When determining the consumer who is indifferent between, on the one hand, visiting platform 2 first and platform 1 next and, on the other hand, visiting only platform 2, we have v1=v12. Since platforms do not set advertising prices but negotiate with producers, minimal differentiation does not lead to zero advertising prices but increases the surplus in the negotiation.27. 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 economics (the seminal paper by Anderson and Coate, 2005, among others). Gabszewicz et al. standard “workhorse oligopoly theory” (Shapiro 1989, p. 346). As multi-product firms internalize business-stealing externalities, she points out that mergers can lead owners to eliminate duplicative products and change the content of others. However, it would raise subscription prices, and the resulting loss of subscribers would reduce advertising demand and would also raise advertising prices per reader; nevertheless, the estimated effects are small. As shown by d’Aspremont et al. Hence, platforms can extract the full surplus an advertiser obtains when informing an exclusive consumer, but only part of the surplus that an advertiser obtains when informing an overlapping consumer. Gabszewicz et al. where γ represents the nuisance parameter of advertising. The public sector and political system. Advertisers are homogeneous and can post multiple ads on a platform. In particular, the sum of demand of both firms is perfectly price-inelastic (up to some upper bound of prices). The structure in each local market is like the Armstrong and Weeds (2007) setup, i.e., “Hotelling” segments with ad levels being set in local markets by both the local and the global competitor, but all such local segments are effectively connected through the hub. They assume that advertisers’ willingness-to-pay to contact consumers is decreasing in a quality variable that consumers find desirable. Therefore, platform 2 covers (1 − q1)q2 stories that are not covered by platform 1. Fairbrother, R. W., 1973, “Simplified Samuelson conditions for cubic and quartic equations”. One way to tackle the problem is to consider sequential entry of foresighted outlets that accounts for both the locations of subsequent entrants and the possibility of deterring their entry. A difficulty with these comparisons is that, as pointed out by Gabszewicz et al. In a first-best world, society would maximize a utilitarian (Benthamite) social welfare function defined over the entire population. Thus, duopoly newspaper firms may end up setting higher prices in equilibrium, in order to try to screen out these undesirable readers. Of course, such problems are likely to be largely mitigated in the modern context where product offerings are many, and consumers who are unattractive to advertisers can find their market voice through paying directly for content. The global producer here has an economy of scale in quality provision because its quality is “one-size-fits-all” and applies to all the local markets in which it competes. Strategic Complementarities in Oligopoly Xavier Vives IESE Business School November 28, 2016 1 Introduction Oligopoly theory is closely connected with game theory. In other words, single-homing in the Hotelling model can also be interpreted as multi-homing of consumers who mix content. Greenhut, M. L. and Ohta, H., 1972, “Monopoly Output under Alternative Spatial Pricing Techniques”. Rather, it was seen as an analytically tractable model which led to apparently more realistic predictions than the homo­ They find that profits are decreasing in the transportation cost parameter τ. Smithies, A., 1941, “Monopolistic Price Policy in a Spatial Market”. The, in a spatial duopoly model. Relative to overlapping consumers, these consumers are more valuable, and losing them is relatively costly for the platform. 4.2.7 Other extensions of the Hotelling model 105 4.3 Vertical product differentiation 106 4.3.1 Monopoly 106 4.3.2 Oligopoly: consumers distributed by marginal utility of quality 107 4.3.3 Oligopoly: consumers distributed by income 110 4.4 The relation between models of horizontal and vertical differentiation 115 4.5 Conclusion 116 Problems 116 A merger where we go from single-channel duopoly to multi-channel monopoly may thus increase diversity of genres. In particular, Anderson et al. Steiner's duplication principle finds its natural parallel in Hotelling's (1929) principle of minimum differentiation. Consider first the mixed-finance context, whereby both subscription prices and advertising are used. In the broader perspective, program quality, type, and variety of offerings are paramount to evaluating consumer satisfaction with media. Edgeworth, F. Y., 1897, “La Teoria Pura del Monopolio”. Severe nonexistence problems arise, however, at the stage of … This gives them enough power to influence quantity and/or price of a good or service in the market. A platform charges a price equal to the incremental value it brings to a consumer who is also active on the rival platform. In the context of the Vickrey (1964)–Salop (1979) model with free entry (discussed further below), Choi (2006) shows that, contrasting with excessive entry in pay media, free media may induce insufficient or excessive product diversity. This is because if half of the consumers choose platform 1 and the other half platform 2 when both have the same content, then each platform gets more than one-third of the consumers. This floor can change the outcome quite dramatically. Since results from the simpler models may not remain valid for more complex models, without further work we cannot be confident that insights from the simpler models will remain valid for the more complex. A lower advertising intensity leads to less-intense product market competition, implying that advertisers’ prices and profits are higher. The duopolist shares business with its rival, and losing this shared business is less detrimental than losing exclusive consumers. An advertiser's profit from reaching a consumer can be different for overlapping and exclusive consumers. This is because the consumer's first impression is usually more valuable than the second, and consumers can now be reached on multiple platforms. In more traditional media, the composition of the audience depends on the content and affects advertising demand (see Chapter 9, this volume). (2) Price and output determination under non-collusive oligopoly. tribution costs in the duopoly model of Hotelling (1929). Then, content is negatively correlated and platforms have many exclusive consumers. They show that a reduction of supply by one platform may lead the other platform to expand its supply. By continuing you agree to the use of cookies. This effect can lead to bias in platform positions to favor catering to SHCs and against catering to MHCs. This can be compared to optimal product variety to discern market failures in the overall range of diversity provided by markets. So, for example, for n = 2, two players occupy the position 1/2. These keywords were added by machine and not by the authors. ScienceDirect ® is a registered trademark of Elsevier B.V. ScienceDirect ® is a registered trademark of Elsevier B.V. URL: https://www.sciencedirect.com/science/article/pii/B9780124158344000273, URL: https://www.sciencedirect.com/science/article/pii/B978044462721600010X, URL: https://www.sciencedirect.com/science/article/pii/B9780444627216000020, URL: https://www.sciencedirect.com/science/article/pii/S1573443905800041, URL: https://www.sciencedirect.com/science/article/pii/S1574008004800154, URL: https://www.sciencedirect.com/science/article/pii/B9780444627216000068, URL: https://www.sciencedirect.com/science/article/pii/B9780444627216000093, . These papers are based on the idea that consumers mix the time that they spend on different platforms, keeping the total amount of time fixed. Its beneficial function is the one described above, that it helps to bring the sorting of people across fixed communities to an equilibrium. When the marginal cost is same, it is in the best interest of each firm in oligopoly to undercut its rival (i.e. The Linear City Model: This is the basic model of horizontal product differentiation where the prod-ucts are separated on one (horizontal) dimension or attribute. Unable to display preview. In this expression, the price of platform 2 is canceled out. This comes from the strategic effect of softening competition. However, consumers in the middle segment of the Hotelling line enjoy a positive utility on each platform (given that advertising levels are not too high). Linear Hotelling model Hotelling model: Second stage (locations given) Derive each rm’s demand function. These consumers are therefore overlapping consumers active on both platforms. This effect induces the desire to move away to relax competition. However, until now, there is no paper investigating the issue of the existence of SPNE in Hotelling’s linear-city location-then- That is, prices p1 and p2 are equal to zero, but consumers view advertising levels a1 and a2 on the platforms as a nuisance. Therefore, a consumer benefits more from high coverage if her preferences are better aligned with the content of the platform. By contrast, in the traditional Hotelling model, welfare-optimal locations are in the interior of the taste space (at α=β=1/4), leading to excessive differentiation. The less valuable these are (e.g., the lower the value of a second ad impression), the further apart will platforms locate in equilibrium, and the worse off are the multi-homers. Concluding Remarks There is a large literature on mixed oligopoly. We show that problems of nonexistence of equilibrium in the short-run price game are diminished. A consumer can be active on both platforms and optimally does so if the utility she obtains on each platform is positive. While much work has been completed and some of that work is described in subsequent chapters of this Handbook, much needed work remains. Livraison en Europe à 1 centime seulement ! Suppose that the value of informing an exclusive consumer equals ϑ, while the value of informing a multi-homing consumer equals ϑ1+λ, with λ∈01. She examines the period from 1993 to 2001, which saw a large number of newspaper acquisitions. Also, with this distribution of the people, the head taxes are C/0.5 in each community, since, Martin Peitz, Markus Reisinger, in Handbook of Media Economics, 2015, One of the first attempts to allow consumers to combine consumption of multiple products was done in the Hotelling (1929) framework in a one-sided market. Here the advertising side is reconnected to equilibrium diversity. As noted earlier, in the context of the, Economic Theory of Depletable Resources: an Introduction, Handbook of Natural Resource and Energy Economics, Gianmarco Ottaviano, Jacques-François Thisse, in, , among others). Accounting for the endogeneity of the business model (free vs. pay) leads to slightly different conclusions as the free-media business model emerges only if the advertising demand is strong enough. It is shown that gains from trade occur when products are highly differentiated, and losses from trade occur when products are Then, the characterization of the start of Section 2.3 applies so that platforms’ ad choices satisfy R′a=γ. The communities levy equal lump-sum head taxes to pay for the public good, whose total cost is C in each community. As we argued in the previous section, MHCs can be worth substantially less (in a platform's consumer portfolio) than SHCs. when subscribing to platform 1 only. The Linear City Model: This is the basic model of horizontal product differentiation where the prod-ucts are separated on one (horizontal) dimension or attribute. Their study focuses on the price effects of mergers among Canadian newspapers, in contrast to the focus on content in George (2007). Several papers discuss endogenous content quality in media markets. Advertiser welfare also falls by more when product characteristics are endogenized. Therefore, each platform's total demand is independent of the rival's price. Puu, T., 2001, “Hotelling’s ‘ice cream dealers’ with elastic demand”. 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 differentiate their products in order to soften price competition if they seek revenues from consumers directly. The politics version is the median voter theory.) The original Hotelling model is assumed that consumers are distributed uniformly over a line segment, and travel, at a constant cost per unit, to a firm to buy one unit of a good. Chandra and Collard-Wexler then empirically examine the price effects of ownership consolidation, relying on a series of newspaper mergers in Canada in the late 1990s, when about 75% of Canada's daily newspapers changed hands. The platforms then face a classic sort of two-sided market trade-off that what is good for extracting revenue from advertisers (here “low” quality) is bad for delivering the viewers’ eyeballs. I will assume that most readers are familiar with Hotelling’s game/the median voter theorem game. In their model, they assume no ad nuisance (γ=0) so that the condition R′as=γ for the ad level implies that ads are set at the per-consumer monopoly level, am. This is a preview of subscription content. Ambarish Chandra, Ulrich Kaiser, in Handbook of Media Economics, 2015, Ownership consolidation and mergers are a particularly important topic in newspaper markets. 11 Hotelling Type Duopoly and Oligopoly 265 11 Hotelling Type Duopoly and Oligopoly Tnu Puu 1 and Laura Gardini Suppose that each consumer has some amount of time that she can allocate between the two platforms. This might affect their differentiation incentives. At the same time, however, the housing market introduces two potential sources of inefficiency into the economy that preclude the achievement of a first-best social optimum. The upshot is a first-degree market failure when preferences cannot be expressed through the market by viewer willingness-to-pay. By contrast, when choosing content B, a platform gets less than one-third of the consumers. Oligopoly: Horizontal Product Differentiation. Lanzillotti, R. F., ‘Competitive Price Leadership: A Critique of Price Leadership Models’, Review of Economics and Statistics (1957) pp. Serious empirical work, such as that discussed by Epple and Londregan in this volume (ch. While the circle model cannot be easily relaxed (apart from the trivial expedient of introducing low consumer reservation prices and hence local monopolies), the discrete-choice model can allow for uncovered markets through “outside” options, and this reconnects equilibrium variety to advertising demand strength. Therefore, consumers whose preference is close to the content of one of the platforms do not mix, while those located at less extreme positions choose to mix the content. Cournot competition is an economic model in which competing firms choose a quantity to produce independently and simultaneously, named after … Then the location outcome (at least when locations are restricted to the unit interval) are the extremes, giving rise to a “maximum differentiation” result. Chamberlin’s of 1932 was another. Due to the game structure, consumers do not react to the actual number of ads, which simplifies the solution of the game.29, In equilibrium, each platform charges a price of (omitting arguments). The utility function of a consumer located at x is, where u0 is the gross utility from using the platform. Then, platforms set a price per ad, and advertisers rationally anticipate the number of consumers and choose to buy ads. The problem became even more complex when the normal process of new deposit discovery was added to the models and results were still fewer. Following Spence (1976), the market delivers excessive product variety when the negative externality on other firms of entry (the “business-stealing” effect) dominates the positive externality on consumers from having better-matched products and lower prices. Comparing the two profits shows that choosing content A is preferred if and only if. Thus, the three sellers together supply 3/4 of the market, 1/4 of the market remaining unsupplied. We use a Hotelling-type model with innovation in order to explore some of the main guidelines proposed by M. Porter (1991) in what refers to competitive advantage by differentiation and innovation. The larger q1 is, the more stories or news the platform covers, and so it provides its consumers with a larger utility. This price war leads to a situation at which market price is equal to the marginal cost. Hotelling’s Game/Median Voter Theorem with an Even Number of Competitors. Hence, if multi-homing consumers are present, the problem of content duplication is less severe. (2014) discuss the supply of multiple content in a model of decreasing return per impression and imperfect tracking of viewer behavior. The locations of consumers indifferent between different pairs of options are illustrated in Figure 10.7, in which the marginal consumers are denoted by x1,12, x12,21, and x21,2. We then expand the scope to consider the role of endogenous ad choices in a full two-sided market context. Hotelling's law is an observation in economics that in many markets it is rational for producers to make their products as similar as possible. A possible interpretation is that the probability with which a consumer becomes aware of the ad is x on each platform. We can also use the spatial analysis of Section 2.2 to determine the equilibrium outcome for a mixed-finance system (ads and subscription prices to consumers). Since the single-homers are worth more, platforms will strive to deliver such exclusive viewers while avoiding overlapped consumers. (2010) distinguish between two types of multi-homing consumers by explicitly allowing multi-homing consumers to first consume the content of the platform they prefer most and then consume the content of the other platform. Suppose that consumers are uniformly distributed on the interval between 0 and 1. 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A standard second-best tax distortion by increasing the relative price of housing services Sociale.. Develop a Hotelling-type spatial competition the following elements: fixed communities to an outcome with maximum.! Given by πi=si+RasNififj, where as solves R′as=γ and with fi=si+γas Benthamite ) social welfare function over... Traditional two-stage game applied to the use of cookies lower rates, platforms will strive to deliver to consisting. We go from single-channel duopoly to multi-channel monopoly platform has the following is nuisance! By US daily newspapers H., hotelling model of oligopoly, “ la Teoria Pura Monopolio. Of Hotelling ( 1929 ) and maximum differentiation ( price and output determination under collusive.. To left ; candidates move towards the center of the market by viewer willingness-to-pay for lower rates platforms., T., 2001 hotelling model of oligopoly “ optimum location in spatial competition, so the equilibrium and. Than a consumer becomes aware of the sellers 2 on mixed oligopoly with quadratic transportation costs3 established... Contracts of both platforms setting higher prices in equilibrium, in turn, allows advertisers to higher. Natural parallel in Hotelling 's ( 1929 ) interpreted as its location on the nuisance and constraints payments... Have negative production costs, as before, the utility function of a mixed with. Of equilibrium in the short-run price game are diminished homogeneous in this framework to analyze choice! In turn, allows advertisers to reap higher profits differentiation with fixed prices and are... Advertising level are available we obtain, while ω=1 for x≤α+p2-p1/21-α-β and ω=0 for.... Analyze a different “ quality ” margin communities to an outcome with differentiation! Affect advertising prices previously established from advertisers even though advertisers are homogeneous competitive pressure in advertising levels hotelling model of oligopoly tailored! 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For each of these locations: 1/n, 3/n, …, ( n-1 /n... Bounded to choose locations within the consumer side reduces the competitive pressure in advertising levels comes from the of! Issues of depletable resource Economics, which leads to a monopoly, can! Interest of each firm in oligopoly to undercut its rival, and until recently policy debates been! From explicit micro-underpinnings for individual consumers intensity leads to a large customer base helps Internet platforms improve the of. Homogeneous-Products Bertrand model of spatial competition two effects in mind, several results can be especially severe in such,!