Effects of an increase in the positive externality δ

An increase in the ad effectivenessδ can for instance be triggered by choosing popular instead of unknown testimonials for advertisements, by an increase in the screen size of the average TV set, by improving on the timing of advertisement slots (for instance by airing them at the same time as the advertisement slots of the competing channels), or by interactive forms of advertising (lottery games). In the following, we discuss how such an increase affects equilibrium values.

Proposition 6 As the size of the positive externalityδincreases, the equilibrium values evolve as follows:

• Prices and profits

Under all regimes, both broadcasters set higher prices on the advertising market (where possible). The effects on viewer prices and profits are often ambiguous as depicted in Table 1.3.

• Advertising market shares

sym1: The market shares of the low quality broadcaster A decrease while B’s market shares increase.

sym2 and asym: The market shares of both broadcasters increase.

• Viewer market shares

sym1 and sym2: For any given δ ∈ (0,1], the high quality broadcaster B gains market shares at the expense of A if and only if β < β˜sym1_{, or β < β}˜sym2_,

respectively. Both threshold levels are increasing in δ.

asym: Broadcaster A gains market shares at the expense of broadcaster B on the whole parameter range.

Proof. See Section A5 of the Appendix.

Table 3.3: Increase in the positive externality

Partial derivative with respect to δ

Regime: Sym1 Sym2 Asym

Broadcaster: A B A B A B Viewer prices ∂pA ∂δ <0 ∂pB ∂δ <0 ∂pA ∂δ R0 ∂pB ∂δ <0 ∂pA ∂δ <0 ∂pB ∂δ R0 Ad prices ∂τA ∂δ >0 ∂τB ∂δ >0 ∂τA ∂δ >0 ∂τB ∂δ >0 ∂τA ∂δ >0 — Viewer market shares ∂nvA

∂δ R0 ∂nv_B ∂δ R0 ∂nv_A ∂δ R0 ∂nv_B ∂δ R0 ∂nv_A ∂δ >0 ∂nv_B ∂δ <0 Ad market shares ∂nadA ∂δ <0 ∂nad B ∂δ >0 ∂nad A ∂δ >0 ∂nad B ∂δ >0 ∂nad A ∂δ >0 — Profits ∂ΠA ∂δ <0 ∂ΠB ∂δ R0 ∂ΠA ∂δ R0 ∂ΠB ∂δ R0 ∂ΠA ∂δ >0 ∂ΠB ∂δ R0

Note: This table illustrates the effects of an increase in the size of the size of positive externality the number of viewers exerts on advertisers’ profits,δ. 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.

An increase in the intensity of the positive externality δ affects the relative weights of the components in the profit function of advertisers such that the relative importance of the number of viewers increases whereas the relative importance of low ad prices decreases. For the broadcasters, this shift intensifies price competition in the viewer market, and weakens price competition in the advertising market. This affects the evolution of advertising and viewer prices as follows: Relaxed price competition in the market for advertisements and the incentive to attract more consumers leads to higher advertising prices. The latter also exerts downward pressure on viewer prices of the platform(s) carrying advertisements. Hence, in the asymmetric regime, the viewer price of medium B increases under regime asym, if β is sufficiently large relative to δ (see Figure 3.5). AsAcarries advertisements, and B does not, choosing A overB becomes more costly for consumers, since the number of advertisements on A is increasing in

δ. This allows for B increasing his viewer price, if the nuisance from advertisements is sufficiently large. On all platforms that sell advertising space, however, the viewer

prices decrease inδ.27

Due to the number of viewers becoming more important for advertisers, the identity of the pivotal advertiser changes as δ increases. The previous marginal advertiser ceteris paribus switches to the channel that provides him with the larger number of consumer contacts (sym1), or enters the advertising market (sym2 and asym), as the marginal return per advertisement has increased in δ. Since platform B hosts the larger number of consumers under regimesym1 (see the first column of Table 3.1), the high quality broadcasterB gains shares in the ad market at the expense of channelA. Under the regimes with market abstention, the previous marginal advertisers now finds it profitable to advertise, which implies that all respective advertising market shares increase.

As there is no direct effect of an increase inδon consumers’ utility, the changes in their decision which channel to watch are determined by (i) the viewer prices, and (ii) the number of advertisements. In the asymmetric regime, the distribution of viewer market shares is unambiguous: The decrease in the viewer price of platformAovercompensates forAcarrying advertisements such thatB loses market shares on the viewer market as

δ increases. This leads to A having higher profits whereas the effect on the profits of

B are ambiguous. Under regimesym1, with both viewer prices decreasing, the number of advertisements becomes relatively more important for consumers than choosing the platform with the lowest price. The previous marginal viewer now switches to the channel with the lower number of advertisements. As known from the first column of Table 3.1, the channel with the smaller number of advertisements is broadcaster A, if and only if β is sufficiently small compared to δ. The exact relationship is shown in Figure 3.5. The figure also shows that the effects of an increase in δ on the viewer market shares under regimesym2 are similar.

27_{Technically spoken, there is a very small parameter range in which A’s viewer price under the}

sym2-regime increases. This is true for intermediate values of δ-β-combinations, as illustrated in Figure 3.5.

Figure 3.5: Ambiguous effects of an increase in δ

sym1: viewer market shares sym2: viewer price of A

sym2: viewer market shares asym: viewer price of B

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

sym1 (upper left panel) and in regime sym2 (lower left panel) as well as the effects on viewer prices of A in regimesym2 (upper right panel), and on viewer prices ofBin regimeasym(lower left panel). The area denoting combinations ofβ and δfor which y is increasing (decreasing) inβ is indicated byy↑(y↓) withy∈ {nv,r_i , p_ir},i∈ {A, B}andr∈ {sym1, sym2, asym}.

The effects of an increase inδon broadcasters’ profits is ambiguous with the exceptions ofA’s profits increasing under regimeasym (see discussion above), and the loss inA’s profits undersym1. Under thesym1-regime, for the low quality broadcasterA, lowering

the viewer prices and losing advertising market shares always dominate the increase in the advertising price as well as an eventual gain in viewer market shares. For the high quality broadcaster B, there are gains on the advertising market due to higher prices and a higher market share on the one hand, but potential losses on the viewer market on the other hand, as prices decrease and the viewer market shares may fall as well. If and only if the negative externality β is sufficiently small, the gains from advertisements outweigh the losses on the viewer market, andB’s profits increase inδ. A similar reasoning applies to the profits ofB under the sym2-regime.