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Strategic Differentiation by Business Models: Free-to-Air and Pay-TV

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Why do `Free' and `Pay' content cohabit in practically all media markets? We develop a model in which two identical broadcasters compete for viewers and advertisers that leads to endogenous differentiation. We show that differentiation does not require heterogeneous agents. Instead, we relate it to the `two-sided' nature of these markets. The asymmetric outcome is driven by the property that business models form strategic substitutes: if one station goes towards the ‘pay’ business model the rival has stronger incentives to choose the ‘free’ business model and viceversa. We propose a simple and natural property of the advertising technology that enhances strategic substitutability guaranteeing differentiation. In regime of competition there is a misallocation of advertising messages and therefore a waste of viewer attention. We show that a multi-station monopolist does not necessarily maintain differentiation and never offers content for free.

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  • Emilio Calvano & Mihele Polo, 2016. "Strategic Differentiation by Business Models: Free-to-Air and Pay-TV," CSEF Working Papers 438, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 07 Nov 2017.
    • Handle: RePEc:sef:csefwp:438
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    Cited by:

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    3. Bruno Jullien & Alessandro Pavan & Marc Rysman, 2021. "Two-sided markets, pricing, and network effects," Post-Print hal-03828345, HAL.
    4. Hemant K. Bhargava, 2022. "The Creator Economy: Managing Ecosystem Supply, Revenue Sharing, and Platform Design," Management Science, INFORMS, vol. 68(7), pages 5233-5251, July.
    5. Christian Bach & Robert Edwards & Christian Jaag, 2023. "Postal Platform Pricing with Limited Consumer Attention," Working Papers 202318, University of Liverpool, Department of Economics.
    6. Calvano, Emilio & Polo, Michele, 2021. "Market power, competition and innovation in digital markets: A survey," Information Economics and Policy, Elsevier, vol. 54(C).
    7. Gregor Langus & Vilen Lipatov, 2022. "Value Creation by Ad-Funded Platforms," CESifo Working Paper Series 9525, CESifo.
    8. Shekhar, Shiva, 2020. "Zero Pricing Platform Competition," MPRA Paper 99364, University Library of Munich, Germany.
    9. Federico Boffa & Lapo Filistrucchi, 2014. "Optimal Cartel Prices in Two-Sided Markets Access," Working Papers 14-19, NET Institute.

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