the market. Other things being equal, this will harm both consumers and advertisers.
However, since the advertising market has now become more lucrative for the newspa-
pers, they will have greater incentives to attract readers and sell the eyeballs to advertisers.
The newspapers will therefore reduce the subscription prices so much that the size of the
readership increases even though the advertising volume has fallen. The consumers thus
gain from the newspapers’ collaboration on the advertising market. This reflects the gen-
eral insight that increased market power on one side of the market tends to reduce prices
on the other side of the market (see, e.g.,
Rochet and Tirole, 2006; Weyl, 2010).
13
Interestingly, and in sharp contrast to what one might expect from the logic in one-
sided markets, also the advertisers might gain. This is so because even though advertising
prices increase, advertisers will now reach a larger number of readers. If the latter effect
dominates, which
Dewenter et al. (2011) show might be the case, all agents benefit. The
fact that many countries allow newspapers to collude on the advertising market might
thus be fully rational even from a total welfare point of view.
Under a merger—the newspapers cooperate on both sides of the market—ad levels
and subscription prices will be chosen so that overall profits for the newspapers are max-
imized. With no other choice variables, the outcome will then be the same as under a full
merger. Whether a merger is welfare improving depends on the benchmarks. Compared
with collusion in the advertising market, a merger will clearly be negative from a social
point of view. The reason is that the subscription prices increase when the newspapers no
longer compete in the reader market. However, if the welfare gains from the collusion in
the advertising market are sufficiently strong, it could nonetheless be the case that merger
is better than unrestricted competition. The likelihood for this to be true is increasing in
the size of the advertising market and decreasing in the newspaper substitutability in the
reader market. The intuition is that a larger advertising market tends to make it more
profitable to reduce subscription prices in order to attract readers, while a high substitut-
ability might mean that the pre-merger subscription prices were so low that it is none-
theless optimal to increase them if the newspapers are no longer competing. This shows
that the possibility that a merger between two media firms might benefit both the audi-
ence and the advertisers cannot be rejected.
6.3. MERGERS AND PLATFORMS’ CHOICE OF GENRES
I bought a bourgeois house in the Hollywood hills
With a truckload of hundred thousand dollar bills
Man came by to hook up my cable TV
We settled in for the night my baby and me
We switched 'round and 'round 'til half-past dawn
There was fifty-seven channels and nothin' on
“57 Channels (And Nothin' On)”
—Bruce Springsteen (1992).
13
Weyl (2010) also provides an informal discussion of the effects of mergers in media markets.
236
Handbook of Media Economics
6.3.1 Maximum Versus Minimum Differentiation
An idiosyncrasy of many media markets is that the firms are partially or completely
ad-financed. This might affect their differentiation incentives. The economic literature
on the interplay between the degree of competition and product variety goes back to
Hotelling (1929)—the workhorse for the majority of recent contributions in media eco-
nomics (the seminal paper by
Anderson and Coate, 2005, among others). A general
insight from the Hotelling model is that with the conventional assumptions of quadratic
transportation costs and single-homing consumers, firms will have incentives to differ-
entiate their products in order to soften price competition if they seek revenues from
consumers directly. As shown by
d’Aspremont et al. (1979), this might lead to an out-
come with maximum differentiation. If, in contrast, the media platforms are purely
ad-financed, and the audience is indifferent to the ad level, the platforms will want to
maximize the number of viewers/readers/listeners (i.e., consumers). This might lead
to co-location in the center of the market, i.e., no differentiation.
The classical contribution that analyzes differentiation incentives for advertising-
financed media firms is
Steiner (1952). Within a stylized simplified framework, he shows
how competing platforms aim for the mass market in order to raise advertising revenue,
and how this gives rise to the principle of genre duplication. In contrast to competing
firms, a monopoly operating two channels would not cannibalize its own audience by
duplication of genre. If the market would otherwise be uncovered, it would therefore
offer diversity of genres in order to increase the total number of consumers. A multi-
channel monopoly platform has no incentives to offer several identical channels. In con-
trast, a single-channel platform may duplicate rivals’ genre if it captures more eyeballs that
way than by providing a different genre than the rivals. A merger where we go from single-
channel duopoly to multi-channel monopoly may thus increase diversity of genres.
Interestingly,
Steiner (1952) does not build on or cite Hotelling (1929). However, it is
straightforward to transfer Steiner’s model into a Hotelling framework (see discussion by
Anderson and Gabszewicz, 2006).
In the next section, we present
Steiner (1952)’s classical duplication result. We then
proceed by altering the explicit and implicit simplifying assumptions in
Steiner (1952),
and in particular introduce the lessons from more recent contributions on two-sided
media markets.
6.3.2 Steiner (1952): Mergers May Reduce Duplication of Genres
In order to analyze how mergers affect media firms’ choice of genre we first go back to the
classical contribution of
Steiner (1952), who developed a framework to investigate what
the consequences would be of exposing the BBC to competition from a new radio station
in the 1950s.
Let us translate Steiner’s illustrative example into ad-financed TV channels and assume
that each channel chooses between two types of genres to broadcast: football (segment F)
237Merger Policy and Regulation in Media Industries
and ballet (segment B). A critical assumption, which will be relaxed in Section 6.3.4, is that
viewers are single-homing. Now, suppose that 90% of viewers want to watch football pro-
grams and 10% want to watch ballet. If their favorite genre is not aired, then they do not
watch any TV at all. It is then clear that with only two channels, both will offer segment
F (football) and get 45% of the viewers each (assuming equal split between identical chan-
nels). The ballet lovers will be left unserved. If the number of channels increases from two
to three, we still have duplication of genres. All deliver football, now to 30% of the viewers
each. If we continue this line of reasoning, we find that we need nine independent single-
channel platforms before one of them will deliver ballet. Then, they will be indifferent
between football and ballet since both choices provide them with 10% of the viewers.
Steiner argues that a change from two competing single-channel providers to one
multiple-channel provider increases product variety. The story is simply that a multi-
channel platform is concerned about the total number of viewers, and so has no incen-
tives to air two identical channels.
14
Accordingly, when considering consequences of
mergers (or entries), we need to make a distinction between the number of channels
and the number of competing firms.
If we return to the case with two single-channel platforms, the lesson from
Steiner
(1952)
is that duplication prevails as long as
v
A
2
> v
B
,
where v
i
, i¼A,B, is the fraction of consumers in segment i. Waldfogel (2009) terms this
concept “preferences externalities” which refer to the fact that the majority overrides the
minority when there are few alternatives (see
Anderson and Waldfogel, 2015, this volume).
To compare with more recent contributions, it is straightforward to reformulate
Steiner’s model into a standard Hotelling framework with uniform consumer distribu-
tion. If consumers single-home, two ad-financed rivals will locate in the middle of
the line (genre duplication) when consumers are ad-neutral. This was labeled the prin-
ciple of minimum differentiation by
Boulding (1955).
In an extension to more than two firms,
Eaton and Lipsey (1975) find that the results
of
Boulding (1955), and other extensions of Hotelling (1929), might be sensitive to the
number of firms, distribution of consumers, and changes in conjectural variations. Eaton
and Lipsey show that in a one-dimensional model, the principle of minimum differen-
tiation does not survive if we have more than two firms. However, when they extend
their model to a two-dimensional space they arrive at the principle of local clustering;
an entrant locates as close as possible to another firm. Thus, the principle of minimum
differentiation in the two-firm case is considered by Eaton and Lipsey as a special case
of the principle of clustering (or principle of pairs as they also label it).
15
14
Other early contributions that indicate such a duplication result are Rothenberg (1962) and Wiles (1963) .
15
See Hannesson (1982) for a critical assessment of the assumption made in Eaton and Lipsey (1975) on
conjectural variations.
238
Handbook of Media Economics
We now discuss how altering some of the (simplifying) assumptions in Steiner (1952)
may alter the duplication result. For more on Steiner, see Anderson and Waldfogel (2015,
this volume).
6.3.3 Consumers Have Second Preferences
In an extension of Steiner’s model, Beebe (1977) allows consumers to have second pref-
erences; i.e., if their favorite genre is not available, they still attend and watch some other
genre. The message from Beebe’s seminal paper is that a monopoly channel might pro-
vide content that may not be anyone’s favorite, but that will be watched if nothing else is
available. This is referred to as Lowest Common Denominator (LCD) programming.
Take the example from above and now assume that 90% of viewers have football
(F) as their first choice, while 10% have ballet (B) as their first choice. A third genre, reality
(R), is now an option for the channels. No one has R as their favorite, but the football
lovers prefer reality (R) to ballet (B) if football (F) is not available. Similarly, ballet lovers
prefer reality (R) to football (F) if ballet is not available. In this setting, a monopoly pro-
vider chooses reality (LCD programming), and will run only one channel. In this sense,
Beebe’s extension may be considered as a caveat to Steiner’s prediction that mergers
reduce duplication. However, media diversity will be weakly lower. For more details
on
Beebe (1977) and LCD programming, see Anderson and Waldfogel (2015, this
volume).
6.3.4 Advertising Effect Differs Between Genres
Empirical analyses of the television market in the United States show that advertisers’
favorite genres are reality and comedy, since their experience suggests that the advertising
effect is greatest when such programs are aired (
Wilbur, 2008). Viewers, however, prefer
action and news. Wilbur finds that the types of programs viewers would primarily watch
account for only 16% of the transmission surface, while the advertisers’ favorites—reality
and comedy—account for 47%. This illustrates that in a two-sided market consumers are
offered genres that to a greater or lesser degree are twisted in the direction of advertisers’
preferences.
Foros et al. (2012) show that less competition between different media—for
example, through a merger—will increase this problem.
6.3.5 Dual Source of Financing: Charging Both Users and Advertisers
For media products that are financed by a combination of user payments and advertising
revenue a tradeoff with respect to location incentives arises. On the one hand, in order to
maximize the revenue from advertising, the platform wants to deliver a large number of
eyeballs to advertisers. Under the assumption of single-homing consumers, this drives
platforms to move closer to the middle of the Hotelling line. The second source of
239Merger Policy and Regulation in Media Industries
financing, payment from users, drives platforms in the opposite direction; moving apart
from the rival softens price competition.
Anderson and Gabszewicz (2006) present a simple model to illustrate how introduc-
ing revenue from ads as a second source of revenue would alter the maximum
differentiation principle from
d’Aspremont et al. (1979). In the standard model (pure
user-financed), firms’ profits are given by:
π
i
¼ p
i
cðÞx
i
, where i ¼1, 2,
where p
i
is the user price, c is the marginal cost of serving one user, and x
i
is the demand. If
revenue from ads is introduced in addition, and the price per advertiser per viewer is given
by β, the firms’ profits equal:
π
i
¼ p
i
c + βðÞx
i
, where i ¼1, 2:
The revenue from ads then acts as a unit subsidy, and
Anderson and Gabszewicz (2006)
show that the outcome depends on β and the transportation costs (t). If t is low and β is
high, the outcome resembles Steiner’s duplication result (a crucial assumption is that the
user prices have to be non-negative).
Gabszewicz et al. (2001) analyze this tradeoff by modifying the game used by
d’Aspremont et al. (1979). In the latter, firms choose location at stage one and user prices
at stage two.
Gabszewicz et al. (2001) add a third stage where firms choose advertising
charges (see also
Gabszewicz et al., 2002). This could change the outcome of the first
stage (where firms choose location/genre) such that firms may want to locate in the mid-
dle of the Hotelling line if transportation costs (political preferences in their framework)
are low or unit advertising revenues are high.
The opposing location incentives under user payments and ad financing have impact
on the effects of a merger. Since purely ad-financed platforms tend to differentiate too
little, while platforms with payments only from users differentiate too much, the total
effects are ambiguous both under competition and under a merged multi-channel
monopolist.
6.3.6 Imperfect Competition in the Product Market
The conventional way to break Steiner’s duplication result is to introduce disutility of
ads. If consumers dislike ads, they face an indirect price of watching TV, which is increas-
ing in the ad volume. Under certain assumptions, this brings us back to the principle of
maximum differentiation from
d’Aspremont et al. (1979). However, Gal-Or and Dukes
(2003)
show that this may change if strategic interaction with the product market is taken
into account.
Gal-Or and Dukes incorporate imperfect competition in the product market and find
that the interplay between this competition and the competition between ad-financed
media provides an additional explanation of the duplication of genre outcome. Both
240 Handbook of Media Economics
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