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Strategic Differentiation by Business Models: Free-to-Air and Pay-TV

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Why do `Free' and `Pay' content cohabit in practically all media markets? We develop a model in which two identical broadcasters compete for viewers and advertisers that leads to endogenous differentiation. We show that differentiation does not require heterogeneous agents. Instead, we relate it to the `two-sided' nature of these markets. The asymmetric outcome is driven by the property that business models form strategic substitutes: if one station goes towards the ‘pay’ business model the rival has stronger incentives to choose the ‘free’ business model and viceversa. We propose a simple and natural property of the advertising technology that enhances strategic substitutability guaranteeing differentiation. In regime of competition there is a misallocation of advertising messages and therefore a waste of viewer attention. We show that a multi-station monopolist does not necessarily maintain differentiation and never offers content for free.

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  • Emilio Calvano & Mihele Polo, 2016. "Strategic Differentiation by Business Models: Free-to-Air and Pay-TV," CSEF Working Papers 438, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 07 Nov 2017.
  • Handle: RePEc:sef:csefwp:438
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    1. Attila Ambrus & Rossella Argenziano, 2009. "Asymmetric Networks in Two-Sided Markets," American Economic Journal: Microeconomics, American Economic Association, vol. 1(1), pages 17-52, February.
    2. Attila Ambrus & Emilio Calvano & Markus Reisinger, 2016. "Either or Both Competition: A "Two-Sided" Theory of Advertising with Overlapping Viewerships," American Economic Journal: Microeconomics, American Economic Association, vol. 8(3), pages 189-222, August.
    3. Jean‐Charles Rochet & Jean Tirole, 2006. "Two‐sided markets: a progress report," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 645-667, September.
    4. repec:hrv:faseco:4589709 is not listed on IDEAS
    5. Bolt, Wilko & Tieman, Alexander F., 2008. "Heavily skewed pricing in two-sided markets," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1250-1255, September.
    6. Claude Crampes & Carole Haritchabalet & Bruno Jullien, 2009. "ADVERTISING, COMPETITION AND ENTRY IN MEDIA INDUSTRIES -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 57(1), pages 7-31, March.
    7. Hans Jarle Kind & Tore Nilssen & Lars Sørgard, 2009. "Business Models for Media Firms: Does Competition Matter for How They Raise Revenue?," Marketing Science, INFORMS, vol. 28(6), pages 1112-1128, 11-12.
    8. 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.
    9. Amir, Rabah & Garcia, Filomena & Knauff, Malgorzata, 2010. "Symmetry-breaking in two-player games via strategic substitutes and diagonal nonconcavity: A synthesis," Journal of Economic Theory, Elsevier, vol. 145(5), pages 1968-1986, September.
    10. Susan Athey & Emilio Calvano & Joshua S. Gans, 2014. "The Impact of Consumer Multi-homing on Advertising Markets and Media Competition," CSEF Working Papers 379, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 27 Apr 2016.
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    Cited by:

    1. Anderson, Simon P. & Jullien, Bruno, 2016. "The advertising-financed business model in two-sided media markets," TSE Working Papers 16-632, Toulouse School of Economics (TSE).
    2. Federico Boffa & Lapo Filistrucchi, 2014. "Optimal Cartel Prices in Two-Sided Markets Access," Working Papers 14-19, NET Institute.

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