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A Theory of Bundling Advertisements in Media Markets

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  • Kevin M. Murphy
  • Ignacio Palacios-Huerta

Abstract

Watching TV and other forms of media consumption represent, after sleeping and working, the main activity that adults perform in developed countries. We present a dynamic theory of commercial broadcasting where the media trade utility-raising goods (programs, information, and services) with audiences in exchange for their exposure to advertisements (utility-decreasing bads), and where goods are otherwise free to the audience except for their opportunity cost of time. Goods and bads are dynamically arranged, and as such traded in an intertemporal bundle. No monetary transfers take place between media and audiences, and this barter exchange is not contractually sustained. We study this dynamic problem in a model that captures the central characteristics of how commercial media markets operate. The model is rich enough to account for a variety of disparate evidence in television, radio, print media and the web.

Suggested Citation

  • Kevin M. Murphy & Ignacio Palacios-Huerta, 2016. "A Theory of Bundling Advertisements in Media Markets," NBER Working Papers 22994, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:22994
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    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media

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