Quality Choice and Advertising Regulation in Broadcasting Markets

Transcription

1 Qualiy Choice and Adverising Regulaion in Broadcasing arkes iguel González-aesre Universidad de urcia Francisco arínez-sánchez Universidad de urcia February, 01 Absrac We consider he role of he endogenous choice of plaform qualiy in a broadcasing duopoly marke where compeing media plaforms choose also heir level of adverising. We compare he equilibrium levels of qualiy, adverising and welfare under privae and mixed duopoly compeiion. We show ha he welfare comparison beween he privae and mixed duopoly regimes depends, crucially, on he inerplay beween he ne direc effec of adverising on welfare and he degree of subsiuabiliy beween plaforms. We also consider he effecs on qualiy and welfare of recen policies ending o eliminae adverising as a way of financing publicly-owned plaforms. Keywords: endogenous qualiy, wo-sided markes, broadcasing duopoly, publicly-owned plaform, adverising regulaion JEL Classificaion: L11, L33, L8, 37. The firs auhor acknowledges financial suppor from Fundación Séneca, Agency of Science and Technology of he Region of urcia, under projec 11885/PHCS/09 and he Spanish inisry of Science and Innovaion under projec ECO /ECON, and he second acknowledges financial suppor from he Spanish ICINN under Projec ECO Deparameno de Fundamenos del Análisis Económico, Universidad de urcia, urcia, Spain. mmaesre@um.es. Deparameno de éodos Cuaniaivos para la Economía y la Empresa, Universidad de urcia, urcia, Spain, fms@um.es 1

2 1 Inroducion In he conex of a free-o-air broadcasing indusry, he objecive of his paper is o invesigae he role of a publicly-owned plaform and he regulaion of adverising levels, assuming he endogenous choice of plaforms qualiy. As poined ou by Coase (1966), in his indusry, he public policy migh have an imporan role in regulaing he qualiy and diversiy of he available programming, as well as he level of adverising. However, despie of he empirical relevance of he presence of publicly-owned plaforms in he media indusries of many wesern counries, here is a surprising lack of research abou his form of public inervenion in broadcasing markes. Neverheless, here are some recen excepions. On he heoreical side, he work by Kind e al. (007), consider a mixed oligopoly wih horizonal differeniaion, while González-aesre and arínez-sánchez (010) focus on a mixed duopoly wih boh horizonal and verical differeniaion bu wih exogenous qualiies, showing he crucial relevance of he qualiy differenial among plaforms in he welfare resuls. Regarding he empirical conribuions, Alcock and Docwra (005) develop an sochasic oligopoly model for he Ausralian broadcasing marke, and Bel and Domènech (009) analyzes he adverising prices in he Spanish broadcasing indusry. Our conribuion is relaed wih some recen empirical lieraure dealing wih he imporance of plaform s qualiy in elevision markes. In paricular, he work by Beard e al. (001) gauges ha he increase in consumer gains due o a qualiy increase are almos exacly counerbalanced by reducions due o price increases. Chu (010) sudies he cable elevision marke and finds ha saellie enry ypically causes cable plaforms o raise qualiy and lower prices. Finally, Imbs e al. (010) sudy elevision prices across European counries and regions. They show ha a large fracion of inernaional price gaps corresponds o qualiy differences. On he heoreical side, he analysis of adverising in broadcasing media indusries, wih privae plaforms, has been exensively considered in recen lieraure. 1 os of hese previous conribuions focus on he combinaion of adverising and horizonal produc differeniaion among privae plaforms in wo-sided markes. In paricular, Gabszewicz e al. (004) and Anderson and Coae (005) consider he role of plaform subsiuabiliy on he equilibrium and socially opimal 1 See he ineresing surveys abou adverising in he media by Anderson (007) and Anderson and Gabszewicz (006).

3 levels of adverising; Ganman and Shy (007) analyze he profiabiliy of improvemens in adverising qualiy and Peiz and Vallei (008) compares he levels of adverising inensiies and conen differeniaion under wo differen scenarios: pay-v and free-o-air. In he recen work by Lin (011), his auhor considers a privae duopoly wih endogenous choice of qualiy by TV plaforms, analyzing differen oucomes depending on he presence of free-based or pay TV plaforms. The aim of our paper is wofold: Firs, we will analyze he combined role of he endogenous choice of plaform qualiy and he presence of a publicly-owned plaform in he broadcasing indusry. In previous conribuions, Armsrong (005) and more recenly Crampes e al. (009), hose auhors analyze he effecs of endogenous qualiy improvemens in broadcasing indusries. In paricular, Armsrong compares he equilibrium qualiy levels beween he free-o-air duopoly regime and he case of subscripion, while Crampes e al. (009) analyze he effecs of endogenous qualiy improvemens under free enry. However, hese previous conribuions assume compeiion among symmeric privae plaforms while we consider he case of a publicly-owned plaform compeing wih a privae one. We compare he equilibrium levels of plaforms qualiies and adverising under privae and mixed duopoly compeiion, and show ha he resuls are drasically differen beween boh scenarios Second, we also consider he effecs on plaform qualiy and welfare of recen policies ending o eliminae adverising as a way of financing publiclyowned plaforms. This aspec of our analysis is relaed wih some recen conroversial policy decisions wihin he EU. Paricularly remarkable is he decision by he public TV plaform in France (more recenly followed by is counerpar in Spain) of eliminaing adverising as a way of financing. In subsiuion of his source of financing, he French governmen has esablished a ax on he revenues by privae TV and elecom plaforms, a decision which is currenly under invesigaion by he European Commission. The res of he paper is organized as follows: Secion presens a spacial duopoly marke wih privae plaforms and endogenous choice of adverising and qualiy, Secion 3 analyzes a duopoly model where one of he compeiors is a publicly-owned plaform ha maximizes welfare, Secion 4 analyzes he Regarding adverising regulaion, recenly, Sümeier and Wenzel (011) evaluae he effecs of a binding adverising cap on compeiion for viewers and adverisers in a privae duopoly model. They obain ha regulaion of adverising can increase plaforms profis. 3

4 conroversial policy decisions wihin he EU carried ou by France and Spain of eliminaing adverising as a way of financing he public plaform, Secion 5 considers he adverising, plaform qualiy and welfare comparisons among he hree regimes and Secion 6 concludes. The privae duopoly model There are wo privae plaforms, 1 and which are locaed, respecively, a he exreme lef and righ of a linear marke of lengh 1. 3 Thereisamass of consumers of measure 1 indexed by [0 1] and disribued uniformly along his linear marke. Each consumer chooses eiher one uni of good or zero. The uiliy of consumer if she/he waches plaform is given by he funcion ½ ( ) = 1 1 if =1, (1) (1 ) if =, where is he gross uiliy from he chosen plaform, is he parameer represening he disuiliy or nuisance cos per uni of adverising (denoed by ) 4 and is he ranspor cos per uni of he disance of deparing from her/his favorie TV plaform. oreover, can be inerpreed as he degree of horizonal differeniaion, so a higher means ha plaforms are leas subsiuable. Le us define by 1 as he marginal consumer who is indifferen beween waching plaforms 1 and. Similarly, we define =1 1. From he uiliy funcion (1), we obain he audience share for plaform, whichis given by: ( )= + ( ) =1 6= () As in Gabszewicz e al. (004) we consider ha he adverising marke is perfecly compeiive, so adverisers profis are zero. We assume ha he adverising revenues obained by plaform are given by =,where can be inerpreed as he revenue per ad per viewer. On he oher hand, he 3 As i is usual in horizonal differeniaion models, he commodiy space allows a wide range of inerpreaions, including ideological preferences or enerainemen ases. 4 Our assumpion ha 0 is consisen wih he empirical evidence shown by Wilbur (008). This auhor obains ha viewers dislike adverising in he TV indusry. 4

5 cos of achieving a qualiy for plaform is given by he quadraic funcion ( )=.Thus,profis of plaform are given by: = =1 6= (3) By subsiuing he demand funcion () in he profi funcion(3), we can obain: µ 1 ( )= + ( ) =1 6= (4) We assume a wo-sage game where, firs, he plaforms choose, simulaneously, heir levels of qualiy and in he second sage hey choose he adverising levels. Le us obain he Nash equilibrium (NE) in he levels of adverising a he second sage of he game. From he firs order condiions, we can obain he reacion funcion of each plaform: ( )= + + =1 6= (5) Which yields he following NE levels of adverising and marke shares a he second sage of he game: = +3 3 ; = +3 6 ; (6) By subsiuing (6) in (4), we find he following expression for plaform s profi, evaluaed a he firs sage of he game: ( )= ( +3 ) =1 6= (7) 18 where is he raio of he revenue per ad per viewer and he nuisance cos. If 1 (respecively 1), he negaive impac of adverising on consumers uiliy is greaer (lower) han he posiive impac of adverising on he plaform s revenue. Therefore, he direc ne effec of adverising on welfare is negaive (respecively posiive) if 1 ( 1), while =1is he case where adverising is neural from he welfare poin of view. The firs order condiions of profi maximizaion yield he following reacion funcions of plaforms, in erms of qualiy choices: 5

6 ( )= (3 ) ; =1 6= (8) 9 Solving he above equaions gives he subgame perfec equilibrium (SPE) levels of qualiies, adverising, marke shares and profis: = 3 ; = ; = 1 ; (9 ) =, =1 (9) 18 As can be seen from (9), in equilibrium boh plaforms choose he same qualiy and ads, so ha hey obain he same demand and profi. We also find ha profis are increasing in. This is because plaforms profiabiliy of qualiy improvemen posiively depends on, whichisreflecedinhefac ha equilibrium qualiies are increasing in. Finally,wefind ha he level of qualiy does no depend on he degree of subsiuabiliy. Consumer surplus ( ) is calculaed as: 5 Z 1 Z 1 = (1 1 ) (1 1 ) (1 ) (10) 1 We now calculae social welfare ( ), defined as he sum of plaforms profis ( = 1 + ) and consumer surplus ( ), =( ) +( 1 + +( )( 1 )) (11) By using (9) in (11), we obain he social welfare a he SPE in he privae duopoly, which is given by: = (36 45) 4( 3 ) (1) 36 3 The mixed duopoly model In his secion, we will assume ha plaform 1 is a publicly-owned firm ha maximizes social welfare, while plaform is a privae firm ha maximizes is profi. Subsiuing () in (11) and maximizing he resuling welfare funcion 5 Recall ha =1 1. 6

7 wih respec o 1, we obain he reacion funcion of he publicly-owned plaform 1: 1 ( )= + 1 ( 1) ( 1 + ) (13) In order o guaranee he second order condiion of social welfare maximizaion by plaform 1, we assume ha 1. Noicehaplaform s reacion funcion is he same ha he one in he previous secion since i coninues o be a privae firm. Thus, from (5) and (13) we can calculae he second sage NE levels of adverising and marke shares in he mixed duopoly: 1 = (4 3) ( 1 ) ; = (3 ) ( 1 ) ( 1) ( 1) 1 = ( 1 + ) ( 1) ; = (3 ) ( 1 ) ; ( 1) (14) By subsiuing he NE values of marke shares and adverising of plaforms 1 and ino expressions (3) and (11) we obain he profis funcions and he welfare a he firs sage of he game, in erms of he qualiies: 1 = ((4 3) ( 1 ))( 1 + ) ( 1) 1 ; = ((3 ) ( 1 )) ( 1) ; = 4( 1)((3 ) ( 1 )) + ( 1 + ) + 4( 1) (15) 1 By maximizing he social welfare wih respec o 1,weobainhereacion funcion of he publicly-owned plaform, 1 ( ),and,bymaximizing plaform s profi wih respec o,wefind he reacion funcion of he privae plaform, ( 1 ). Those funcions are given by: 1 ( )= + ; 4 + ( 1 )= (16) Thus, from (16) we calculae he SPE levels of qualiy, adverising, marke shares, plaform s profi and welfare in he mixed duopoly: 1 = = ;

8 1 = ( 1) ( 3 +4 ) ; = = ; = where Ω ( ) = ( )( ) ( 1) ( ) Ω ( ) = ( 1) ( ) 8 8 [98 (30 +4) ] 6 [ +(460 49) + ( ) (6 113)] + 4 [ ( ) + ( ) ] [(14 10) ( ) + ( ) 3 ] 4 The case of zero adverising commimen by he public plaform In his secion we evaluae he consequences of he new regulaion inroduced in he TV broadcasing indusry by he French and Spanish governmens. Thus we will assume ha he publicly-owned plaform is commied o se zero adverising ( 1 =0). Therefore, he iming is similar o he previous game, excep ha a he adverising sage only he privae plaform chooses is level of adverising. To simplify he erminology, in he res of he paper, we will define he case analyzed in his secion as he zero duopoly regime. 6 By subsiuing he demand funcion () in he definiion of profis and aking ino accoun ha 1 =0, we can obain: 6 Apar from eliminaing he adverising in he publicly-owned plaform, he French and Spanish regulaion involves a ax on he revenue obained by he privae plaforms. However, in order o simplify he exposiion of he paper, we assume ha he governmen se a ax equal o zero, which is an equilibrium in he game where he governmen can se a ax on he privae plaform s revenue. The resoluion of his game is relegaed o he Appendix. 8

9 1 = 1 ; = 1 + (17) From maximizing he privae plaform s profi,we can obain he privae plaform s adverising level, so: = 1 + (18) By subsiuing he level of adverising (18) in he profi funcions (17) we obain he profis: 1 = 1 ; = ( 1 + ) 8 We now consider he plaforms qualiy choices, so he publicly-owned plaformmaximizeshesocialwelfareandheprivaeonemaximizesher/his profi. Taking ino accoun ha plaform 1 does no obain any revenue from adverising, he social welfare ( )ahefirs sage is now given by: = + ( 1 +3 )(3( 1 )+ ) 16 + ( 1)( 1 + ) 8 1 (19) where he plaforms profis ( ) and consumer surplus ( )aregivenby: = 1 + = ( 1 + ) 8 1 (0) = + ( 1 +3 )(3( 1 )+ ) 16 ( 1 + ) 8 From he firs order condiions in he firs sage of he game, we can obain he reacion funcion of each plaform: 1 ( )= ( 7) +( +1) ; 8 +1 ( 1 )= ( 1) 4 + From he inersecion of plaforms qualiy reacion funcions, we obain he levels of adverising, marke shares and profis a he SPE of his game: 9

10 1 = +( 7) ; ( 1) = ; 1 =0; 4 ( 1) = ( ) (1) 1 = ; ( 1) = = ( ) (4 8 +1) ; = ( 1) (4 ) (4 8 +1) = (1 )( ) (4 8 +1) In he res of he analysis, we will assume ha (0 8; 1 ) and 5. This assumpion ensures, in he hree regimes, boh he second order condiions of he SPE and posiive values for all he endogenous variables a he SPE. 7 5 Comparing he hree regimes In his secion we consider he comparisons among he main variables in he hree regimes. In order o help he undersanding of he basic inuiions of our welfare resuls ha we show in Subsecion 5.3, we illusrae graphically some comparaive saics regarding qualiy, adverising and audience shares beween he mixed and he zero duopoly in Subsecion 5.1, and beween he mixed and he privae duopoly in Subsecion ixed versus Zero Duopoly The Figures 1, and 3 illusrae he comparisons among equilibrium variables in he mixed and he zero duopoly in he case in which he adverising is neural, =1. The res of he cases follow a similar paern. Noe, firs, ha he adverising level of he privae plaform in he zero duopoly is lower han he adverising level of each plaform in he mixed duopoly. This is because adverising levels are sraegic complemens and he public plaform does no se adverising in he zero duopoly. 7 In paricular if 0 7and hen he second order condiions of SPE are ensured in he mixed duopoly, while 5 an 1 ensures ha 1 0 Finally, 0 8 ensures ha

11 a 1, a a1 a Z a Z a 1 Figure 1: Adverising =1 Regarding qualiy levels, Figure shows ha he sign of he qualiy differenial beween boh plaforms is reversed when we shif from he convenional mixed duopoly o he zero duopoly. While in he mixed duopoly he privae plaform provides higher qualiy, in he zero duopoly we ge he opposie resul. As a consequence, given ha only he privae plaform provides adverising in his laer case, he public plaform obains a greaer marke share han he privae plaform a he SPE. Noe, also ha in he mixed duopoly boh differenials are decreasing and very sensiive wih while in he zero duopoly hose differenials are almos independen of. Inuiively, under he mixed duopoly, he adverising underaken by he public plaform ends o increase he audience of he privae plaform, which in urn increases he profiabiliy of is invesmen in qualiy. As a resul, he SPE qualiy by he privae plaform is greaer han he qualiy chosen by he public plaform. In conras, in he zero duopoly, he absence of adverising by he public plaform ends o reduce he audience of he privae plaform, which reduces is incenive o inves in qualiy and explains he greaer qualiy of he public plaform a he SPE. Noice ha he commimen of he publicly-owned plaform o se zero ads makes i a ougher compeior for he privae plaform. 5. ixed versus Privae Duopoly Firs, le us consider he case where adverising is neural wih respec o welfare ( =1). The comparisons beween he mixed and privae duopoly in his case is illusraed in Figures 4, 5, and 6. Noe ha in boh regimes he privae and public plaforms provide he same level of adverising and ha 11

12 v 1, v v Z v v 1 Z v Figure : Qualiy =1 x 1, x Z x 1 Z x x x Figure 3: Audience shares =1 1

13 a 1, a 0 15 a1 a P P a 1 a Figure 4: Adverising =1 v 1,v v v 1 P P v1 v Figure 5: Qualiy =1 his level is similar in boh regimes. oreover, adverising is increasing in. Noe also, ha while in he privae duopoly boh plaforms provide he same qualiy and audience share, in he mixed duopoly he privae plaform provides higher qualiy and in consequence i obains higher audience share. However hese differences are decreasing in. Inuiively, adverising levels are increasing wih because he plaforms ake advanage of he greaer marke power associaed o an increased degree of produc differeniaion, which in urn is associaed o a reduced incenive o provide a high differenial qualiy by plaforms in he mixed duopoly. Now, le us consider he case where adverising is socially harmful. In paricular, Figures 7, 8 and 9 illusrae he comparisons among he mixed and privae regimes wih =0 9. Noe ha in conras wih he previous 13

14 x 1, x x x 1 P P x1 x Figure 6: Aundience shares =1 a 1,a 0 15 P P a 1 a a a Figure 7: Adverising =0 9 case, he adverising levels are smaller in he mixed duopoly for sufficienly large. oreoverhisdifference is increasing in. Noe also ha he public plaform always ses lower level of adverising han he privae plaform in he mixed duopoly and his difference is increasing in. Inuiively he public plaform ends o reduce he socially harmful adverising. As a resul, for large he public plaform obains higher audience share han he privae one despie of he fac ha i provides lower qualiy level. Finally, Figures 10, 11 and 1 illusrae he previous comparisons when adverising is socially beneficial, assuming =1 1. The main difference wih respec o he previous cases is ha he adverising levels in he mixed duopoly are greaer han in he privae one. oreover he publicly-owned plaform provides higher level of adverising han is privae compeior. This 14

15 v 1,v v v 1 P P v1 v Figure 8: Qualiy =0 9 x 1, x x 1 x P P x1 x Figure 9: Audience shares =0 9 15

16 a,a 0 1 a 1 a P P a1 a Figure 10: Adverising =1 1 v 1,v P P v1 v v v Figure 11: Qualiy =1 1 paern is explained by he fac ha he public plaform ends o increase he socially beneficial adverising. 5.3 Welfare comparisons In his subsecion we compare he social welfare obained in he hree regimes. Firs, we compare social welfare in he mixed and he zero duopoly. This comparison is illusraed in Figure 13, where in region and in region. According o Figure 13, when adverising is very harmful he zero duopoly is always beer han he convenional mixed duopoly, from he social welfare poin of view. Oherwise, he convenional mixed duopoly can be socially preferred, as saed in he following proposiion. Proposiion 1 In he comparisons beween he mixed and zero duopoly, we obain ha here exiss a criical value of k defined as ( ), haisdecreasing 16

17 x 1, x x x 1 P P x1 x Figure 1: Audience shares =1 1 in, such ha for ( ) he zero duopoly is socially beer (see region ) and for ( ) he mixed duopoly is socially beer (region ). Inuiively, he more harmful adverising is, he more likely is ha he governmen commimen o zero adverising is he opimal policy. Addiionally, when is small, qualiy differeniaion is more imporan han horizonal differeniaion. Therefore, he smaller is, he more likely is ha he opimal policy is he governmen commimen o zero adverising because his ensures a large audience for he v-plaform providing he highes qualiy. To see his, noe ha in he zero duopoly he publicly-owned plaform provides he highes qualiy and obains a very high audience share (see Figures 1, and 3). Noice ha he zero duopoly can be socially beer even if adverising is socially desirable (ha is, 1) when he degree of horizonal differeniaion is low enough. In paricular, if 3 75, wehaveha ( ) 1 which implies ha for some 1. Noe ha an ineresing policy implicaion of his resul is ha an adverisingfree public plaform (he zero duopoly) ends o be opimal as far as is conen is sufficienly similar o he conen provided by is privae compeior (see he low values for in Figure 13), excep in he cases where he social value of adverising is very high. The comparison beween he mixed and privae duopoly is illusraed in Figure 14, where in regions 1 and, while in region. By comparing he mixed and privae duopoly, we find ha he privae duopoly is opimal when adverising is neural, i.e. when is near o 1. However, when he negaive or posiive direc ne effec of adverising is large enough, his resul can be reversed, as illusraed in Figure 14 and he following proposiion. 17

18 Z k Figure 13: ixed and Zero-adverising Duopoly Proposiion In he comparisons beween mixed and privae duopoly, we obain he following: (i) for small values of, he mixed duopoly is socially beer if k is low enough, bu i is worse if k is high enough; (ii) for high values of, privae duopoly is beer for inermediae values of k, bu for exreme values of k he mixed duopoly is beer. Noe ha according o Figure 14 if adverising is neural ( =1)privae duopoly is always beer han he mixed duopoly. 8 However, when adverising is no neural, a governmen s inervenion hrough he ownership of a v-plaform is desirable if is large enough. oreover, as increases, he inermediae inerval in which privaizaion is opimal becomes narrower. The inuiion of his resul can be explained by comparing he level of adverising beween boh regimes. In paricular, if adverising is socially harmful ( 1) he mixed duopoly provides lower levels of adverising han he privae duopoly for large enough values of (see Figure 7). Therefore, in his case a mixed duopoly is socially beer han he privae one because i reduces he negaive welfare effecs of adverising. By a similar argumen, if adverising is socially beneficial ( 1), he mixed duopoly is socially beer han he privae duopoly for large enough because in his case he mixed 8 Formally, his paricular case resembles he resul obained by Ishibashi and Kaneko (008), by reinerpreing he adverising levels in our model as he prices levels in heir model. However our formulaion is more general because can be differen from one, which implies ha privaizaion is no always beer han a mixed duopoly. 18

19 P k Figure 14: ixed and Privae duopoly duopoly provides higher levels of adverising (see Figure 10). Noe also ha for small, he marke shares differences beween plaforms are raher large in he mixed duopoly (see Figure 1) which in urn is associaed wih large qualiy differences (see Figure 11). Therefore, given ha in his case adverising levels are similar in boh regimes, welfare is greaer in he privae duopoly because i achieves an opimal disribuion of marke shares. Noe ha our previous resul suggess ha hose public plaforms offering subsanial differences in conen wih respec o heir privae compeiors are more likely o play a beneficial role from he social welfare perspecive. However a privaizaion policy ends o be opimal if he conen provided by he publicly-owned plaform is similar o ha of is compeiors, excep when adverising is oo harmful. Now le us consider he opimal choice among he hree previous regimes, which is gahered in he following proposiion and illusraed in Figure 15, where,, 1 and indicae he opimal regime in each region. Proposiion 3 In he comparisons among he hree regimes, we have he following: (i) for small values of, he opimal regime is he zero duopoly if k is low enough (see region Z) and he privae duopoly if k is high enough (see region P); (ii) for inermediae values of, he opimal regime is he zero duopoly if k is small (see region Z), he privae duopoly for inermediae k (see region P) and mixed duopoly if k is large (see region ); 19

20 Z P k Figure 15: ixed, Privae and Zero-adverising Duopoly (iii) for large values of, he opimal regime is he zero duopoly if k is small (see region Z), he mixed duopoly for inermediae-low and high levels of k (see regions 1 and ) and he privae duopoly for inermediae-high levelsofk(seeregionp). The basic inuiions behind his resul are conneced o he previous comparisons. In paricular, le us consider case (ii) in Proposiion 3. Broadly speaking, he zero duopoly is socially desirable when adverising is sufficienly harmful (region ) because he absence of adverising by he public firm helps wo objecives: firs, o reduce he nuisance coss associaed o adverising and, second, o increase he audience of he v-plaform wih he highes qualiy. On he oher exreme, when adverising involves a large posiive ne welfare effec (region ), he presence of a public plaform is desirable bu wihou he commimen o zero adverising. Finally, when adverising does no generae a large ne welfare effec, he opimal policy is privaizaion (region ). Noe ha our previous resuls (Proposiions and 3) suggess ha hose public plaforms offering subsanial differences in conen wih respec o heir privae compeiors are more likely o play a beneficial role from he social welfare perspecive. However a privaizaion policy ends o be opimal if he conens provided by he publicly-owned plaform is similar o ha of is compeiors. 0

21 6 Conclusions In his paper we develop a model wih a publicly-owned plaform and a privae one ha compee in a free o air broadcasing marke. The plaforms are differeniaed in wo dimensions: conen (horizonal differeniaion) and qualiy (verical differeniaion). Assuming ha each plaform chooses is adverising and qualiy levels, we compare he equilibrium levels of qualiy, adverising and welfare under privae and mixed duopoly compeiion. In his conex, we also consider he effecs on plaforms qualiy and on welfare of recen policies ending o eliminae adverising in he publicly-owned plaforms. We show ha he resuls are subsanially differen depending no only on he presence of a publicly-owned plaform bu also on he adverising resricions on his plaform. One ineresing insigh from our analysis is ha a governmen commimen o an adverising-free public plaform can be socially desirable even if hedireceffec of adverising is beneficial from he social welfare poin of view (see Proposiion 1 and Figure 13). The underlying explanaion of his resul is ha besides he direc effec on welfare of adverising, here are also indirec effecs associaed o endogenous changes in qualiy and marke shares. In paricular, our resuls show ha his case is associaed o small degrees of horizonal plaform differeniaion. Thus a policy implicaion of his resul is ha an adverising-free public plaform ends o be opimal as far as is conen is sufficienly similar o he conen provided by is compeior. However, eliminaing adverising in he public plaform can be subopimal even if adverising is socially harmful. This case is associaed wih large levels of horizonal differeniaion, as is also shown in Proposiion 1. Therefore, he more differeniaed is he conen he weaker he case for an adverising-free public plaform. Our model also suggess some policy implicaions regarding he opimal choice beween privaizaion or mainaining acive public plaforms. Basically, our resuls show ha he case for privaizaion becomes weaker as he degree of horizonal differeniaion becomes greaer and adverising is no neural (see Proposiions and 3). This resul suggess ha hose public plaforms offering subsanial differences in conen wih respec o heir compeiors are more likely o play a beneficial role from he social welfare perspecive. 1

22 Appendix In his secion we incorporae a firs sage in which he governmen ses he ax on he revenue of he rival privae plaform for financing he publiclyowned plaform. Thus, we consider ha he revenue obained by he privae plaform consiss of he adverising revenue afer ax, and he revenue obained by he publicly-owned plaform consiss of he ax revenue colleced from he privae one. So profis are given, respecively, by 1 = 1 ; =(1 ) where represens he direc ax over privae plaform s revenue. By subsiuing he demand funcion () in he definiion of profis and aking ino accoun ha 1 =0, we can obain: 1 = ; =(1 ) 1 + () From maximizing privae plaform s profi, we can obain he level of adverising by he privae plaform, which is (18). By subsiuing i in he profi funcions () we obain he marke shares and profis: 1 = 1 +3 ; 4 1 = ( 1 + ) 1 8 ; = 1 + ; 4 =(1 ) ( 1 + ) 8 We now consider he qualiy choice by plaforms, so he publicly-owned plaformmaximizeshesocialwelfareandheprivaeonemaximizesher/his profi. Taking ino accoun ha he social welfare ( )ahefirs sage is now given by (19), from he firs order condiions in he firs sage of he game, we can obain he reacion funcion of each plaform: 1 ( )= ( 7) +( +1) ; 8 +1 ( 1 )= (1 )( 1) 4 + ( 1) From he inersecion of plaforms qualiy reacion funcion, we obain he NE levels of adverising, marke shares and profis a he second sage of his game: 1 ( ) = (1 )+( 7) ( )+1 8 ; ( ) = ( 1)( 1) ; 1 ( ) =0; ( ) = 4 ( 1) (1+ ( ) 8 )

23 1 ( ) = ( ) = ( 1) ( ) = (1 )( 1) (4 + ) (4 8 +1) 1 ( ) = (4 8 +1) ( ) = ( 1) (( ) ) (4 8 +1) (3) By maximizing he welfare funcion (3) wih respec o he ax, we find ha he opimal level of he ax is zero. 9 ( ) = ( +1)( 1) 8 1 (8 ( ) 1) 3 0 References [1] Alcock, J. and G. Docwra, 005, A Simulaion Analysis of he arke Effec of he Ausralian Broadcasing Corporaion, Informaion Economics and Policy, 17 (4), [] Anderson, S. P., 007, Regulaion of Television Adverising, in Paul Seabrigh and Jurgen Von Hagen, Ediors, TheEconomicRegulaionof Broadcasing arkes, Cambridge Universiy Press. [3] Anderson, S. P. and S. Coae, 005, arke Provision of Broadcasing: AWelfareAnalysis, Review of Economic Sudies, 7, [4] Anderson, S. P. and J. J. Gabszewicz, 006, The edia and Adverising: A Tale of Two-sided arkes, in Vicor A. Ginsburgh and David Throsby, Ediors, Handbook of he Economics of Ar and Culure, Volume 1, Elsevier B.V. [5] Armsrong,., 005, Public Service Broadcasing, Fiscal Sudies, 6 (3), We do no consider he possibiliy of subsidies for he privae plaform. 3

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25 [17] Lin, P., 011, arke provision of Program Qualiy in he Television Broadcasing Indusry, The B.E. Journal of Economic Analysis & Policy: Vol. 11: Iss. 1 (Conribuions), Aricle 17. [18] Peiz,. and T.. Vallei, 008, Conen and Adverising in he edia: Pay-v versus Free-o-air, Inernaional Journal of Indusrial Organizaion, 6, [19] Sühmeier, T. and T. Wenzel, 011, Regulaing Adverising in he Presence of Public Service Broadcasing, mimeo. [0] Wilbur, K. C. (008), A Two-Sided, Empirical odel of Television Adverising and Viewing arkes, arkeing Science, 7 (3),