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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 M. Dietl

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

  • Markus Lang

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

  • Pannlang Lin

    ()
    (Department of Business Administration (IBW), 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 suffciently large, aggregate broadcaster profits increase through the introduction of advertising in pay TV, while aggregate consumer surplus always increases.

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File URL: http://repec.business.uzh.ch/RePEc/zrh/wpaper/315_IBW_full.pdf
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Bibliographic Info

Paper provided by University of Zurich, Department of Business Administration (IBW) in its series Working Papers with number 315.

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Length: 26 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:zrh:wpaper:315

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Keywords: Manufacturing network; Manufacturing plant; Global operations management; Lead factory; Knowledge transfer;

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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.
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  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.
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  6. Alexander Rasch, 2007. "Platform competition with partial multihoming under differentiation: a note," Economics Bulletin, AccessEcon, vol. 12(7), pages 1-8.
  7. Claude Crampes & Carole Haritchabalet & Bruno Jullien, 2005. "Advertising, Competition and Entry in Media Industries," CESifo Working Paper Series 1591, CESifo Group Munich.
  8. Jean J. Gabszewicz & Didier Laussel & Nathalie Sonnac, 2004. "Programming and Advertising Competition in the Broadcasting Industry," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(4), pages 657-669, December.
  9. Caillaud, Bernard & Jullien, Bruno, 2003. " Chicken & Egg: Competition among Intermediation Service Providers," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 309-28, Summer.
  10. E. Glen Weyl, 2010. "A Price Theory of Multi-sided Platforms," American Economic Review, American Economic Association, vol. 100(4), pages 1642-72, September.
  11. Simon P. Anderson & Oystein Foros & Hans Jarle Kind, 2010. "Hotelling Competition with Multi-Purchasing: Time Magazine, Newsweek, or both?," CESifo Working Paper Series 3096, CESifo Group Munich.
  12. Esther Gal-Or & Anthony Dukes, 2003. "Minimum Differentiation in Commercial Media Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(3), pages 291-325, 09.
  13. repec:ebl:ecbull:v:12:y:2007:i:7:p:1-8 is not listed on IDEAS
  14. Kaiser, Ulrich & Song, Minjae, 2009. "Do media consumers really dislike advertising? An empirical assessment of the role of advertising in print media markets," International Journal of Industrial Organization, Elsevier, vol. 27(2), pages 292-301, March.
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Cited by:
  1. Dietl, Helmut & Lang, Markus & Lin, Panlang, 2013. "Advertising pricing models in media markets: Lump-sum versus per-consumer charges," Information Economics and Policy, Elsevier, vol. 25(4), pages 257-271.

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