The Effects of Introducing Advertising in Pay TV: A Model of Asymmetric Competition between Pay TV and Free TV

University of Zurich - Institute for Strategy and Business Economics Working Paper No. 153

25 Pages Posted: 1 Feb 2012

See all articles by Helmut M. Dietl

Helmut M. Dietl

University of Zurich - Department of Business Administration (IBW)

Markus Lang

University of Zurich - Department of Business Administration (IBW)

Panlang Lin

University of Zurich - Department of Business Administration (IBW)

Date Written: January 31, 2012

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.

Keywords: Asymmetric competition, advertising, television broadcasting, media

JEL Classification: D40, L10

Suggested Citation

Dietl, Helmut M. and Lang, Markus and Lin, Panlang, The Effects of Introducing Advertising in Pay TV: A Model of Asymmetric Competition between Pay TV and Free TV (January 31, 2012). University of Zurich - Institute for Strategy and Business Economics Working Paper No. 153. Available at SSRN: https://ssrn.com/abstract=1996601 or http://dx.doi.org/10.2139/ssrn.1996601

Helmut M. Dietl

University of Zurich - Department of Business Administration (IBW) ( email )

Hottingerstrasse 10
Plattenstrasse 14
Zurich, 8032
Switzerland

Markus Lang (Contact Author)

University of Zurich - Department of Business Administration (IBW) ( email )

Hottingerstrasse 10
Plattenstrasse 14
Zurich, 8032
Switzerland

Panlang Lin

University of Zurich - Department of Business Administration (IBW) ( email )

Hottingerstrasse 10
Plattenstrasse 14
Zurich, 8032
Switzerland

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