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An Economic Analysis of Media Markets An Economic Analysis of Media Markets Inaugural-Dissertation zur Erlangung des Grades Doctor oeconomiae publicae (Dr. oec. publ.) an der Ludwig-Maximilians-Universit¨atM¨unchen 2011 vorgelegt von Tanja Greiner Referent: Prof. Dr. Andreas Haufler Korreferent: Prof. Dr. Tobias Kretschmer Datum der m¨undlichen Pr¨ufung: 26. Januar 2012 Promotionsabschlussberatung: 8. Februar 2012 Acknowledgements My first and foremost thanks go to my advisors Andreas Haufler and Tobias Kretschmer for guiding my steps along this academic journey. I owe my deepest gratitude to Andreas Haufler for giving me the opportunity to pursue this dissertation. His outstanding support and continuous encouragement, as well as his helpful comments and suggestions were invaluable to me. This thesis benefited a lot from Tobias Kretschmer's experience and knowledge. He always took the time to give me advice on my research projects and provided me with many valuable comments. I am also very grateful to Monika Schnitzer who kindly agreed to join my thesis committee. I also want to acknowledge Marco Sahm, my co-author of Chapter 3 of this thesis, from whom I learned a lot during our joint project. Special thanks go to my friends and colleagues at the Seminar for Economic Policy and the Munich Graduate School of Economics who made my time as a graduate student a very enjoyable experience. I am very much indebted to Maximilian von Ehrlich, not only for his helpful proofreading, but for always supporting and encouraging me. Last but not least, I want to thank my parents for their unequivocal support throughout all the years of my studies. Tanja Greiner Munich, September 2011 To my parents. Contents 1 Introduction 1 2 The effect of entertainment in newspaper and television news cover- age 13 2.1 Introduction . 13 2.2 Competition in a one-sided market . 17 2.2.1 Symmetric model . 22 2.2.2 Bilateral shift in distance costs . 25 2.2.3 Unilateral decrease in distance costs . 28 2.3 Introducing a two-sided market: The effect of advertising . 32 2.3.1 Symmetric model . 34 2.3.2 Bilateral shift in distance costs . 36 2.3.3 Unilateral decrease in distance costs . 38 2.4 Conclusion . 40 Appendix . 45 3 How effective are advertising bans? On the demand for quality in two-sided media markets 51 3.1 Introduction . 51 iv Contents 3.2 Model setup . 55 3.3 Equilibria in pay-TV systems with and without an advertising ban . 61 3.3.1 Symmetric advertising without market abstention (sym1 ).... 63 3.3.2 Symmetric advertising with market abstention (sym2 )..... 65 3.3.3 Asymmetric advertising with an advertising ban on broadcaster B (asym).............................. 66 3.3.4 Characterization of the equilibria . 68 3.4 The role of the externalities . 70 3.4.1 Effects of an increase in the negative externality β ........ 70 3.4.2 Effects of an increase in the positive externality δ ........ 74 3.5 Effectiveness of an advertising ban . 78 3.6 Equilibria in free-to-air systems with and without an advertising ban . 81 3.6.1 Symmetric advertising without market abstention (sym1 ).... 82 3.6.2 Symmetric advertising with market abstention (sym2 )..... 83 3.6.3 Comparison to pay-TV system . 84 3.6.4 Asymmetric advertising with an advertising ban on broadcaster B (asym).............................. 87 3.7 Concluding remarks . 88 Appendix . 92 4 The role of online platforms for media markets - multidimensional spatial competition in a two-sided market 101 4.1 Introduction................................. 101 4.2 Model setup . 105 4.3 Equilibrium of the game . 110 v Contents 4.3.1 The impact of the type-dimension ................. 114 4.3.2 Comparative statics . 116 4.4 Why do firms offer online platforms? . 119 4.4.1 The world without online platforms . 119 4.4.2 The benefits of unilaterally deviating from the equilibrium with- out online platforms . 122 4.5 Discussion . 129 4.6 Conclusion . 140 Appendix . 143 5 Outlook 153 Bibliography 170 vi List of Figures 1.1 Tabloidization in U.S. magazines ..................2 1.2 Advertising regulation in the EU .................5 1.3 Ownership structure and television financing in the EU ..6 1.4 Main news sources by media type, U.S. ..............8 1.5 Online advertising expenditures, U.K. ..............9 2.1 Topics in news coverage, 2010 .................... 19 2.2 Equilibrium of symmetric model, one-sided market ...... 23 2.3 Equilibrium with bilateral shift in consumer preferences, one-sided market ............................ 27 2.4 Equilibrium with unilateral shift in consumer preferences, one-sided market ............................ 30 3.1 Market shares per target group .................. 60 3.2 Demand structures under the different regimes ....... 62 3.3 Ad demand in regime sym1 ...................... 70 3.4 Ambiguous effects of an increase in β .............. 73 3.5 Ambiguous effects of an increase in δ .............. 77 3.6 Comparison of both regimes (sym2 vs. asym) .......... 80 viii Contents 3.7 Market concentration and ownership structures on EU television markets ........................... 89 3.8 Commercial broadcasters' CPM with and without an ad- vertising ban ............................... 90 3.9 Comparison of both regimes (sym2 vs. asym) .......... 100 4.1 Consumer market shares ....................... 112 4.2 Payoff matrix .............................. 123 4.3 Consumer market shares, unilateral deviation ........ 124 4.4 Market shares with multi-homing consumers .......... 130 4.5 Market size and revenues under multi-homing ......... 131 4.6 Market abstention of consumers ................. 134 4.7 Percentage change in media use per day, Germany 2006-2011 136 ix List of Tables 3.1 Comparison within regimes ...................... 69 3.2 Increase in the negative externality ............... 72 3.3 Increase in the positive externality ............... 75 3.4 Comparison across regimes (sym2 vs. asym) ........... 79 x Chapter 1 Introduction The economic analysis of media markets has received a lot of attention in recent years, which can be attributed to two main causes: First, political decisions seem to be increasingly influenced by public opinion, with the advent of horse-race journalism1 in the late 1970s being indicative of this development. The second cause is the growing economic importance of the media and advertising industry. Earlier contributions studied the role of the media for political decisions and democratic societies. The focus then shifted towards analyzing the microeconomics underpinnings of media outlets' behavior and their interactions with the advertising industry, which is also central to this thesis. In the following chapters, this dissertation sheds light on how three major trends have affected the media market, with each of these trends corresponding to one of the chapters: the tabloidization of news contents, the regulation of television advertising, and the rise of online media. Chapter 2: The effect of entertainment in newspaper and television news coverage This chapter investigates the economics of tabloidization, which defines a trend towards more entertainment and sensationalism in media coverage.2 Empirical evidence sug- gests that media outlets' style of coverage shifts towards predominantly entertaining 1The term horse-race journalism refers to news coverage on politicians and politics especially prior to elections that focusses on confrontation and competition. 2Tabloidization describes changes to the way of media coverage with respect to the style as well as the contents, and, in most cases, a decline in journalistic standards. Tabloid contents are typically easily recognizable by sensationalism, bold headlines, and unambiguous coverage that cater to the audience's base instincts. For an etymology and a detailed definition see Bird (2008). 1 Introduction contents. The model derived in this chapter looks into the causes of this shift and provides a general framework of two competing media outlets with endogenous choice of the style of news coverage. Serious and unbiased news had already in the 1960s a reputation for selling worse than light entertainment.3 This has lead to "hard" news and information being gradually replaced by entertaining "soft" news stories. Figure 1.1 illustrates for the magazine market in the U.S., how the style of media coverage has shifted towards entertainment. Figure 1.1: Tabloidization in U.S. magazines 35 2,5 30 2 25 1,5 20 15 1 10 Entertainment ratio Share ofeditorialpages 0,5 5 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Entertainment Information Ratio Note: This figure illustrates the share of the number of editorial pages in U.S. magazines falling under one of the categories. Entertainment/Celebrities, and Wearing Apparel is counted as Entertainment, and National Affairs, Business&Industry, Foreign Affairs as well as Cul- ture/Humanities is counted as Information. The entertainment ratio is calculated by dividing the share of editorial pages containing entertainment contents by the number of pages containing information. Data source: American Society of Magazine Editors (2011). 3William S. Paley, former chief executive of Columbia Broadcasting System (CBS) allegedly told his newsroom staff: "You guys cover the news; I've got [the comedian] Jack Benny to make money for me." (Kalb, 1998, p.10) 2 Introduction The growing popularity of "soft" news and entertainment has been observable since the mid-1970s and affects all kinds of media types, as shown by a content analysis of about 4,000 new stories broadcasted in NBC, CBS, and ABC news, as well as on the covers of the main U.S. news magazines and newspapers from 1977 to 1997 conducted by The Project for Excellence in Journalism. The findings indicate that the share of entertaining stories, categorized under celebrity, gossip, and scandal coverage, relative to the total number of stories rose from 15% to 43% (see Hickey, 1998). This development is symptomatic of the changes to the media market, although it is not clear what it has been triggered by. This chapter presents two scenarios that lead to media outlets' changing their way of news coverage.
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