sided media markets
Main Findings
Magazines make all their money from
advertisers while readers are subsidized
Relevancy
+
Audience positively values advertising
in magazines
Increased demand on the audience side
raises advertising prices; Increased
demand on advertising side reduces
content prices
44
Author/s
(Year)
Kind,
Nilssen,
Sorgard
(2009)
Title
Journal/Source
Business Models
for Media Firms:
Does
Competition
Matter for How
They Raise
Revenue?
Marketing
Science
Research Focus
Studies the television
market; looks at one media
industry in isolation
Studies how competitive
pressure impacts media
firms’ trade- off between
raising money from
advertisers or audience
Two competitive forces:
content substitutability and
number of media firms
present in industry
Main Findings
Relevancy
Increased competitive pressure due to:
+++
Higher content substitutability: Leads to
lower revenues from the audience;
media platform becomes reliant on
revenues from advertising
Higher number of media platforms
present in the industry: Leads to lower
revenues from advertising
45
Author/s
(Year)
Lambrecht,
Goldfarb,
Bonatti,
Ghose,
Goldstein,
Lewis, Rao,
Sahni, Yao
(2014)
Title
Journal/Source
How do firms
make money
selling digital
goods online?
Marketing Letters
Research Focus
Revenue models for online
firms, providing digital
goods/content online
Discusses combining
different revenue streams
Main Findings
Relevancy
Sources of revenues can be information, +++
content or advertising; in return
consumers can offer information,
money or time
Trade-off between revenues streams
(information, content and advertising)
because increasing one (e.g.
subscription), usually decreases another
(e.g. advertising)
46
Author/s
(Year)
Peitz and
Valletti
(2008)
Title
Journal/Source
Content and
advertising in the
media: Pay-tv
versus free-to-air
tv
International
Journal of
Industrial
Organization
Research Focus
Diversity of media content
Comparison Pay-TV
versus free-to-air TV
(advertising financed TV)
(TV: television)
Main Findings
Trade-off between financing TV with
subscription or advertising revenues
depends on viewers’ attitude towards advertising and intensity of competition
Relevancy
++
The smaller the nuisance parameter (the
disutility of advertising) the less content
becomes differentiated, as more TV
channels advertise
Advertising-financed TV (free-to-air
TV) provides less diversity of contents,
pay-TV maximally differentiates
content
Author/s
(Year)
Resende
(2008)
Title
Journal/Source
The Economic
Journal of Media
Advantage of
Economics
Being the “Voice of the Majority”
Research Focus
Focuses on a duopolistic
newspaper industry
Assess the question
whether indirect network
externalities of advertisers
on the audience are
negative or positive
Main Findings
Explains that indirect network
externalities in the newspaper market
are positive on both market sides
Relevancy
++
Reasons that advertising in newspaper
is easy to skip and most of the time
informative
47
Author/s
(Year)
Rysman
(2004)
Title
Journal/Source
Competition
Journal of
between
Economic
networks: A
Perspectives
study of the
market for yellow
pages
Research Focus
Empirically estimates
network effects for Yellow
Pages directories
Main Findings
Finds existence of positive indirect
network externality of advertisers on
audience/readers for Yellow Pages
directories
Relevancy
++
Negative parameter for nuisance of
advertising in the market of Yellow
Pages
Reason: Consumers value the
advertisements of directories for
information
Author/s
(Year)
Sonnac
(2000)
Title
Journal/Source
Readers’ Attitudes Toward
Press
Advertising: Are
They Ad-Lovers
or Ad-Averse?
Journal of media
economics
Research Focus
Empirically assess the
attitude of readers towards
press advertising
Examines the implications
of ad-averse readers on the
newspaper price and
circulation as well as
advertising price and
volume for a monopoly
newspaper firm
Main Findings
Finds that attitudes towards press
advertising are country specific
Relevancy
++
Reasons that attitudes towards
advertising are rooted in cultural habits;
Americans are more ad-lovers, whereas
Europeans are more ad-averse
Obtains same results as in the theory of
the “circulation spiral” by Furhoff with ad-loving readers
48
Author/s
(Year)
Steiner
(1952)
Title
Journal/Source
Program patterns
and preferences,
and the
workability of
competition in
radio
broadcasting
Quarterly Journal
of Economics
Research Focus
Radio broadcasting
industry in the US
Impact of competition on
the variety of media
content
Contrasts impact in
monopoly to impact in
more competitive markets
Main Findings
Monopolist has a greater incentive to
provide more variety in media content,
because the monopolist does not
duplicate a radio show when he is not
able to reach additional customers, but
broadcasts another radio show with
different content to reach the whole
audience market
Relevancy
+++
Broadcasters in a competitive market
duplicate radio show content because
they want to maximize audience in oder
to maximize profits
Conclusion: competition is harmful for
the variety of media content in the radio
broadcasting industry
49
50
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________________________
1
Positive and negative direct network externalities are also present in two-sided markets. However, indirect
network externaltities differentiate two-sided markets from all. Thus, hereinafter the thesis mainly focuses on
indirect network externalities.
2
For example ARD and ZDF, the two main German public broadcasters, are restricted to showing commercials
after 8pm, on Sundays as well as on public holidays (§ 16 Abs. 1 Rundfunkstaatsvertrag). In contrast, private
broadcasters are not limited by this restriction. Furthermore, all German broadcasters, whether public or private,
are restricted to a maximum of twelve minutes of advertising per hour (§ 45 Abs. 1 Rundfunkstaatsvertrag).
55
Affidavit
I hereby declare that I have developed and written the enclosed bachelor thesis entirely on
my own and have not used outside sources without declaration in the text. Any concepts or
quotations attributable to outside sources are clearly cited as such. This bachelor thesis has
not been submitted in the same or substantially similar version, not even in part, to any other
authority for grading and has not been published elsewhere. I am aware of the fact that a
misstatement may have serious legal consequences.
Mannheim, June 15, 2015
_____________________
Isabel Rath