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Strategies to Fight Ad-sponsored Rivals

We analyze the optimal strategy of a high-quality incumbent that faces a low-quality ad-sponsored competitor. In addition to competing through adjustments of tactical variables such as price or advertising intensity, we allow the incumbent to consider changes in its business model. We consider four alternative business models, two pure models (subscription-based and ad-sponsored) and two mixed models that are hybrids of the two pure models. We show that the optimal response to an ad-sponsored rival often entails business model reconfigurations, a phenomenon that we dub "competing through business models." We also find that when there is an ad-sponsored entrant, the incumbent is more likely to prefer to compete through a pure, rather than a mixed, business model because of cannibalization and endogenous vertical differentiation concerns. We discuss how our study helps improve our understanding of notions of strategy, business model, and tactics in the field of strategy.

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File URL: http://www.netinst.org/Casadesus-Masanell_Zhu_09-09.pdf
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Paper provided by NET Institute in its series Working Papers with number 09-09.

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Length: 57 pages
Date of creation: Sep 2009
Date of revision: Sep 2009
Handle: RePEc:net:wpaper:0909
Contact details of provider: Web page: http://www.NETinst.org/

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  1. Simon P. Anderson & Stephen Coate, 2003. "Market Provision of Broadcasting: A Welfare Analysis," Virginia Economics Online Papers 358, University of Virginia, Department of Economics.
  2. Ramon Casadesus-Masanell & Francisco Ruiz-Aliseda, 2008. "Platform Competition, Compatibility, and Social Efficiency," Working Papers 08-32, NET Institute.
  3. Hansen, Claus Thustrup & Kyhl, Soren, 2001. "Pay-per-view broadcasting of outstanding events: consequences of a ban," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 589-609, March.
  4. 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.
  5. CHAMPSAUR, Paul & ROCHET, Jean-Charles, . "Multiproduct duopolists," CORE Discussion Papers RP -854, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Ramon Casadesus-Masanell & David B. Yoffie, 2007. "Wintel: Cooperation and Conflict," Management Science, INFORMS, vol. 53(4), pages 584-598, April.
  7. GABSZEWICZ, Jean J. & LAUSSEL, Didier & SONNAC, Nathalie, . "Competition in the media and advertising markets," CORE Discussion Papers RP -1872, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. 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.
  9. Jean-Charles Rochet & Jean Triole, 2002. "Platform Competition in Two Sided Markets," FMG Discussion Papers dp409, Financial Markets Group.
  10. Gabszewicz, Jean J. & Laussel, Didier & Sonnac, Nathalie, 2005. "Does advertising lower the price of newspapers to consumers? A theoretical appraisal," Economics Letters, Elsevier, vol. 87(1), pages 127-134, April.
  11. Kenneth C. Wilbur, 2008. "A Two-Sided, Empirical Model of Television Advertising and Viewing Markets," Marketing Science, INFORMS, vol. 27(3), pages 356-378, 05-06.
  12. Beebe, Jack H, 1977. "Institutional Structure and Program Choices in Television Markets," The Quarterly Journal of Economics, MIT Press, vol. 91(1), pages 15-37, February.
  13. 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.
  14. Bourreau, Marc, 2003. "Mimicking vs. counter-programming strategies for television programs," Information Economics and Policy, Elsevier, vol. 15(1), pages 35-54, March.
  15. Esther Gal-Or, 1983. "Quality and Quantity Competition," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 590-600, Autumn.
  16. 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.
  17. Spence, A Michael & Owen, Bruce, 1977. "Television Programming, Monopolistic Competition, and Welfare," The Quarterly Journal of Economics, MIT Press, vol. 91(1), pages 103-26, February.
  18. Crampes, Claude & Haritchabalet, Carole & Jullien, Bruno, 2006. "Advertising, Competition and Entry in Media Industries," IDEI Working Papers 374, Institut d'Économie Industrielle (IDEI), Toulouse.
  19. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  20. Reisinger, Markus, 2004. "Two-Sided Markets with Negative Externalities," Discussion Papers in Economics 478, University of Munich, Department of Economics.
  21. Choi, Jay Pil, 2006. "Broadcast competition and advertising with free entry: Subscription vs. free-to-air," Information Economics and Policy, Elsevier, vol. 18(2), pages 181-196, June.
  22. Doyle, Chris, 1998. "Programming in a competitive broadcasting market: entry, welfare and regulation," Information Economics and Policy, Elsevier, vol. 10(1), pages 23-39, March.
  23. Justin P. Johnson & David P. Myatt, 2003. "Multiproduct Quality Competition: Fighting Brands and Product Line Pruning," American Economic Review, American Economic Association, vol. 93(3), pages 748-774, June.
  24. repec:att:wimass:9508 is not listed on IDEAS
  25. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  26. Raymond J. Deneckere & R. Preston McAfee, 1996. "Damaged Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(2), pages 149-174, 06.
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