Quality differentiation and firms’ choices between online and physical markets

We study firms’ choices between online and physical markets with respect to product quality and competition, and examine consequences of transparency policies on price competition and market structure. We investigate two contrasting forces. First, since consumers cannot fully inspect an online product’s quality prior to purchase, conventional wisdom and some of the literature suggest that this attracts low-quality products to the online market (a pooling effect). On the other hand, the literature on vertical product differentiation indicates that a firm with a lower-quality product may prefer to reveal its product quality in the physical market because quality differentiation helps alleviate price competition (a differentiation effect). We show that an entrant firm with product quality lower than that of the offline incumbent may choose the physical market, whereas the entrant with a quality higher than the incumbent’s may sell online. More generally the two contrasting forces can give rise to a wide range of product quality—from low-end to high-end—in both markets.     

The Adverstising Market in a Product Oligopoly

A model is developed in which producers in a differentiated product market compete in prices and informative advertising. The model also includes commercial media, which are linked to producers through the advertising market and to consumers through the media market. We investigate how certain market parameters, such as media market differentiation or product market differentiation, affect the competitive level advertising chosen in the market. The model shows that less product differentiation or more media differentiation leads to a higher market level of advertising. In the case of sufficiently high media differentiation, levels of advertising are in excess of the social optimum.     

Net Neutrality and internet fragmentation: The role of online advertising

We investigate the relation between Net Neutrality regulation and Internet fragmentation. We model a two-sided market, where Content Providers (CPs) and consumers interact through Internet Service Providers (ISPs), and CPs sell consumers' attention to advertisers. Under Net Neutrality, a zero-price rule is enforced. By contrast, in the Unregulated Regime, ISPs make access to their subscribers for CPs conditional on payment of a termination fee. Multiple impressions of an ad on the same consumer are partially wasteful. Thus, equilibrium ad rates decrease when audiences overlap. We show that ISPs may strategically set termination fees to induce fragmentation. This takes place when advertising revenues are potentially large but strongly diminished by competition among CPs, and when consumers are not highly sensitive to content availability. We therefore identify an important link between termination fees, the online advertising market and Internet fragmentation. We extend the model to account for multi-homing consumers, vertically integrated ISPs, third-party advertising platforms and heterogeneous CPs.     

Which one is more valuable in coordinating the online and offline distribution? Service support or online price coordination

Nowadays effective mechanisms to coordinate the online and offline distribution become increasingly important in the business market. In this research, we first propose two mechanisms (i.e. the offline service to the retailer and the online price coordination) for the manufacturer and the retailer to employ. Our results show that the online price coordination does help coordinate the online and offline distribution and bring higher profits to the manufacturer-retailer supply chain and thus both the manufacturer and the retailer, while the offline service to the retailer does not; comparing to the offline service to the retailer, the online price coordination is a better strategy to be utilized to alleviate the online to offline competition. Furthermore, we investigate if a novel coordination mechanism, which combines the offline service to the retailer with the online price coordination, can help coordinate the online and offline distribution better and becomes the optimal coordination mechanism. Surprisingly, our results show that compared to both the offline service to the retailer and the online price coordination, this combination coordination mechanism does show a dominant competitive advantage to bring highest profits to all parties.     

Vertical integration in the TV market: Exclusive provision and program quality

We study how vertical integration in a media market affects investments in premium content. We show that a content provider provides the premium content exclusively to a platform, regardless of the vertical structure of the industry. However, a vertically integrated content provider has lower incentives to invest in quality than an independent one. With asymmetric platforms, the platform with a competitive advantage in the advertising market obtains the exclusive content, and the content provider invests even less when it is integrated with it. We show that the content provider prefers to merge with the platform with a competitive advantage in the advertising market. Vertical integration reduces both consumer and total surplus. Our results suggest that authorities should carefully assess the effects of vertical mergers on the incentives to invest in content quality, incorporating non-price measures in merger analysis. An intervention at the distribution stage that enforces non-exclusive provision reduces quality and may have adverse effects on consumer and total surplus.     

Selling cross-border in online markets: The impact of the ban on geoblocking strategies

We develop a model of strategic geoblocking, where two competing multi-channel retailers, located in different countries, can decide to block access to their online store from foreign consumers. We characterize the equilibrium when firms decide unilaterally whether to introduce geoblocking restrictions. We show that geoblocking allows firms to soften competition, but at the cost of lower demand. A ban on geoblocking leads to lower prices, both offline and online. However, when firms can invest in increasing online demand, the ban may have adverse effects on investment and social welfare. We extend our analysis to account for price discrimination and investigate the role of shipping costs.     

Competitive targeted online advertising

This paper examines how an online publisher utilizes its information about consumer preference to target advertising. In our model, two firms first bid for a prominent ad position in a publisher-organized position auction, and then compete on price in the subsequent product marketplace. We consider two dimensions of consumer heterogeneity. First, consumers are heterogeneous in product preference. Based on their tastes, some consumers prefer one product over the other, whereas other consumers may rank the products in an opposite order. Second, consumers differ in search preference, i.e., “nonshoppers” only consider the advertised product, while “shoppers” always search both firms’ products before buying. We show that targeted advertising based on product preference will mitigate price competition in product markets as well as competition in position auctions, the latter to the detriment of the publisher. In contrast, targeted advertising based on search preference always benefits the publisher, as the winning firm can charge monopoly prices to nonshoppers. We show that the publisher’s optimal choice is to utilize only the information about consumer search preference. We also explore the welfare implications of targeted advertising based on different types of consumer preference.     

Valuable strategy and firm performance in the O2O competition

When the manufacturer opens an online channel to compete with its traditional retailer, what valuable strategy can be utilized to alleviate the O2O (online to offline) competition and conflict and improve the performances of all channel members? Our research addresses this important question by initiating an innovative strategy considering the retailer's sales effort and the manufacturer's support in local advertising simultaneously in a manufacturer – retailer O2O supply chain. Our results show that although the retailer's sales effort helps improve the channel coordination and leads to a win-win solution for both the manufacturer and the retailer, investing in both the retailer's sales effort and manufacturer's support in local advertising is a more effective strategy to be employed to coordinate the O2O distribution and achieve higher profits for all parties in the manufacturer - retailer supply chain. In addition, our results also show that compared to the simultaneous mode, the Stackelberg leader-follower mode provides no competitive advantage to the manufacturer or the retailer when the retailer's sales effort and manufacturer's support in local advertising strategy is implemented to coordinate the O2O distributions.     

Competition in the Korean Internet Portal Market: Network Effects, Profit, and Market Efficiency

Internet portals serve as platforms for coordinating advertisements, content, and user markets. We model portal structure with South Korean market data to explain network effects and other competition factors. We also analyze network effects on profit and market efficiency. The results indicate a negative network effect from banner advertisements in the user market, which is countered by a network effect from content provision. In the advertising market, the network effect from user demand is positively identified, which explains profit making through increased user visits. Furthermore, we show that network effects due to market concentration result in increases in consumer surplus.     

Inter-firm price coordination in a two-sided market

In many two-sided markets we observe that there is a common distributor on one side of the market. One example is the TV industry, where TV channels choose advertising prices to maximize own profit and typically delegate determination of viewer prices to independent distributors. We show that in such a market structure the stronger the competition between the TV channels, the greater will joint profits in the TV industry be. We also show that joint profits may be higher if the wholesale contract between each TV channel and the distributor consists of a simple fixed fee rather than a two-part tariff.     

Content and advertising in the media: Pay-tv versus free-to-air

We compare the advertising intensity and content of programming in a market with competing media platforms. With pay-tv, media platforms have two sources of revenues, advertising revenues and revenues from viewers. With free-to-air, media platforms receive all revenues from advertising. We show that if viewers strongly dislike advertising, the advertising intensity is greater under free-to-air television. We also show that free-to-air television tends to provide less differentiated content whereas pay-tv stations always maximally differentiate their content. In addition, we compare the welfare properties of the two different schemes.     

What is Different About Online Advertising?

Drawing on the literature on online advertising, I argue that the fundamental economic difference between online and offline advertising is a substantial reduction in the cost of targeting. This cost reduction informs what I view as the main themes in the online advertising literature: understanding advertising effectiveness, auctions, privacy, and antitrust.     

Is targeted advertising always beneficial?

In this paper, we study a simple model in which two horizontally differentiated firms compete in prices and targeted advertising on an initially uninformed market. First, the Nash equilibrium is fully characterized. We prove that when the advertising cost is low, firms target only their “natural markets”, while they cross-advertise when this cost is high. Second, the outcome at equilibrium is compared with random advertising. Surprisingly, we prove that firms' equilibrium profits may be lower with targeted advertising relative to random advertising, while firms are given more options with targeted advertising.     

Competition and commercial media bias

This paper reviews the empirical evidence on commercial media bias (i.e., advertisers influence over media accuracy) and then introduces a simple model to summarize the main elements of the theoretical literature. The analysis provides three main policy insights for media regulators: (i) Media regulators should target their monitoring efforts towards news contents upon which advertisers are likely to share similar preferences. (ii) In advertising industries characterized by high correlation in products' qualities, an increase in the degree of competition may translate into a lower accuracy of news reports. (iii) A sufficiently high degree of competition in the market for news drives out commercial media bias.     

Bagging bundle benefits in broadband and media mergers: Lessons from Sky/Vodafone for antitrust analysis

The historic precedents in telecommunications antitrust findings have tended towards finding harm to competition when network operators integrate downstream and bundle the provision of applications and services. The reason for this is that market power in network provision is thought to be extended into the applications market(s). More recently however, proposed mergers have been between telecommunications and media distribution firms, both of whom have some degree of market power, already sell their own services in bundles, and who may or may not have been offering combined bundles already via contractual agreements. Examples include Sky/Vodafone in New Zealand, and Time Warner/AT&T in the United States as well as Vodafone/Unitymedia in Germany and Media Capital/Altice in Portugal. These complex proposed arrangements pose challenges to competition authorities, whose legal and procedural rules and precedents, especially those defining the relevant markets affected by the merger or vertical integration activity, have been developed from the analysis of simpler cases. These precedents may not be sufficient to analyse current cases, characterized by multiple products catering to heterogeneous consumer preferences, and consumers are not constrained to buying only one variant of the products in each of the upstream and downstream markets.We illustrate the challenges by way of a case study of the proposed merger between Sky and Vodafone, declined by the New Zealand Commerce Commission in February 2017. Limitations in existing market definition processes and the evaluation of market power where bundling already occurs risk overlooking complex demand-side interactions that influence the profitability and efficiency of various structural and contractual strategic choices. We propose that classic merger and antitrust analysis based on econometric cost-benefit analysis can be augmented by using simulation and numerical analysis of a range of bundle offers expected to be relevant in decision-making. We develop a simple model and use it to illustrate how it may be used to inform broadband and content mergers, and other complex antitrust cases, such the assessment of the effects of two-sided markets and firm pricing decisions.     

Discrimination in Dynamic Procurement Design with Learning-by-doing

We study the long-run impact of procurement discrimination on market structure and future competition in industries where learning-by-doing makes incumbent firms more efficient over time. We consider a sequential procurement design problem in which local and global firms compete for public good provision. Both firms benefit from learning-by-doing if they provide the public good in the previous period, but global firms only may be able to transfer learning-by-doing from different markets. We show that the optimal procurement has to be biased in favor of the local firm even when all firms are symmetric with respect to their initial cost distribution.     

TARGETED ADVERTISING: THE ROLE OF SUBSCRIBER CHARACTERISTICS IN MEDIA MARKETS*

This paper seeks to establish the importance of targeted advertising in media markets. Using zip‐code level circulation for U.S. newspapers, I show that newspapers facing more competition have lower circulation prices but higher advertising prices than similar newspapers facing little or no competition. I explain this by showing that newspapers in more competitive markets are better able to segment readers according to their location and demographics. This leads to greater homogeneity in the characteristics of subscribers and raises advertisers' willingness to pay for such readers. The results imply a substantial benefit to advertisers and media firms from targeted advertising.     

An experimental test of automatic mitigation of wholesale electricity prices

In several major deregulated electricity generation markets, the market operator uses an “automatic mitigation procedure” (AMP) to attempt to suppress the exercise of market power. A leading type of AMP compares the offer price from each generation unit with a recent historical average of accepted offer prices from that same unit during periods when there was no transmission-system congestion to impede competition. If one or more units' offer prices exceed the recent historical average by more than a specified margin, and if these offer prices raise the market-clearing price by more than a specified margin, the market operator replaces the offending offer prices with lower ones. In an experiment, we test an AMP of this type. We find that it keeps market prices close to marginal cost if generation owners have low market power in uncongested periods. However, with high market power in uncongested periods, a condition that may apply in many parts of the world, the generation owners are able to gradually raise the market price well above short-run marginal cost in spite of the AMP. We also test the effect of the AMP on the frequency with which high-variable-cost units are used, inefficiently, in place of low-variable-cost units.     

Supporting New Product Launches With Social Media Communication and Online Advertising: Sales Volume and Profit Implications

The question of how important firms’ investments in digital communication formats are for the commercial success of new products remains unexplored in the product innovation management literature. Drawing on reactance theory, the authors examine the extent to which investments in social media communication and online advertising are related to the sales volume and profits of new products within six months of being launched. Using dyadic survey data, an analysis of new products launched by 122 consumer durable goods firms reveals that sales volume and profits of new products are associated with (1) social media communication in a positive but diminishing shape, and (2) online advertising in an inverted U‐shape. Further analyses show that those curvilinear relationships are steeper for social media communication and flatter for online advertising at respective (1) higher levels of customer product involvement and (2) lower levels of product superiority. The results imply that there is an optimal level of investment in social media communication and online advertising, with the optimum dependent on a new product’s consumer involvement and superiority levels.