Effects of an increase in the negative externality β

Proposition 5 As the size of the negative externality β increases, the equilibrium values evolve as follows:

• Prices and profits

In all three regimes, both broadcasters set higher prices on both markets (where possible), and earn higher profits.

• Advertising market shares

sym1: The low quality broadcaster Agains market shares at the expense of broad- caster B.

sym2: The high quality broadcaster B loses market shares while the effects are ambiguous for broadcaster A.

asym: The low quality broadcaster A loses market shares.

• Viewer market shares

sym1: For any given δ∈(0,1], the low quality broadcaster A gains market shares at the expense of broadcaster B if and only if β < βˆsym1_{. The threshold level}

ˆ

βsym1 _{is increasing in δ.}

sym2: The low quality broadcaster A gains market shares at the expense of the broadcaster B on the whole parameter range.

asym: For any given δ∈(0,1], the low quality broadcaster A gains market shares at the expense of broadcaster B if and only if β > βˆasym_{. The threshold level}

ˆ

βasym is increasing in δ.

Proof. See Section A4 of the Appendix.

The results of Proposition 5 are summarized in Table 3.2.

An increase in the nuisance cost β alters the platform decision of viewers such that the relative importance of (ad-free) contents increases, and the relative importance of low viewer prices decreases. When competing for viewers, broadcasters now have a stronger incentive to reduce the number of advertisements but a weaker incentive to set low viewer prices. Put differently, since by assumption viewers do not abstain from the market, higher nuisance costs relax price competition on both sides of the market. On the advertising side of the market, broadcasters increase their prices in order to reduce the number of advertisements, whereas on the viewer side of the market, the fact that low prices are less important for consumers’ decision allows for higher prices. Due to the relaxed price competition (on both sides of the market), the profits of both broadcasters increase.

Table 3.2: Increase in the negative externality

Partial derivative with respect to β

Regime: Sym1 Sym2 Asym

Broadcaster: A B A B A B Viewer prices ∂pA ∂β >0 ∂pB ∂β >0 ∂pA ∂β >0 ∂pB ∂β >0 ∂pA ∂β >0 ∂pB ∂β >0 Ad prices ∂τA ∂β >0 ∂τB ∂β >0 ∂τA ∂β >0 ∂τB ∂β >0 ∂τA ∂β >0 — Viewer market shares ∂nvA

∂β R0 ∂nv B ∂β R0 ∂nv A ∂β R0 ∂nv B ∂β R0 ∂nv A ∂β R0 ∂nv B ∂β R0 Ad market shares ∂nadA ∂β >0 ∂nad B ∂β <0 ∂nad A ∂β R0 ∂nad B ∂β <0 ∂nad A ∂β <0 — Profits ∂ΠA ∂β >0 ∂ΠB ∂β >0 ∂ΠA ∂β >0 ∂ΠB ∂β >0 ∂ΠA ∂β >0 ∂ΠB ∂β >0

Note: This table illustrates the effects of an increase in the size of the negative externality on consumer utility,β. We compare the effects on equilibrium values of each broadcaster in each regime. The symmetric model without market abstention (regimesym1) is shown in the first column, the symmetric model with market abstention (regimesym2) in the second column, and the asymmetric model (regimeasym) in the third column.

The price increase on the advertising market induces a shift in the identity of the piv- otal advertiser such that the previous pivotal advertiser either switches to the cheaper platformA (regimesym1), or exits the market (sym2 and asym). In the regimes with market abstention, both broadcasters lose advertising market shares on virtually the whole parameter range under regime sym2, and the advertising market shares of A

decrease under regimeasym.24

Starting from equilibrium, the previous marginal viewer in all scenariosceteris paribus switches to the channel with the smaller number of advertisements, once β is raised. The scenarios vary, however, with respect to the platform containing the smaller num- ber of advertisements. As we have seen in the previous section (see Table 3.1), broad- casterAprovides the platform with the smaller number of advertisements under regime sym2. Under regime sym1, B contains less advertisements than A, if and only if β is 24_{The small parameter range in which advertising market shares of broadcaster A increase in β}

under regime sym2 arises due to an increase of A’s viewer market share countervailing the rising advertising price.

sufficiently large compared to δ.25 _{Due to the advertising ban, A is the platform car-}

rying more advertisements in the asymmetric scenario. In the cases where B is the platform containing less advertisements thanA, there is, from the consumers’ perspec- tive, a trade-off between the lower number of advertisements and the higher price than on platformA.26 This leads to ambiguous effects of an increase in β on viewer market shares, as illustrated in Figure 3.4. The intensity of this trade-off, however, changes as

β increases. In the sym1-regime, for instance, B’s consumer price increases in β, but the number of advertisements decreases. For a givenδ, such a reduction of advertising volume attracts the more viewers the higher the nuisance parameter β (see the right panel of Figure 3.4). This effect is likely to dominate the evolution of viewer market shares if β is sufficiently large compared to δ.

Figure 3.4: Ambiguous effects of an increase in β

sym1: viewer market shares asym: viewer market shares

Note: This figure illustrates the effects of an increase in β on viewer market shares in regime

sym1 (left panel), and in regimeasym (right panel). The area denoting combinations ofβ and

δfor which nv,r_i is increasing (decreasing) inβ is indicated by nv,r_i ↑ (nv,r_i ↓) with i∈ {A, B}

andr∈ {sym1, asym}.

25_{Figure 3.3 captures the exact movement of viewer market shares in this case.}