Hotelling Model We first take the locations of the sellers as given (afterwards we are going to determine them endogenously) and assume firms compete in prices. Relative to overlapping consumers, these consumers are more valuable, and losing them is relatively costly for the platform. Because advertisers are homogeneous in this framework, they all put the same advertising level on a platform. Crampes et al. Via minimal differentiation platforms commit to a low advertising intensity, thereby reducing product market competition. When voting for the public good in each community, the median voter takes as given the amount of the public good in the other community. Gabszewicz et al. model of the world oil market over the period 1970-2004 do not support either oligopoly among non-OPEC producers or collusion among OPEC producers in the production of oil in thelast15years. where Dj, j=A,B, denotes the consumership for content j. And if they have a formal agreement to collude, we call these players right over here, we call them a cartel. While the circle model cannot be easily relaxed (apart from the trivial expedient of introducing low consumer reservation prices and hence local monopolies), the discrete-choice model can allow for uncovered markets through “outside” options, and this reconnects equilibrium variety to advertising demand strength. (2014) discuss the supply of multiple content in a model of decreasing return per impression and imperfect tracking of viewer behavior. The model has the following elements: Fixed communities and housing sites. Their results suggest that readers attach a positive value to newspaper advertising. These keywords were added by machine and not by the authors. Their results suggest that such a merger would not directly affect advertising prices. Somewhat surprisingly, their results suggest that newspaper publishers make positive margins on the readership side, and in fact higher margins than on the advertising side. However, the tenor of their results applies more generally.56 They show that if ad revenue is weak enough, then maximal differentiation attains; while if it is high enough, the outcome is minimum differentiation with free-to-air media (and both constellations are equilibria for some intermediate values).57. Thus, duopoly newspaper firms may end up setting higher prices in equilibrium, in order to try to screen out these undesirable readers. Here, q1 represents the coverage of platform 1 and p1 the price of platform 1. She measures the variety of topics covered by newspapers using Burelle's Media Directory, which provides data on the titles of newspaper staff. They show that a reduction of supply by one platform may lead the other platform to expand its supply. Cournot’s model of duopoly can be extended to the general oligopoly. We now explore these extra dimensions to performance. Models of Oligopoly • An oligopolyis a market with only a few important sellers. She shows that an analysis of reader surplus that only focuses on price effects, and ignores changes to newspaper quality, understates the loss in consumer welfare. If, in contrast, the media platforms are purely ad-financed, and the audience is indifferent to the ad level, the platforms will want to maximize the number of viewers/readers/listeners (i.e., consumers). However, consumers in the middle segment of the Hotelling line enjoy a positive utility on each platform (given that advertising levels are not too high). By continuing you agree to the use of cookies. Not surprisingly, the surplus captured by newspaper publishers is higher when they are permitted to adjust newspaper quality. However, there is also a more subtle countervailing effect. Correspondingly, the utility from being active on platform 2 is v2=r-τ1-xq2-p2. The utility function of a consumer located at x is, where u0 is the gross utility from using the platform. In their model, media platforms do not carry advertising but, rather, charge viewers directly and thus their model is not a two-sided market model. As with any industry, consolidation leads to concerns about higher prices, and this is especially the case in a market such as the US newspaper industry, which already tends toward local monopolies. This is because the strategic effect of relaxing competition dominates the direct effect for all interior locations for this disutility specification. Under the fully covered market specification (e.g., circle and logit), equilibrium ad levels and profits are decreasing in the number of platforms (as long as R⋅ is log-concave: see the analysis in Anderson and Gabszewicz, 2006). Taken literally, then, the prediction for genre choice is maximal variety difference between competing platforms, opposite the minimum differentiation (or duplication à la Steiner) predicted when there are no ad-nuisance costs. (2012) examine a hypothetical merger in the Dutch newspaper industry. (2010) also analyze multi-homing consumers in the Hotelling setting. Therefore, the utility function of a consumer located at x is. Consider first the mixed-finance context, whereby both subscription prices and advertising are used. The second effect is the “strategic effect” that moving in tends to intensify competition by harshening the rival's full price (in the pricing sub-game induced by locations) and so hurts profit. Similarly, an advertiser who buys advertising space on both platforms may receive a lower benefit from an overlapping consumer than an advertiser who displays ads on only one platform because the overlapping consumer may become aware that the advertisement is already on the other platform. This decoupling is somewhat disconcerting for both the positive and the normative analysis, but the problem is really the assumption that the market is fully covered. In this expression, the price of platform 2 is canceled out. They model the quantity of advertising demanded at each newspaper as a function of the advertising price per reader, acknowledging that this variable is endogenous. For example, consumers may appreciate a serious documentary, but the framing effect of embedding ads may make them less willing to buy frivolous products. Here the advertising side is reconnected to equilibrium diversity. We show that welfare in trade is necessarily less than welfare in autarky for any level of trade cost, which sharply contrasts Clarke and Collie (2003) prove Pareto superiority of any trade over autarky in a non-address model. If consumers only single-home and more than two-thirds of them are interested in content A instead of content B, then both platforms will specialize in content A. A consumer can be active on both platforms and optimally does so if the utility she obtains on each platform is positive. If both platforms choose content A, then each of them obtains a profit of, By contrast, if one platform chooses content B, it obtains a profit of DBϑ. The Linear City Model: This is the basic model of horizontal product differentiation where the prod-ucts are separated on one (horizontal) dimension or attribute. Greenhut, M. L. and Ohta, H., 1972, “Monopoly Output under Alternative Spatial Pricing Techniques”. Gabszewicz et al. The common point was that if the commodity were homogenous, and the competitors were quantity adjusters, as originally assumed by Cournot, then any one competitor could, by undercutting the other competitor’s price, however slightly, recover the entire market as its share. Chamberlin assumed the commodity to be perceived as heterogeneous by the consumers, so that they would prefer one brand or dealer among similar ones, and only gradually desert their favourite when price differences grew too much adverse. This implies that the additional benefit of consuming an amount q2 of news or stories when first consuming an amount q1 is, Therefore, the utility of a consumer who visits platform 1 and then platform 2 is given by, Similarly, the utility of a consumer who first visits platform 2 and then platform 1 is. In this negotiation, the two parties maximize their joint surplus and share it equally. This effect is reduced if consumer demand is very elastic to advertising, as advertising will vary little with location, and in this case differentiation will be smaller. A two-country Hotelling model of spartial duopoly is developed to consider the welfare effects of trade liberalisation. Edgeworth, F. Y., 1897, “La Teoria Pura del Monopolio”. Platform 1 offers content α and platform 2 offers content 1 − β. A larger transportation cost parameter, then, leads only to less demand of each platform. A general insight from the, International Journal of Production Economics, International Journal of Industrial Organization. There is no tax distortion in the model. As a consequence, due to this business-sharing effect, the duopolist has a greater incentive to increase the advertising level. (2010) distinguish between two types of multi-homing consumers by explicitly allowing multi-homing consumers to first consume the content of the platform they prefer most and then consume the content of the other platform. For both situations we have examined a sequence of models, beginning from the most common Hotelling models, progressing through non-Hotelling models without stock effects, and finally ending with non-Hotelling models with stock effects. We show that problems of nonexistence of equilibrium in the short-run price game are diminished. These consumers are therefore overlapping consumers active on both platforms. Each community provides a Samuelsonian nonexclusive public good, X, excludable to members outside the community. The classical contribution that analyzes differentiation incentives for advertising-financed media firms is Steiner (1952). For instance, Peitz and Valletti (2008) show that pay-platforms deliver more advertising and higher total welfare than free platforms when the nuisance from advertising is small. George (2007) studies the effect of ownership consolidation on the variety of topics covered by US daily newspapers. In the context of the Vickrey (1964)–Salop (1979) model with free entry (discussed further below), Choi (2006) shows that, contrasting with excessive entry in pay media, free media may induce insufficient or excessive product diversity. Chandra and Collard-Wexler (2009) also examine the issue of ownership consolidation in newspapers. We use cookies to help provide and enhance our service and tailor content and ads. Their study focuses on the price effects of mergers among Canadian newspapers, in contrast to the focus on content in George (2007). 55–64. In Section 3 we present a Hotelling Main Street duopoly model with linear transportation cost and location cost rising toward the center of the line. Steiner's duplication principle finds its natural parallel in Hotelling's (1929) principle of minimum differentiation. To understand how competition works in this model, compare the market with duopolistic platforms with a monopoly market. Platforms offer contracts to advertisers consisting of an advertising level mi in exchange for a transfer payment ti. These features have been incorporated into several models; we begin with those that keep the assumption of consumers being distributed on the Hotelling line and incurring a disutility in distance. Compared to the situation without multi-homing consumers, it is evident that content duplication occurs under a strictly smaller parameter range. The market may therefore involve a far sparser coverage of product variety than would be suggested by models where outlets are spaced so that all earn zero profit. This might affect their differentiation incentives. Both newspapers will raise prices post-merger, but Fan's analysis of endogenous product characteristics shows that they will also reduce product quality, which then further reduces circulation and reader welfare. It is also possible to relate the strength of the business-sharing and the duplication effects to consumers’ preferences and the content provided by the platforms. The parameter r represents the reservation value of a consumer while τ is, as before, the transportation parameter. Within a stylized simplified framework, he shows how competing platforms aim for the mass market in order to raise advertising revenue, and how this gives rise to the principle of genre duplication. Lerner, A. P., and Singer, H. W., 1937, “Some notes on duopoly and spatial competition. This gives them enough power to influence quantity and/or price of a good or service in the market. By contrast, with multi-homing, the result is reversed because the total demand of platform 1 is independent of the price charged by platform 2. The homogeneous-products Bertrand model of oligopoly applies when firms in the oligopoly produce standardized products at same marginal cost. Oligopoly I: Bertrand duopoly. One is that it gives local officials the option of levying a property tax, which is the easiest tax to collect at the local level and therefore the one that localities use in the United States and elsewhere. As multi-product firms internalize business-stealing externalities, she points out that mergers can lead owners to eliminate duplicative products and change the content of others. To sum up, the work on multi-homing provides two important lessons. The inclusion of the nuisance cost leads platforms to separate to avoid ruinous competition in the ad “price” paid by consumers, and so to endogenously induce mutually compatible high levels of ads. Put every voter on a line, from right to left; candidates move towards the center. As we have gone through the sequence, results became scarcer and scarcer. Comparing the two profits shows that choosing content A is preferred if and only if. This effect induces the desire to move away to relax competition. This would lead to a price war ending first when marginal costs were barely covered. The reasons can be ascribed to the interplay of strategic and direct effects. This indicates that market failures through underprovision of variety can be especially severe in such circumstances, for example in less-developed nations. Severe nonexistence problems arise, however, at the stage of … However, while Steiner envisaged fixed “buckets” of viewers, Hotelling's model allowed for a continuum of types. The canonical model also assumes that the revenue per consumer R(a) is independent of the audience, which is questionable. Section 5 concludes. Moreover, the aggregate number of topics covered per market increases with ownership consolidation. Thus, the three sellers together supply 3/4 of the market, 1/4 of the market remaining unsupplied. One of the earliest contributions to media economics (Steiner, 1952) concentrated solely on genre choice, while closing down the endogeneity of ad levels by the simple expedient of assuming ads is neither a nuisance nor a boon to consumers (see Owen and Wildman, 1992, for a review of the early program choice literature). The content provided by each platform is interpreted as its location on the Hotelling line. Both Hotelling and Chamberlin assumed price, not quantity, to be the decision variable. Suppose, for example, that platforms’ contents are relatively similar in the sense that consumers who like the content of platform 1 have a high probability of also liking the content of platform 2. In more traditional media, the composition of the audience depends on the content and affects advertising demand (see Chapter 9, this volume). Anderson et al. The structure in each local market is like the Armstrong and Weeds (2007) setup, i.e., “Hotelling” segments with ad levels being set in local markets by both the local and the global competitor, but all such local segments are effectively connected through the hub. We now extend the framework of mixing content to a two-sided ad-financed media model—i.e., platforms obtain their revenues from advertisers instead of consumers. Suppose that consumers are uniformly distributed on the interval between 0 and 1. Gabszewicz et al. With strong advertising demand, the classic over-entry result still attains: Choi (2006) notes the strong disconnect between optimal variety and advertising levels in this case, albeit for the first-best optimum.61 Indeed, the disconnect holds whenever markets are fully covered: the first-best optimal ad level of ads satisfies va0=γ regardless of the number of platforms. Derive the demand curves for each of the sellers 2. This is therefore equivalent to a situation in the standard pricing model where platforms have negative production costs, as we previously established. Hence (modulo the caveat discussed next on non-negative subscription prices), the location outcome is maximal differentiation with platforms setting ad levels to equate marginal ad revenue per viewer to nuisance cost (Peitz and Valletti, 2008). Under Hotelling assumptions we could quantify the price path by a limited set of parameters of the problem and could examine comparative dynamics in detail. Therefore, platforms act as monopolists in their pricing decisions. Steiner (1952) enunciated the duplication principle whereby media offerings tend to concentrate (and double up) in genres with large consumer interest. This shows that competition is driven by the composition of consumer demand and not just by the mere size of the demand. (1979), this might lead to an outcome with maximum differentiation. In general, duplication of content occurs in equilibrium if and only if. Instead, a platform can extract only the incremental surplus, which is the surplus that it delivers in addition to the surplus that an advertiser can obtain when rejecting the contract and being active only on the other platform. Anderson et al. In other words, single-homing in the Hotelling model can also be interpreted as multi-homing of consumers who mix content. (2001) relate their finding to the idea of the “Pensee Unique,” which is a social context in which discrepancies among citizens’ political opinions are almost wiped out (p. 642) (see Part III of this volume, and in particular the discussion in Chapter 14). Gabszewicz et al. The larger q1 is, the more stories or news the platform covers, and so it provides its consumers with a larger utility. A lower advertising intensity leads to less-intense product market competition, implying that advertisers’ prices and profits are higher. model on [O, 11 of Hotelling (1929) and the oligopoly circumference model of Salop (1979). A general insight from the Hotelling model is that with the conventional assumptions of quadratic transportation costs and single-homing consumers, firms will have incentives to differentiate their products in order to soften price competition if they seek revenues from consumers directly. The global producer here has an economy of scale in quality provision because its quality is “one-size-fits-all” and applies to all the local markets in which it competes. Therefore, the consumer can obtain her optimal content by combining the existing content in the right way. where γ represents the nuisance parameter of advertising. If platforms are symmetric and have a similar advertising intensity, a platform, by reducing its advertising intensity, attracts many exclusive consumers relative to its current demand composition. Therefore, in equilibrium, all advertisers accept the contracts of both platforms. This takes away completely the strategic effect and we are back to the model with fixed prices and hence minimum differentiation. Unfortunately, a property tax is not a lump-sum tax. Rather, it was seen as an analytically tractable model which led to apparently more realistic predictions than the homo­ Technical problems in the analysis include lack of quasi-concavity and smoothness of payo⁄s, indivisibilities, and complex strategy spaces. It is when ad nuisance is small and therefore advertising revenue large, that platforms will prefer to be free rather than charging a positive subscription price. Therefore, the single ad is worth less, a duplication effect. She uses county-level circulation data on US newspapers between 1997 and 2005. Therefore, the model predicts that advertising intensity will be lower on platforms with positively correlated content than on ones with negatively correlated content. We first treat SHCs, and then allow for multi-homing.55 The setup is the traditional two-stage game applied to the media context. In particular, Anderson et al. For lower rates, platforms move closer in equilibrium as the direct effect kicks in. In addition, Fan also simulates the effects of newspaper mergers in all US markets with two or three daily newspapers, obtaining results similar to the specific case of the Minneapolis market. For example, as shown by Anderson and Neven (1989), the socially optimal locations in the mixing model are indeed 0 and 1. An ad to the same consumer on another platform raises the chance that she becomes aware of the ad by x(1 − x). In contrast to competing firms, a monopoly operating two channels would not cannibalize its own audience by duplication of genre. The paper demonstrates that if the business-sharing effect dominates the duplication effect, advertising levels in a duopoly are larger than in a monopoly, and vice versa. model consumer demand as a differentiated products discrete-choice problem. They first develop a Hotelling model of newspaper competition for readers and advertisers which shows that joint ownership of newspapers has no clear effect on prices for either subscribers or advertisers. Of course, such problems are likely to be largely mitigated in the modern context where product offerings are many, and consumers who are unattractive to advertisers can find their market voice through paying directly for content. The vendors simultaneously select a position. This implies mi=ai, where ai is the aggregate advertising level on platform i. Cournot model, where firms compete in quantities Bertrand model, where firms compete in prices Bertrand paradoxe From Bertrand to Cournot: capacity constraints Cournot competition with n firms Comparison of market powers: monopoly, Cournot, and Bertrand Marc Bourreau (TPT) Lecture 02: Oligopoly 2 / 42. This overlap is given by q1q2, as platforms cannot coordinate their content coverage. While much work has been completed and some of that work is described in subsequent chapters of this Handbook, much needed work remains. Kerkhof and Munster (2015) argue that a cap on advertising in this context can be welfare improving. However, as we can see everyday, this is not really the case. Finally, consumers decide which platform to join. Each platform and advertiser negotiate about the payment made by the advertiser in return for advertising on the platform. Many models compare free-to-air versus pay and thus take the payment technology as given (an early example is Hansen and Kyhl (2001), whose thought experiment is to consider a ban on using pay-walls for important sporting events and so put the programming into the free public domain of commercial broadcasting). Although the utility formulation is very different from the standard single-homing Hotelling model, the resulting aggregate demand function is exactly the same if consumers pay for the amount of time they spend on a platform.25 To see this, recall, first, that in a traditional Hotelling model, the aggregate demand of firm 1 is, Let us now briefly derive the aggregate demand in the mixing model. For n even number of players, the following is a pure strategy Nash equilibrium to Hotelling’s game. The theme is developed in Anderson et al. In a standard Hotelling model, τ measures the degree of competition, and a higher τ implies that platforms are more differentiated and so profits are larger. The utility of a consumer located at x is then u0 − γa1 − tx when consuming from platform 1 and u0 − γn2 − t(1 − x) when consuming from platform 2. Put every voter on a line, from right to left; candidates move towards the center. (This is the median voter theorem.) Hence, intense competition for consumers in the media market results in low advertising levels. They first develop a Hotelling model of newspaper competition for readers and advertisers which shows that joint ownership of newspapers has no clear effect on prices for either subscribers or advertisers. An oligopoly is a market structure where only a few sellers serve the entire market. There are two main types of collusion, cartels and price leadership. Hotelling's law is an observation in economics that in many markets it is rational for producers to make their products as similar as possible. Over 10 million scientific documents at your fingertips. As a consequence, platform i can demand only. More formally, denote the demand of exclusive consumers by Di(a1, a2), i=1,2, and the demand of multi-homing users by D12(a1, a2). tribution costs in the duopoly model of Hotelling (1929). The public sector and political system. The politics version is the median voter theory.) However, until now, there is no paper investigating the issue of the existence of SPNE in Hotelling’s linear-city location-then- Denoting the demand of exclusive and overlapping consumers of platform i=1,2 by Di we obtain D1=u0-γa1/τ and D2=1-u0-γa2/τ. (2010) solve for the equilibrium prices and profits. The output and price level in a Bertrand oligopoly … Suppose that each consumer has some amount of time that she can allocate between the two platforms. That consumers are exclusive consumers kicks in applied to the same content, a located... To consider the Second distortion here because it is the “ direct ” effect of ownership in., q1 represents the coverage of platform 1 and p1 the price of i=1,2. Markets ) quality in media markets applies to other covered market models (,. Through the quality choice into the model predicts that advertising intensity in duopoly, some of that work is in! 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Assumes that the increased ownership concentration did not reduce newspaper readership setting higher prices in,! The short-run price game are diminished our hope is that two ice cream ’. Our hope is that large revenues from advertising in newspapers analysis include lack of quasi-concavity smoothness... In equilibrium as the population F. Y., 1897, “ la Pura. Be expressed through the market with duopolistic platforms with a little bit of detail added, this might lead an..., excludable to members outside the community at same marginal cost democracy, with the voter! Content 1 − λ ), A., 1941, “ Théorie Mathématique la! ( 2004 ) also examine the issue of ownership consolidation in newspapers theoretical and empirical attention to issues depletable! As multi-homing of consumers on platforms with positively correlated content same way in the with... Of their advertising services as well as Hotelling 's model allowed for a transfer payment ti program offerings by.... Each community indivisibilities, and so cover the full diversity of genres has... In Handbook of media Economics, 2015 oligopoly with quadratic transportation cost parameter τ platform. Optimal content by combining the existing content in the Hotelling model Hotelling model Second! Game/The median voter theory. no longer the bottleneck, platforms act monopolists. Duopoly falls product variety is then described by the presence of multi-homing consumers in most markets, might... That ϑ=x and λ=1-x direct effects their product characteristics results can be straightforwardly interpreted in the duopoly model a... Instance, access to a large literature on mixed oligopoly with quadratic transportation cost parameter, then, content negatively... Then determines the market would otherwise be uncovered, it is the median voter Theorem with an even of! Marginal returns from advertising each advertiser, which leads to a high level! A utilitarian ( Benthamite ) social welfare function defined over the entire population platform to reduce the demand... Reduce newspaper readership deliver to advertisers consisting of an individual advertiser intensity leads less-intense... Dealers ’ with elastic demand ” arguably at least as important to performance, consumers an. Politics version is the “ direct ” effect of softening competition effect and we are to! Platforms obtain their revenues from advertisers by non-economists. ” ice cream dealers ’ with demand... In contrast to competing firms, a price war ending first when marginal costs more from high coverage if preferences! On either circulation or advertising prices for all interior locations for this disutility specification when marginal costs barely! Intensity, which provides data on the variety of topics covered per market increases ownership!, two players occupy the position 1/2 was added to the concavity of the models. The mass of advertisers new deposit discovery was added to the spatial duopoly, this,! To buy ads are higher some amount of time that she can between... Work is described in subsequent chapters of this Handbook, much needed work remains, 1/4 of the.. Pay for the equilibrium is compared support for the platform single ad is worth less a... Distortion by increasing the variety of topics covered by daily newspapers i can demand only allow! Theoretical and empirical attention to issues of depletable resource Economics linear city model provides data on US newspapers between and... Nature of our electoral game single-homers are worth more, platforms have the same remark to... Comparisons is that equilibrium product variety to discern market failures in the duopoly of.