new and original insights from this approach, and to clarify the conceptual aspects. The chapter first
develops a canonical model of two-sided markets for advertising, where platforms deliver content to con-
sumers and resell their “attention” to advertisers. A key distinction is drawn between free media and pay
media, where the former result from the combination of valuable consumer attention and low
ad-nuisance cost. The first part discusses various conceptual issues such as equilibrium concepts and
the nature of inefficiencies in advertising markets, and concrete issues such as congestion and
second-degree discrimination. The second part is devoted to recent contributions on issues arising when
consumers patronize multiple platforms. In this case, platforms can only charge incremental values to
advertisers, which reduce their market power and affect their price strategies and advertising levels.
The last part discusses the implications of the two-sided nature of the media markets for the choice
of content and diversity.
Keywords
Two-sided markets, Ad-financed business model, Single-homing consumers, Competitive bottlenecks,
Multi-homing consumers, Media see-saws, Advertising congestion, Genre choice, Equilibrium platform
variety
JEL Codes
D43, L11, L13, L82, L86, M37
2.1. INTROD UCTION
Media markets are important for their consumption value to consumers, their conduit of
potential consumers to advertisers in generating product sales, communication of polit-
ical information to voters, and the ongoing transformational impact of the Internet. Most
media markets are financed all or in part by advertising. This aspect renders them sub-
stantially different from standard product markets, requiring a dedicated analysis of their
performance. Such analysis has (surprisingly) only developed in detail over the last decade
or so, with the recognition that they are two-sided markets. A two-sided market is one
where two groups of agents, here media consumers and advertisers, interact through
intermediaries (platforms).
The consequences for market performance are quite profound. Platforms face a two-
sided equilibrium balance calculus to extract revenues from (potentially) both sides inter-
acting on them. In doing so, they must account for the consequences for the participation
on each side from attracting more participants on the other side. In the media context,
this means that the business model is to deliver potential consumers to advertisers while
advertiser’s presence is typically a turn-off for consumers. Surplus and merger analysis
must account for the impacts on three groups of agents. Consumer sovereignty can be
indirect in such markets because consumers are valuable only insofar as they are desired
by advertisers.
In the sequel, we first describe the preferences and objectives of the agents interacting
through the platforms. We then set out (in
Section 2.3) the equilibrium analysis of
42 Handbook of Media Economics
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