Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
Market Structure and Political Differentiation of
Newspapers in the Framework of Two-sided Markets
Hend Ghazzai*
We consider two editors competing in both the newspapers' market
and the advertising market. We assume that readers may be
positively or negatively affected by advertising and advertisers are
positively affected by the audience of the newspaper. We
characterize the equilibria of a game where editors must choose their
political content, their prices and their advertising rates. We show
how two-sided interactions affect both the market structure and the
political content of newspapers.
Keywords: Two-Sided Markets, Advertising, Newspapers' Competition, Political
Differentiation
JEL Code: L11
I.
Introduction and Literature Review
Commercial media such as newspapers, magazines, TV channels operate in two
markets. They sell their product to readers or viewers and they sell advertising space
to advertisers. Readers are affected by the amount of advertising in such media and
advertisers take into consideration the audience of the media when making
advertising decisions. These demand linkages are referred to in the literature as twosided network effects1.
In this paper, we study the press industry. Taking into consideration the dependence
of editors on advertisers and their need to satisfy politically differentiated readers, the
objective is to examine the consequences of such effects on the market structure
and on the political content of newspapers. Will a competitive market structure
prevail at equilibrium or will two-sided network externalities confirm the tendency of
concentration observed in media markets? The nature of content delivered by the
newspapers is also a crucial issue. Will editors offer a differentiated content tailored
to different types of readers or a standardized and moderated content corresponding
to a neutral reader? While the first question about market structure has been well
studied in previous works either in the media industry framework or in the general
framework of two-sided markets, the second question received little attention. To our
knowledge, the political content of newspapers was not studied in the framework of a
two-sided market2.
While advertisers are clearly positively affected by the audience of the media, the
attitudes of readers or viewers toward advertising is not obvious. This attitude is
mainly affected by the type of media and is also country specific. It is generally
*
Dr.Hend Ghazzai, Department of Finance and economics, College of Business and Economics,
Qatar University. P.O. Box 2713 Doha, Qatar. E-mail: hend.ghazzai@qu.edu.qa. Tel: +974 44 03 50
86. Fax: +974 44 03 5081
1
See (Rochet and Tirole , 2003) and (Armstrong, 2006) for the literature review about two-sided
markets.
2
(Gabszewicz et al, 2002) study the political differentiation of newspapers when readers are not
affected by advertising.
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
accepted that TV viewers are negatively affected by advertising3. However, readers
of newspapers may be positively or negatively affected by advertising. In the US,
many papers either theoretical or empirical support the positive effect of advertising
on readers ((Blair and Romano, 1993), (Rosse, 1980), (Bogart, 1989), (Ferguson,
1983)...). In Europe, consumers' reactions to advertising are more mitigated and
readers can be either positively or negatively affected by advertising. Advertising
may be considered in the latter case as polluting the main objective of a newspaper
which is to deliver valuable information (See (Musnick,1999) and (Sonnac, 2000). In
this paper, like in (Ferrando et al, 2008), we consider the general case of a
continuum of readers where a proportion are ad-avoiders and the rest are ad-lovers.
In the literature on two-sided markets applied to the media industry, authors assume
the existence of either positive or negative network externalities for the audience.
The negative externalities where mainly studied in the broadcasting market where
the good into consideration is a public good4. When consumers value advertising
positively, the main result is that there is a tendency to market concentration in the
media industry5. To our knowledge only (Ferrando et al, 2008) consider two types of
readers ad-avoiders and ad-lovers.
Unlike (Ferrando et al, 2008), we do not impose exogenously fixed locations for the
newspapers. In addition to the determination of the market structure that prevails at
equilibrium, we also determine the type of political content that will be offered by
editors. In fact, we analyze the decisions in terms of newspaper prices, advertising
rates and political locations of two competing editors in both the newspapers and
advertising markets. We assume that readers and advertisers first form expectations
about the advertising space in each newspaper and about the readerships
respectively. Editors then decide where to locate on the political spectrum and set
newspaper prices and advertising rates simultaneously. Finally, advertisers and
readers make their purchase decisions. We characterize the fulfilled expectations
equilibria of this game and show how the equilibria are affected by the intensity of
the audience feelings about advertising and by the type of the audience i.e. whether
the audience is constituted of a majority of ad-lovers or a majority of ad-avoiders.
We prove that different market structures may prevail at equilibrium: a symmetric
duopoly, an asymmetric duopoly or a monopoly. When the market structure is a
duopoly, newspapers choose maximum differentiation and locate at the extremities
of the political spectrum. Therefore, competition leads to divergent ideologies of the
newspapers. Editors cater to consumers' beliefs and deliver an extremist content
targeting extremist readers. When a monopoly emerges at equilibrium, the
newspaper offers a neutral content and locates at the middle of the political spectrum
delivering an unbiased content. It seems that the lack of competition resulting from
strong feelings toward advertising is compensated by the type of political content
offered by the surviving editor.
The rest of the paper is organized as follows. Section 2, introduces the model. We
present the results in Section 3 . We conclude in section 5.
3
See (Gal-Or, 2003), (Anderson and Coate, 2005), (Gabszewicz et al, 2004) for theoretical model and
(Brown and Rotchild, 1993), (Danaher, 1995) and (Dukes, 2004) for empirical models.
4
See (Choi, 2006), (Cunningham and Alexander, 2004), (Masson et al, 1990) and (Anderson and
Coate, 2005).
5
See (Armstrong, 2005), (Rochet and Tirole, 2003), (Hackner and Nyberg, 2008)).
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
II.
The Model
We consider two editors selling one newspaper each to a population of readers and
selling advertising space in their newspaper to a population of firms. Thus, each
editor has two revenue sources: an editorial revenue generated by the sales of the
newspaper itself and an advertising revenue generated by the sales of the
advertising space. Consumers in each market will make their consumption decisions
based on the expected demands in the other market. In fact, advertisers' demands
depend on their expectations about newspapers' sales and readers' purchase
decisions are affected by the amount of advertising they expect to find in the
newspaper.
We denote by and
the amount of advertising in each newspaper expected by
readers and we denote by
and
the readership of each newspaper expected by
advertisers.
The Newspaper Market
We consider a population of readers characterized by their political opinion t and
distributed on the political spectrum [0, 1], Editor 1 is located at distance
from
point 0 and Editor 2 is located at distance
from the point 1. At each point t of
the political spectrum [0,1], there corresponds a continuum of readers [0,1] divided in
two sub-groups: a proportion of readers are ad-avoiders and a proportion 1- are
ad-lovers.
Ad-avoiders lose utility when the advertising space in the newspaper increases. Adlovers gain utility when the advertising space in the newspaper increases. The
parameter β measures the intensity of ad-aversion or ad-attraction of readers and is
assumed to be positive.
The utility loss of an ad-avoider reader located at distance t on the political spectrum
and buying newspaper 1 is given by:
The utility loss of an ad-avoider reader located at distance t on the political spectrum
and buying newspaper 2 is given by:
The utility loss of an ad-lover reader located at distance t on the political spectrum
and buying newspaper 1 is given by:
The utility loss of an ad-lover reader located at distance t on the political spectrum
and buying newspaper 2 is given by:
An ad-avoider who is indifferent between buying newspaper 1 or newspaper 2 is
characterized by for which the equality 6
holds, i.e.
6
It is assumed here that
examined later.
or
Thus,
The case where
will be
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
An ad-lover who is indifferent between buying newspaper 1 or newspaper 2 is
characterized by for which the equality
(
)
holds, i.e.
We notice that
and thus
Figure 1 illustrates newspaper’s demands in both cases
assuming that each editor has a positive market share.
and
Figure 1: Newspapers’ Demands
𝑥𝑒
𝑥𝑒
𝑥𝑒
1
𝑥𝑒
1
𝛾
𝛾
0
𝑡𝛼
𝑡𝜆
1
0
𝑡𝜆
𝑡𝛼
1
Buy Newspaper 1
Buy Newspaper 2
We denote by
. The demand for newspapers are as follows:
The demand function of newspaper 1 is


if

if
if
The demand function of newspaper 2 is


if

if
if
The difference (
) and the proportion of ad-avoiders play an important role
in determining the demand of each newspaper. At equal prices and for symmetric
locations, if readers expect newspaper i to attract more advertisers than newspaper j
(
) and if there is a majority of ad-lovers
the readership of
newspaper i will be more important than the readership of newspaper j. On the
contrary, if there is a majority of ad-avoiders, newspaper j will have more readers
than newspaper i.
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
We now study the case
follows:



If
and
, the demand functions are given as
if
and
(
if
and
)
if
In case both editors choose to locate at the center and at equal prices, the
newspaper which is expected to offer more advertising attracts the ad-lovers and the
newspaper which is expected to offer less advertising attracts the ad-avoiders.
Finally, when both newspapers choose to locate at the center of the political
spectrum and if
then the newspaper with the lowest price attracts all the
demand and if prices are equal then
.
The Advertising Market
The advertisers are characterized by their willingness to advertise in a newspaper.
They are uniformly distributed on the unit interval [0, 1]. Each advertiser
buys
exactly one ad in only one of the two newspapers. The utility of an advertiser
depends on the expected readership of each newspaper
.The utility of buying an
ad from newspaper i increases proportionately to the expected readership. More
precisely, the utility of buying an ad in newspaper i at the unit rate
is given by
This is a vertical differentiation model a la Mussa and Rosen for the advertisers. The
advertiser who is indifferent between advertising in newspaper 1 or 2 is given by:
̂
̂
̂
In the previous equality, it is assumed that
. The case where advertisers
expect the same readership for both newspapers is examined below:

If
then
and
.

If
then
and
.


If
If
and
then
o If
o If
then
and
.
and
The Fulfilled Expectations Equilibrium
Editors will choose their locations (political orientation), prices and advertising rates
according to the following sequencing:
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
1. Readers form expectations about the advertising volumes in the newspapers
and advertisers form expectations about the readership of each newspaper.
2. Editors choose their location on the political spectrum.
3. Editors choose the price of their newspapers and the advertising rates
simultaneously.
4. Readers and advertisers make their purchase decisions.
We consider a fulfilled expectations equilibrium represented by a couple of strategies
(
)
and a vector of
expected demands
such that
I.
II.
Each editor chooses its location, newspaper price and advertising rate as a
best reply to the location and prices of the competitor, given readers' and
advertisers' expectations.
Expectations are fulfilled, i.e if
then
and if
then
. If
then
and if
then
.
If an equilibrium exists, it is a Bertrand equilibrium given the expectations of readers
and advertisers. As at the Bertrand equilibrium, the expectations may not be fulfilled,
by condition 2, we restrict the equilibria to those where expectations are fulfilled.
III.
Results
We now determine the equilibria of the game presented in Section II by backward
induction. We characterize the price equilibrium, the location choice of the editors
and we examine fulfilled expectations equilibria.
1. The Price Equilibrium
Given the readership expectations
and
, the advertising expectations
and
and the newspapers locations and , we determine the newspapers' prices and
the advertising rates of each editor. Editors have two sources of revenue: an editorial
revenue and an advertising revenue. Editor i’ s profit is given by:
Lemma 1 characterizes the prices and demands in the newspaper market and
Lemma 2 characterizes the prices and demands in the advertising market. All prices
satisfy condition 1 of our equilibrium.7
Lemma 1 The pair of prices satisfying condition (1) of the Bertrand equilibrium and
the corresponding newspapers demands are as follows:

If
)
)
)
)
)

7
If
)
All proofs are provided in the Appendix.
then
then
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
)

If
)
then
)
For symmetric locations and if there is a majority of ad-lovers, the newspaper which
is expected to attract the more advertisers sets a higher price for its newspaper and
attracts more readers. The opposite occurs when there is a majority of ad-avoiders.
If readers expect one editor to attract much more advertisers than the other only one
editor survives at equilibrium.
The price equilibrium given by Lemma 1 implicitly supposes that
or
.
When
and
, we easily prove from newspapers' demands that a
price equilibrium does not exist as best response functions do not exist for both
editors. When
and
the price equilibrium is when both newspapers
set prices equal to 0.
Lemma 2 The pair of prices
satisfying condition (1) of our equilibrium and the
corresponding advertising demands are as follows:

if
then
(
)
and

if
then
̅
̅
and

if
then
and
2. Location Choice
In this section, we determine editors' locations i.e. the political image of the
newspaper. We focus on two cases that depend on the advertising expectations and
on the intensity of ad-aversion or ad-attraction .
 Readers may expect one editor to attract much more advertisers than the
other. This situation happens when (
)
. In this case should be
sufficiently high so that the previous inequality is satisfied.
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6

Readers may expect editors to offer similar advertising spaces. This situation
happens when
(
)
. In this case should not be very high8.
We have the following results:
Lemma 3 The best location choices for firms are:

if

if

if
then
*
and
then
*
and
then
+ Only newspaper 1 is active.
and
+ Only newspaper 2 is active.
Both newspapers are active.
The concentration of the market depends on advertising expectations. If advertising
expectations favor one newspaper then only one newspaper is active. Depending on
the sign of
i.e. depending on whether there is a majority of ad-lovers
or a majority of ad-avoiders, the active editor is the editor that attracts the more
advertisers if there is a majority of ad-lovers and the editor that attracts the less
advertisers if there is a majority of ad-avoiders. As (
) is greater than 1, there
is market concentration only when readers are very sensitive to advertising. More
interestingly, the active editor locates at the middle of the political spectrum. The
editor's ideology is then at the center offering an unbiased content to a neutral
reader. The loss in terms of competition is thus compensated by the unbiased
content offered by the editor.
If readers expect editors to offer similar advertising spaces and if they are not very
affected by advertising, both firms are active at the location stage of the game and
editors will offer a completely differentiated content as they will locate at the
extremities of the political spectrum. However, the equilibrium will not be symmetric
in terms of prices and demands if readers do not expect exactly the same advertising
space in each newspaper. The market is thus competitive and editors target
extremist readers.
When
we have proved in the previous section that the only possible price
equilibrium is when
In this case, the editors set a null price for their
newspapers and do not generate any profit from the readers. The locations' choice
(
) is then dominated by the choice (
).
3. The Fulfilled Expectations Equilibria
We now characterize the fulfilled expectations equilibria.
Proposition For any value of
there exists a fulfilled expectations symmetric
equilibrium where newspapers offer a completely differentiated content, with equal
prices and markets shares. This equilibrium is unique when
When
8
, there also exists two other types of equilibria:
We only have partial results for the case
are not easy to fully characterize.
(
)
as the optimal newspapers' locations
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6


If (
)
only newspaper i is active. The active newspaper is located
at the middle of the political spectrum.
If
(
)
, both newspapers are active and are located at the
extremities of the political spectrum. Newspaper i has a higher demand and
attracts more advertisers.
When there is majority of ad-avoiders (
) only a unique equilibrium exists and
this equilibrium is symmetric. This equilibrium is such that
. At
equilibrium, newspapers demands are equal to . Newspapers prices are equal to 1.
Advertising demands are equal to and advertising rates are equal to 0. Newspapers
offer a completely differentiated content (
). This equilibrium also exists
when
. When the expectations are symmetric then the equilibrium is symmetric.
The editors do not generate any profit from the advertising market and their only
revenue source is from the newspaper market.
In case of significant ad-attraction, the editor which is expected to offer more
advertising is more attractive to readers. The more readers the editor attracts, the
more advertisers will wish to advertise in its newspaper and so on until the
competitor exits the market. A sort of "circulation spiral" occurs. The concentration in
the newspaper industry seems to be generated by a high ad-attraction and the
dependence of editors on advertising.
If ad-attraction is not very significant, the newspaper which is expected to offer more
advertising is the leader in both the advertising and the newspaper markets. The
leading editor sets higher prices in both markets.
IV.
Conclusion
We have studied in this paper, the strategies of two editors competing in both the
newspapers market and the advertising market and we have shown how two sided
interactions affect the market structure and the type of political content offered by
editors.
The paper can be extended in many ways. We can examine the case were
advertisers in addition to the audience also care about the political opinion delivered
by newspapers and prefer not to publish in very extremist ones. This may eliminate
some of the equilibria where editors locate at the extremities of the political
spectrum. We may also consider the case of targeted advertising and how it affects
the equilibria. Finally, we can distinguish between two types of content delivered by
newspapers: the political content and the non-political one and examine how
advertising affects the spaces allocated to each type of content in the newspaper.
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Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
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Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
Appendix
Proof of Lemma 1. When both newspapers have positive demands. The derivatives
of the editors' profits with respect to prices are given by:
Setting both derivatives equal to 0 leads to the following first order conditions:
The solution to the first order conditions are given by:
with corresponding demands given by
As both demand must be positive the condition
)
must hold.
To completely characterize the price equilibrium, we need to determine the reaction
functions of both firms and then to examine their intersections. The reply functions of
Newspapers 1 and 2 are given by:
{
{
By
distinguishing
3
cases:
)
)
and
)
, we determine the intersection points of the reply functions as given in
Lemma 1. ■
Proof of Lemma 2. Obvious. It is the price equilibrium of a vertically differentiated
market when the market is covered. ■
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
Proof of Lemma 3. Let us first examine the case
check that the inequality
is never satisfied whatever are
and
)>1. We can easily
)
. Thus, only Editor 1 can be
active at equilibrium and the best location for Editor 1 is
choose any location
while Editor 2 will
.
The optimal locations when
the previous case.
)<-1are found using the same argument as in
Let us now examine the case
)
We will determine the best
location choice of Editor 1 as a function of the location choice of Editor 2 and the
best location choice of Editor 2 as a function of the location choice of Editor 1.
The profit of newspaper 1 is given by:
The derivative of
with respect to
is
if and only if
As
then has
two roots
√
√
The variation table of is then given by
+
As
-
+
, to find the location that maximizes editor 1’s profit, we need to discuss
the position of
and
with respect to 0 and .
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
We easily check that as
)
. Now let us compare
We have that
then
and
if and only if
.
Let us study the sign of
. The quadratic expression has
√
two roots
√
and
We easily check that
Thus:

We also easily check that
and
If
The root
then for every
.
9
if and only if
.
,
and
thus

If
then if
,
and if
,
.
The optimal strategies of Editor 1 are then:

If

If
)
then
)
then
√
o if
then
o if √
then
Now we compare
and
(
or .
)when
)
and
√
(
First,
)
(
)
is negative and therefore
(
is decreasing with respect to
)
. Then,
is negative then positive and therefore
decreases and then increases with respect to .
By
9
√
(
)
because
) and
)<
.
(
√
(
) first
).
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
We find that
√
(
(
)
) approaches
when
approaches and
, there is only one
o if
o if
√
(
). As
(
)
√
such that
then
then
Similarly, the best strategy of Editor 2 is the following:

If

If -
)
such that
o if
o if
then
)
√
then there exists only one
then
then
The equilibrium at the location stage of the game is given by
reply functions intersect at this point for
).■
as the best
Proof of Proposition 1. We first examine the symmetric expectations case where
and
. Then, we have that
)
and thus
,
,
,
and
Using the fulfilled expectations
equilibria condition, we have that
.
Next, we prove that only this symmetric equilibrium exists when
Without loss of
generality let us assume that there exist an asymmetric equilibrium such that
. We examine the two cases
) < -1 or .
If
) < -1, editor 2 is active. Thus
and
, a contradiction with the fulfilled expectations equilibria.
The same reasoning holds when demands but
, which means that
and thus
, both editors have positive
Hence, a contradiction.
Two other equilibria may exist when
i.e. when there is a majority of ad-lovers.
The fulfilled expectations condition is satisfied in both cases:
) >1 and
)< .■