TILEC Work In Progress: Gijsbert Zwart (RUG)

Competition for single-homers

We study choice of content substitutability by competing media firms, when consumers can multihome. Firms which only derive profits from consumers benefit from offering contents for which consumers' demand is independent. In this way, each firm can individually monopolize its product. Choosing contents that are closer substitutes heats up competition among the firms, reducing each firm's profits.

This picture changes when advertising is an important source of revenues. With independent demands for the firms' contents, many consumers spend time on multiple media platforms (multi-homing). This harms the firms' bargaining position in selling ad-space if advertisers only need to reach consumers once. With high value from advertising, the platform firms gain by positioning their contents as closer substitutes. The ensuing higher competition, and lower prices, on the consumer side are then offset by an increasing share of single-homing consumers, through which platforms can extract monopoly rents from advertisers.

The model has implications for mergers among media content firms. When advertising is less important, mergers will be more profitable if they involve firms producing similar content, enhancing market power on the content market. With advertising, media firms will more likely seek to merge with dissimilar firms. The creation of media ecosystems that are close substitutes - and intense competitors - for consumers, will allow the resulting multiproduct firms to monopolize the advertising market.

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