Pricing of Media Platforms with Vertical Differentiation

Quality difference prevails among media firms featuring the two- sided property. This paper builds a two-sided duopoly model with vertical differentiation where consumers are heterogeneous in their preferences to high quality. We find that the media platform with high quality does not necessarily charge a higher subscription fee or advertising fee than the media platform with low quality in the presence of cross externalities between consumers and advertisers. In the consumer market, if the cross externality is sufficiently strong relative to the vertical differentiation in the consumer market and the horizontal differentiation on the advertising market, then the high-quality media firm charges a lower subscription fee than the low-quality media firm. In the advertising market, it is also possible for the high-quality firm to charge a lower subscription fee if the externality of consumers is weaker than the externality of advertisers.