CLASIFICACIÓN Y CARACTERISTICAS DE LAS

This section is devoted to evaluating the effectiveness of an advertising ban in the light of its main objective: making quality broadcasts more attractive to consumers by lowering the amount of advertisements and thus increasing the market shares of the quality medium.

There are three possible ways to restrict advertising: imposing a ban on advertise- ments in the high quality medium (which is what we analyze in this chapter), or on advertisements in the low quality medium.28 _{Alternatively, one could impose a gen-}

eral advertising ban that applies to all broadcasters. The latter is not very realistic and would result in purely vertical competition for viewers, which yields the standard results of the high quality medium setting higher prices on the viewer market, serving the larger part of the market, and having higher profits.

In the following, we compare the equilibrium values of the regimessym2 andasym. For the comparison with asym, we choose sym2 over sym1, because, under both regimes, market abstention of advertisers is allowed for, i.e. ¯a= 0.29

Proposition 7 For all δ > β, in equilibrium, an advertising ban on the high quality broadcaster B

• increases the viewer market shares of A at the expense of B.

28_{Since this case is less realistic, it is not presented here in detail. Nevertheless, it yields some}

interesting results. If only the high quality medium is allowed to carry advertisements, in our model the advertising market will break down, i.e. in equilibrium, there will be no (positive demand for) advertising at all.

29_{Comparing the asymmetric regime to the sym1-regime would distort the results, see Section}

• decreases the overall amount of advertisements.

Proof. See Section A6 of the Appendix.

The effects of an advertising ban on all remaining equilibrium values are depicted in Table 3.4.

Table 3.4: Comparison across regimes (sym2 vs. asym)

Broadcaster A B

Viewer prices psym_A 2 _Rp_Aasym psym_B 2 _Rpasym_B

Advertising prices τ_Asym2 < τ_Aasym —

Viewer market shares nv,sym_A 2 < nv,asym_A nv,sym_B 2 > nv,asym_B

Advertising market shares nad,sym_A 2+nad,sym_B 2 > nad,asym_A —

Profits Πsym_A 2 _RΠ_Aasym Πsym_B 2 >Πasym_B

Note: This table illustrates the effects of broadcasterBnot being allowed to enter the advertising market by comparing the equilibria of the symmetric model with abstention (regimesym2) and the asymmetric model (regimeasym).

While the result concerning the reduction of the overall amount of advertising is in- tuitive, it may be surprising that medium B loses viewers by reducing its advertising level to zero. The latter result is due to the twofold nature of broadcasters’ incen- tives to attract viewers by low viewer prices: First, lowering viewer prices has a direct (positive) effect on viewer market shares. Second, there is an indirect (positive) effect on advertising market shares due to the positive externality the number of viewers exerts on the demand for advertising slots. Being prevented from advertising, the high quality medium B loses this second motive while the incentives of medium A remain unchanged. Hence, in the case of asymmetric advertising, the relative incentives to set low viewer prices are stronger for channel A than for channel B. Accordingly, in equilibrium, broadcaster A serves the larger part of the viewer market than B, which allows him to increase the advertising price.

Both broadcasters’ price setting behavior on the viewer market is subject to two oppos- ing effects. There is a negative effect onA’s viewer prices due to the ad-free platformB

becomingceteris paribus more attractive to consumers, which leads to increased price competition that also puts downward pressure onB’s viewer prices. The positive effect onB’s viewer prices comes fromBlosing part of his incentives to attract viewers, which reduces price competition and thus enables both broadcasters to increase their prices. Whether the positive or the negative effect dominates the evolution of viewer prices depends on the relative strength of the externalities between the two sides of the mar- ket. As shown in Figure 3.6, we can distinguish between three cases: If, for any given level of the viewer externality δ, the nuisance cost of advertisement β is sufficiently low (high), both channels set a higher (lower) viewer price in the case of asymmetric advertising compared to the case of symmetric advertising; for an intermediate range of β, channelA lowers its viewer price while channel B raises it.

Figure 3.6: _{Comparison of both regimes (sym2 vs. asym)}

Note: This figure illustrates the effects of an advertising ban for broadcasterB on equilibrium viewer prices by comparing the equilibria of the symmetric model with market abstention (regimesym2) and the asymmetric model (regimeasym).

For broadcaster B, being prevented from entering the advertising market obviously is a disadvantage that lowers his profits. The analysis shows that for any given value ofδ, the advertising ban onB is beneficial for broadcasterA if and only if the nuisance cost

βis sufficiently small. If the nuisanceβ is high, the intensified price competition on the viewer market dominates from broadcasterA’s perspective, and his profits decrease as well.

In our analysis, the levels of quality are exogenously fixed at maximum differentiation. Though analytically hardly tractable, the framework at hand also allows for modeling an endogenous decision on quality levels. The results with exogenous levels of quality may already give a hint on how these levels would react to an advertising ban on broadcaster B, if the decision on quality was endogenous. As we have emphasized above, broadcasterB loses a part of his incentives to attract viewers. The choice of an endogenous quality level is, besides viewer prices, a second instrument for attracting viewers. Hence, one might expect quality levels to evolve analogically to viewer prices: On the one hand, channel A has an incentive to raise its quality level in order to regain shares in the viewer market. This is due to the direct effect of no advertising at channel B making B ceteris paribus more attractive to viewers. An increase in

A’s quality levels intensifies competition in the quality dimension and exerts upward pressure on channel B’s quality level. On the other hand, the indirect effect of not being obliged to please any customers on the advertising market lowers channel B’s incentive to attract viewers by offering high quality. This mitigates quality competition in the viewer market and gives room for decreasing quality levels, even to channelA. Whether the direct or indirect effect dominates is again determined by the relative strength of the externalities between the two sides of the market.