Network effects in the press and advertising industries

Generally, economists interested in network effects analyse these effects when the consumption externality created by the demand for the good is produced inside the industry itself. But it can be conceived that network effects take place from one industry to another. This happens when the utility of a good produced in a given industry varies with the size of the demand for a product produced in another industry. A particularly significant example of this phenomenon is provided by the interaction between the media and advertising industries. To illustrate the consequences of these network effects, we consider an editor who is a monopolist both in the press and advertising markets. In both markets, he faces a continuum of customers. In the press industry, these customers (readers) vary according to their willingness to pay for the newspaper, but also with their attitudes toward advertising: some of them are advertising-lovers while the others are advertising-averse. On the advertising market, advertisers vary according to their willingness to pay for an ad in the newspaper, which also depends positively on its leadership's size. We characterise the monopoly solution in terms of the monopolist's instruments: the price of the newspaper and the advertising rate.