In more traditional media, the composition of the audience depends on the content and affects advertising demand (see Chapter 9, this volume). In particular, if α and β are restricted to be positive, firms in a two-stage location-cum-price game choose maximal differentiation in equilibrium. That is, prices p1 and p2 are equal to zero, but consumers view advertising levels a1 and a2 on the platforms as a nuisance. A key feature of their model is that advertisers value not just the number of readers at a given newspaper, but also their characteristics. The overarching principles governing equilibrium locations balance two effects in the first-order conditions for best responses. However, consumers in the middle segment of the Hotelling line enjoy a positive utility on each platform (given that advertising levels are not too high). Put every voter on a line, from right to left; candidates move towards the center. Crampes et al. This chapter has presented a deterministic theory of depletable resource economics, both for individual deposits and for market equilibrium including extraction from a group of deposits. The original Hotelling model is assumed that consumers are distributed uniformly over a line segment, and travel, at a constant cost per unit, to a firm to buy one unit of a good. These keywords were added by machine and not by the authors. This leaves a profit of D12a1a2ϕ1a1+ϕ2a2-ϕ12a1a2 to each advertiser, which is positive due to the concavity of the advertising technology. Maximizing with respect to ω, we obtain, while ω=1 for x≤α+p2-p1/21-α-β and ω=0 for x≥1-β+p2-p1/21-α-β. This is because of the higher marginal profitability when two revenue extraction instruments are available. Chamberlin’s of 1932 was another. When voting for the public good in each community, the median voter takes as given the amount of the public good in the other community. Therefore, the principle of incremental pricing reemerges. The unidirectional Hotelling model (UHM henceforth) differentiates from the standard bidirectional Hotelling model (BHM henceforth) for this reason: while in the BHM consumers and firms are free to move both to the right and to the left, in the UHM the transportation costs of moving in one direction are prohibitively high, so the agents can move only in one direction. We now explore these extra dimensions to performance. Therefore, although consumers are no longer the bottleneck, platforms cannot extract the full surplus from advertisers. They show that a reduction of supply by one platform may lead the other platform to expand its supply. George (2007) studies the effect of ownership consolidation on the variety of topics covered by US daily newspapers. Over 10 million scientific documents at your fingertips. The model has the following elements: Fixed communities and housing sites. Therefore, the utility function of a consumer located at x is. A general insight from the Hotelling model is that with the conventional assumptions of quadratic transportation costs and single-homing consumers, firms will have incentives to differentiate their products in order to soften price competition if they seek revenues from consumers directly. Suppose, for example, that platforms’ contents are relatively similar in the sense that consumers who like the content of platform 1 have a high probability of also liking the content of platform 2. where γ represents the nuisance parameter of advertising. The important point is that a weak advertising demand delivers low equilibrium diversity because the economic impetus for entry is absent through low profitability from advertising. Taken literally, then, the prediction for genre choice is maximal variety difference between competing platforms, opposite the minimum differentiation (or duplication à la Steiner) predicted when there are no ad-nuisance costs. An advertiser who accepts both contracts gets a benefit of, Instead, when accepting the contract of platform j only, he gets, because the advertiser reaches consumers only on platform j. Another intriguing result (reminiscent of Grossman and Shapiro, 1984) is that platform profits are increasing in the marginal cost of quality investment. Anderson et al. Thus, there is support for the notion that consolidation may actually benefit consumers by increasing the variety of topics covered by daily newspapers. If both platforms have the same content, a fraction d12 of consumers multi-home. Anderson and Neven (1989) extend this formulation by allowing a consumer to consume any mix of the two contents of. Due to the game structure, consumers do not react to the actual number of ads, which simplifies the solution of the game.29, In equilibrium, each platform charges a price of (omitting arguments). Interestingly, Steiner (1952) does not build on or cite Hotelling (1929). Therefore, normalizing the value of informing a consumer to 1, we have that ϑ=x and λ=1-x. Her results show that a reduction in the number of newspaper owners in a market leads to an increase in the degree of separation among the existing newspapers. Relative to overlapping consumers, these consumers are more valuable, and losing them is relatively costly for the platform. This floor can change the outcome quite dramatically. Then, the consumer spends a share ω(x) of this amount on platform 1 and 1 − ω(x) on platform 2. Hotelling with endogenous locations The maximum di erentiation principle In the Hotelling model described above: d 1 da <0, so that rms want to di erentiate as much as possible! Chandra and Collard-Wexler (2009) also examine the issue of ownership consolidation in newspapers. Both newspapers will raise prices post-merger, but Fan's analysis of endogenous product characteristics shows that they will also reduce product quality, which then further reduces circulation and reader welfare. Its beneficial function is the one described above, that it helps to bring the sorting of people across fixed communities to an equilibrium. In contrast to competing firms, a monopoly operating two channels would not cannibalize its own audience by duplication of genre. Hence, incremental pricing also emerges in this model. But the newspaper industry also raises concerns about the diversity of opinion, and as a result this matter is particularly controversial. Although the utility formulation is very different from the standard single-homing Hotelling model, the resulting aggregate demand function is exactly the same if consumers pay for the amount of time they spend on a platform.25 To see this, recall, first, that in a traditional Hotelling model, the aggregate demand of firm 1 is, Let us now briefly derive the aggregate demand in the mixing model. Location choice induces a strategic effect that works through increased levels of advertising when differentiation increases, which explains why free-media platforms may choose maximal differentiation. Découvrez et achetez Oligopoly Dynamics. Advertisers are homogeneous and can post multiple ads on a platform. As a consequence, platform i can demand only. pp 265-310 | Hotelling’s seminal contribution of 1929 was one of several successful attempts to give a precise interpretation to Bertrand’s sweeping criticism of Cournot’s duopoly model of 1838. Chamberlin’s of 1932 was another. Unfortunately, a property tax is not a lump-sum tax. (2001) engage the model above with a surprising twist by assuming that platforms cannot feasibly set subscription prices below zero—if people were paid to take newspapers, clearly they would walk off with stacks of them. Armstrong and Weeds (2007) get several other interesting results. Linear Hotelling model Hotelling model: Second stage (locations given) Derive each rm’s demand function. The demand configuration is displayed in Figure 10.6. Under mixed financing, equilibrium profits are a hump-shaped function of the strength of advertising demand. In addition, she generalizes the model of demand for newspapers by allowing households to purchase at most two daily newspapers, in contrast to most previous work, which assumed single-homing on the subscription side. In equilibrium, a platform cannot extract the full surplus from advertisers even though advertisers are homogeneous. Constructing a two-country Hotelling model of spatial duopoly, this paper explores welfare e ects of bilateral reductions in transport costs. Letting XH and XL be the amounts of the public good in communities H and L, the utility functions of individual i in H and individual j in L are, Hohaus, Konrad, and Thum assume that the people have distributed themselves across the community such that those with the lowest preferences for X are in L, (0, 0.5), and those with the highest preferences are in H, (0.5, 1), hence the use of L and H to designate the low- and high-X communities. One way of avoiding the uncertainty arising from oligopolistic interdependence is to enter into collusive agreements. However, it would raise subscription prices, and the resulting loss of subscribers would reduce advertising demand and would also raise advertising prices per reader; nevertheless, the estimated effects are small. Kerkhof and Munster (2015) analyze a different “quality” margin. This relaxes competition for consumers, raises profits, and reduces advertising and consumer surplus. Hotelling's law is an observation in economics that in many markets it is rational for producers to make their products as similar as possible. (2010) also analyze multi-homing consumers in the Hotelling setting. In Anderson et al.’s (2014) model, first, consumers form an expectation about the advertising intensity on each platform. Because profits are equivalent in the two models, the results on equilibrium content choice correspond to those in quadratic Hotelling models (see, e.g., d’Aspremont et al., 1979). However, in most markets, the availability of content increases consumption. By contrast, suppose that platforms are news platforms and that one caters to a more right-wing audience and the other to a more left-wing audience. However, the local market decisions (advertising levels) are tailored to each market. As we have gone through the sequence, results became scarcer and scarcer. A consumer can be active on both platforms and optimally does so if the utility she obtains on each platform is positive. Given heterogeneity in reader characteristics, it is possible that in a duopoly equilibrium some readers provide a negative value to the newspaper publishers. The output and price level in a Bertrand oligopoly … That is, the program diversity is smaller, the larger is the advertising aversion of consumers (measured by increasing marginal disutility of advertising). Hotelling, H., 1929, “Stability in Competition”. Suppose that consumers are uniformly distributed on the interval between 0 and 1. The utility function of a consumer located at x is, where u0 is the gross utility from using the platform. Suppose that each consumer has some amount of time that she can allocate between the two platforms. In particular, she examines a proposed merger in the Minneapolis market that was blocked by the Department of Justice. The price optimization problem given the demands Industrial Organization-Matilde Machado The Hotelling Model 6 4.2. This implies that the additional benefit of consuming an amount q2 of news or stories when first consuming an amount q1 is, Therefore, the utility of a consumer who visits platform 1 and then platform 2 is given by, Similarly, the utility of a consumer who first visits platform 2 and then platform 1 is. Under the fully covered market specification (e.g., circle and logit), equilibrium ad levels and profits are decreasing in the number of platforms (as long as R⋅ is log-concave: see the analysis in Anderson and Gabszewicz, 2006). The homogeneous-products Bertrand model of oligopoly applies when firms in the oligopoly produce standardized products at same marginal cost. We then proceed by altering the explicit and implicit simplifying assumptions in Steiner (1952), and in particular introduce the lessons from more recent contributions on two-sided media markets. Her paper accounts not just for post-merger price changes, but also for newspapers adjusting their product characteristics. A larger transportation cost parameter, then, leads only to less demand of each platform. Google Scholar 10. As a result, there is more entry and total welfare is lower when platforms are free than if they could subsidize consumers’ participation. Gabszewicz et al. Our hope is that this Handbook will help to motivate renewed theoretical and empirical attention to issues of depletable resource economics. The same remark applies to other covered market models (e.g., discrete-choice random utility models with covered markets). – A duopoly is an oligopoly with only two firms. Consider the well-known problem of content duplication and suppose that each media platform has the choice of providing content A or B. Fan uses the structural estimates to perform counterfactual simulations. Therefore, each company has t… Since platforms do not set advertising prices but negotiate with producers, minimal differentiation does not lead to zero advertising prices but increases the surplus in the negotiation.27. The models so far discussed assume single-homing by media consumers. As we will see below, this distribution is the one that brings the provision of X in the actual equilibrium closest to the provision that maximizes social welfare. This curbs its incentive to increase the advertising level. We use cookies to help provide and enhance our service and tailor content and ads. As with any industry, consolidation leads to concerns about higher prices, and this is especially the case in a market such as the US newspaper industry, which already tends toward local monopolies. quality choice into the model of Hotelling (1929) in pure strategies. Assume Many Buyers ; Few Sellers ; Each firm faces downward-sloping demand because each is a large producer compared to the total market size ; There is no one dominant model of oligopoly we will review several. By contrast, when choosing content B, a platform gets less than one-third of the consumers. Therefore, each platform's total demand is independent of the rival's price. A difficulty with these comparisons is that, as pointed out by Gabszewicz et al. In this LP we see what oligopolies are, and how their behaviour affects the economy. The “fixed-price” version of Hotelling's model was extended to multiple outlets by Eaton and Lipsey (1975), and many subsequent authors elaborated upon the theme. when subscribing to platform 1 only. This price war leads to a situation at which market price is equal to the marginal cost. If consumers only single-home and more than two-thirds of them are interested in content A instead of content B, then both platforms will specialize in content A. However, the tenor of their results applies more generally.56 They show that if ad revenue is weak enough, then maximal differentiation attains; while if it is high enough, the outcome is minimum differentiation with free-to-air media (and both constellations are equilibria for some intermediate values).57. The communities levy equal lump-sum head taxes to pay for the public good, whose total cost is C in each community. In media markets, this means that platforms may polarize content even if it does not match the heterogeneity of tastes. an oligopoly) in which competing companies simultaneously (and independently) chose a quantity to produce. Steiner's duplication principle finds its natural parallel in Hotelling's (1929) principle of minimum differentiation. model consumer demand as a differentiated products discrete-choice problem. If the market would otherwise be uncovered, it would therefore offer diversity of genres in order to increase the total number of consumers. Summary The bigger a firm is, the more efficient. George also finds that the increased ownership concentration did not reduce newspaper readership. Not logged in Steiner (1952) enunciated the duplication principle whereby media offerings tend to concentrate (and double up) in genres with large consumer interest. A platform charges a price equal to the incremental value it brings to a consumer who is also active on the rival platform. which equals (10.1), implying that the two formulations are equivalent. First of all, there is a direct mathematical equivalence between standard models of price competition and models of ad finance when advertisers all have the same willingness-to-pay, v. To see this, notice that then i’s profit is given by πi=vaiNiγai;γaj: writing pi=γai, we have πi=v/γpiNipipj, so that the profit is proportional to that in an equivalent pricing game. Gabszewicz et al. Three Important Economic Models of Oligopoly are as: (1) Price and output determination under collusive oligopoly. Chandra and Collard-Wexler then empirically examine the price effects of ownership consolidation, relying on a series of newspaper mergers in Canada in the late 1990s, when about 75% of Canada's daily newspapers changed hands. In particular, the sum of demand of both firms is perfectly price-inelastic (up to some upper bound of prices). Advertiser welfare also falls by more when product characteristics are endogenized. View Hotelling Type Duopoly and Oligopoly from PAPERS P2 at Universidad de Navarra. Within a stylized simplified framework, he shows how competing platforms aim for the mass market in order to raise advertising revenue, and how this gives rise to the principle of genre duplication. Model was not so much based on the interval between 0 and x21,2, the. A transfer payment ti H. W., 1973, “ Simplified Samuelson for! Discernible effect on either circulation or advertising prices of people across fixed communities to an equilibrium some readers a... The oligopoly produce standardized products at same marginal cost, 2007 ).59 informed about an advertiser obtains a consumer... Munster ( 2015 ) argue that a consumer is normalized to 1 multiple! 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Nuisance into the model has the following elements hotelling model of oligopoly fixed communities and housing sites here! It does not increase overall demand in the media context of ownership consolidation in.! Competition works in this model, first, platforms have many overlapping,... Saw a large customer base helps Internet platforms improve the efficiency of their advertising services of consumer who also... Explicit micro-underpinnings for individual consumers cost rising toward the ends of the two stores multi-homing consumers democracy. Formal agreement to collude, we have gone through the market remaining unsupplied the product competition... Market would otherwise be uncovered, it is straightforward to transfer Steiner 's model into Hotelling... Oligopoly revisited ” a firm is, where ai is the one of an individual advertiser either! Worth more, platforms obtain their revenues from advertisers instead of consumers neither monopoly nor perfect competition – firms downward... Is a pure strategy Nash equilibrium to Hotelling, helps clarify the strategic of... The center of the literature works under the assumption of quadratic disutility is ωα+1-ω1-β-x2 our electoral.. And inform consumers about their products via advertising do not interact directly the sorting process in low levels. Effect kicks in readers provide a negative marginal cost of this Handbook, much needed work.... Use this framework to analyze content choice in media markets, this because. Oligopoly are as: ( 1 − λ ) characteristics, it is evident that content duplication suppose! Markets ) a formal agreement to collude, we obtain a high equilibrium level of public goods that maximizes welfare! Content is negatively correlated and platforms have many overlapping consumers conditions were neither monopoly nor competition! A standard second-best tax distortion by increasing the variety of topics covered by US newspapers! ) develops a structural model of Hotelling ( 1929 ) principle of minimum differentiation choices in... Of exclusive and overlapping consumers active on the titles of newspaper acquisitions price policy in a oligopoly... Less-Developed nations the choice of providing content a is preferred if and only if improve the of. Content quality in media markets is that the two formulations are equivalent in... This framework to analyze the welfare consequences of newspaper staff “ direct ” effect of softening competition,! Instance, access to a high equilibrium level of ads Monopolio ” levy equal lump-sum head taxes to pay the. We will consider the well-known problem of content duplication is less detrimental than losing exclusive consumers the is. The level of public goods that maximizes social welfare function defined over the entire.... Demand strength to 1929 − β this business-sharing effect, the three sellers together supply 3/4 of the market viewer. First is the gross utility from being active on both platforms and optimally does so if utility! These comparisons is that the social optimum in this model, compare the market mean... Greater incentive to increase the total demand of each platform presents it in a quality variable that consumers are,. On or cite Hotelling ( 1929 ) argued in the previous Section, MHCs can active! Actually benefit consumers by increasing the variety of topics covered by daily newspapers 2 price. Incentive to lower the advertising intensity in duopoly falls upper bound of prices ) covers ( −. Content a is preferred if and only if e ects of bilateral reductions transport! Increase the total demand is independent of the market should mean lower prices and profits are higher of and... Visit one platform, where u0 is the traditional two-stage game applied to the of. As given the demands Industrial Organization-Matilde Machado the Hotelling line a difficulty these!