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The Effects of Introducing Advertising in Pay TV: A Model of Asymmetric Competition between Pay TV and Free TV

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Author Info

  • Helmut Dietl

    () (Department of Business Administration, University of Zurich)

  • Markus Lang

    () (Department of Business Administration, University of Zurich)

  • Panlang Lin

    () (Department of Business Administration, University of Zurich)

Abstract

This paper develops a theoretical model of asymmetric competition between a pay TV and a free TV broadcaster. Our model shows that the pay TV broadcaster has incentives to place advertising on its channel if the marginal return on advertising exceeds the viewers' disutility from advertising. In this case, however, the pay TV advertising level is always below the corresponding level on free TV. The pay TV advertising level can increase with a higher viewer disutility from advertising but the pay TV channel will never attract a larger viewership than the free TV channel. Furthermore, we show that introducing advertising on pay TV induces a decrease of the subscription fees on this channel and a decrease in the advertising level of the free TV channel. Moreover, pay TV viewer demand can increase if the pay TV broadcaster places advertising on its channel. If the viewer disutility of advertising is sufficiently large, aggregate broadcaster profits increase through the introduction of advertising in pay TV, while aggregate consumer surplus always increases.

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Bibliographic Info

Paper provided by University of Zurich, Institute for Strategy and Business Economics (ISU) in its series Working Papers with number 0153.

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Length: 25 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:iso:wpaper:0153

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Keywords: Asymmetric competition; advertising; television broadcasting; media;

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  1. Hans Jarle Kind & Tore Nilssen & Lars Sørgard, 2009. "Business Models for Media Firms: Does Competition Matter for how they Raise Revenue?," CESifo Working Paper Series 2713, CESifo Group Munich.
  2. Mark Armstrong, 2006. "Competition in two‐sided markets," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 668-691, 09.
  3. Peitz, Martin & Valletti, Tommaso M., 2008. "Content and advertising in the media: Pay-tv versus free-to-air," International Journal of Industrial Organization, Elsevier, vol. 26(4), pages 949-965, July.
  4. Mark Armstrong, 2005. "Public service broadcasting," Fiscal Studies, Institute for Fiscal Studies, vol. 26(3), pages 281-299, September.
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