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

36 Pages Posted: 1 Feb 2012 Last revised: 18 Feb 2022

See all articles by Helmut M. Dietl

Helmut M. Dietl

University of Zurich - Department of Business Administration (IBW)

Markus Lang

University of Lausanne

Panlang Lin

University of Zurich - Department of Business Administration (IBW)

Date Written: February 15, 2022

Abstract

The television broadcasting industry is of crucial economic and social importance. Traditionally, this industry has been dominated by free-to-air TV (FTV) but due to technological progress, subscription-based pay TV (PTV) has emerged as a competing business model. A key question for the PTV broadcasters is whether to air commercials in addition to charging subscription fees. Based on a theoretical model of asymmetric competition between a PTV and an FTV broadcaster, we examine the effects of placing PTV advertising on broadcaster market strategies, viewer demands, broadcaster profits and consumer surplus. We find that introducing advertising on PTV can induce a higher viewer demand on this channel but a lower viewer demand on the FTV channel. Surprisingly, consumers can benefit through the introduction of advertising in PTV and broadcaster profits can increase if the viewer disutility of advertising is sufficiently large. Our study provides an analytical framework for choosing and implementing an optimal PTV strategy when an FTV competitor preexists in the market. Furthermore, our study derives implications for policymakers and regulatory authorities by showing that additional PTV advertising is not necessarily socially undesirable due to the strategic market reactions.

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 (February 15, 2022). 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 Lausanne ( email )

Quartier UNIL-Centre
Synathlon
Lausanne, 1015
Switzerland

Panlang Lin

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

Hottingerstrasse 10
Plattenstrasse 14
Zurich, 8032
Switzerland