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The Effects of Introducing Advertising in Pay TV: A Model of Asymmetric Competition between Pay TV and Free TVHelmut M. DietlUniversity of Zurich - Department of Business Administration (IBW) Markus LangUniversity of Zurich - Department of Business Administration (IBW) Panlang LinUniversity of Zurich - Department of Business Administration (IBW) January 31, 2012 University of Zurich - Institute for Strategy and Business Economics Working Paper No. 153 Abstract: This paper develops a theoretical model of asymmetric competition between a pay TV and a free TV broadcaster. Our model shows that the pay TV broadcaster has incentives to place advertising on its channel if the marginal return on advertising exceeds the viewers' disutility from advertising. In this case, however, the pay TV advertising level is always below the corresponding level on free TV. The pay TV advertising level can increase with a higher viewer disutility from advertising but the pay TV channel will never attract a larger viewership than the free TV channel. Furthermore, we show that introducing advertising on pay TV induces a decrease of the subscription fees on this channel and a decrease in the advertising level of the free TV channel. Moreover, pay TV viewer demand can increase if the pay TV broadcaster places advertising on its channel. If the viewer disutility of advertising is sufficiently large, aggregate broadcaster profits increase through the introduction of advertising in pay TV, while aggregate consumer surplus always increases.
Number of Pages in PDF File: 25 Keywords: Asymmetric competition, advertising, television broadcasting, media JEL Classification: D40, L10 working papers seriesDate posted: February 1, 2012Suggested CitationContact Information
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