The Media and Advertising: A Tale of Two-Sided Markets

66 Pages Posted: 24 Oct 2005

See all articles by Simon P. Anderson

Simon P. Anderson

University of Virginia - Department of Economics

Jean J. Gabszewicz

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)

Date Written: September 2005

Abstract

Media industries are important drivers of popular culture. A large fraction of leisure time is devoted to radio, magazines, newspapers, the Internet, and television (the illustrative example henceforth). Most advertising expenditures are incurred for these media. They are also mainly supported by advertising revenue. Early work stressed possible market failures in program duplication and catering to the Lowest Common Denominator, indicating lack of cultural diversity and quality. The business model for most media industries is underscored by advertisers' demand to reach prospective customers. This business model has important implications for performance in the market since viewer sovereignty is indirect. Viewers are attracted by programming, though they dislike the ads it carries, and advertisers want viewers as potential consumers. The two sides are coordinated by broadcasters (or 'platforms') that choose ad levels and program types, and advertising finances the programming. Competition for viewers of the demographics most desired by advertisers implies that programming choices will be biased towards the tastes of those with such demographics. The ability to use subscription pricing may help improve performance by catering to the tastes of those otherwise under-represented, though higher full prices tend to favour broadcasters at the expense of viewers and advertisers. If advertising demand is weak, program equilibrium program selection may be too extreme as broadcasters strive to avoid ruinous subscription price competition, but strong advertising demand may lead to strong competition for viewers and hence minimum differentiation (la pensee unique). Markets (such as newspapers) with a high proportion of ad-lovers may be served only by monopoly due to a circulation spiral: advertisers want to place ads in the paper with most readers, but readers want to buy the paper with more ads.

Keywords: Advertising finance, two-sided markets, platform competition, pensee unique, circulation spiral

JEL Classification: D43, L13, L82, M37, Z11

Suggested Citation

Anderson, Simon P. and Gabszewicz, Jean J., The Media and Advertising: A Tale of Two-Sided Markets (September 2005). CEPR Discussion Paper No. 5223. Available at SSRN: https://ssrn.com/abstract=831807

Simon P. Anderson (Contact Author)

University of Virginia - Department of Economics ( email )

P.O. Box 400182
Charlottesville, VA 22904-4182
United States
804-924-3861 (Phone)
804-982-2904 (Fax)

Jean J. Gabszewicz

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

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