because the social benefit exceeds the private benefit. Again, overpricing, this time in the
ad market, is the usual concern with market power.
Lastly, consider pure ad financing where the upshot—too many or too few ads?—is
ambiguous. To see this, first suppose that γ ¼0, so readers are ad-neutral. Then, the opti-
mum allows all ads with a positive benefit to advertisers, so vaðÞ¼0. The market solution
instead delivers a lower ad level, where R
0
aðÞ¼0. At the other extreme, if γ > v 0ðÞ, the
optimum has no ads at all by dint of the nuisance exceeding the maximal ad demand price.
However, under pure ad finance, the market will always deliver some ads because they
are the only source of profit. Between these extremes, there will be too little advertising
for low values of γ, and too much for high enough levels of γ (
Anderson and
Coate, 2005
).
2.3.7 Alternative Equilibrium Concepts: Price Versus Quantity
The model presented so far follows the convention adopted by most articles that the
media platforms choose the amount of advertising (time length for TV, pages for news-
papers, etc.) and that this choice is observed by consumers. As already pointed out, this
assumption implies that we may view the choice of a as similar to choosing a vertical
quality dimension. While the assumption that the media directly choose a might make
sense for traditional media, it may be questionable for modern media. For instance, the
amount of display on a web page may vary with the short-term fluctuations of demand for
advertising slots. Auctions for ad slots often impose a reservation price so that some slots
remain unfilled.
Armstrong (2006) and Crampes et al. (2009) consider an alternative sce-
nario where the platform fixes the price P
i
for ads and lets the quantity a
i
adjust to clear the
advertising market.
If platforms choose their P
i
values, the situation becomes more similar to a standard
two-sided market, where the demand on one side depends on the demand on the other
side. While platform i’s profit is still π
i
¼P
i
a
i
, determining the quantity a
i
requires solving
a complex fixed-point problem to obtain the advertising levels as a function of prices. For
instance, in our base model this requires inverting the system of equations:
P
i
¼va
i
ðÞN
i
γa
i
;γa
i
ðÞ; i ¼1,…,n;
to obtain ads quantities as function of prices a
i
¼A
i
P
i
; P
i
ðÞ. Whether price-setting for
ads results in lower or higher levels of advertising than quantity-setting depends on the
sign of the nuisance term γ. To see this, consider the impact on demand of a marginal
increase in the amount of advertising. In the quantity-setting game, the impact on sub-
scription is just γN
0
i
γa
i
;γa
i
ðÞ, where N
i
0
denotes the derivative with respect to the first
argument. In the price-setting game however, there is a transfer of demand across other
platforms. When the nuisance cost (γ) is positive, this transfer of demand attracts more
advertisers to competing platforms. This effect attenuates the negative impact of platform
i’s advertising on its subscriptions. Thus when consumers dislike advertising, the
61Two-Sided Media Markets