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Will the Internet Destroy the Can Online Advertising Markets News Media?

Save the News Media?
Susan Athey, Emilio Calvano& Joshua Gans Media Economics Workshop October 2010

The chart of doom

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Theories

Loss in classifieds Advertising space unlimited Web display ads are not effective Dramatic increase in competition

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Proposed solutions

Enforce copyright on aggregators Allow mergers Public subsidies (non-profits) Cut public broadcasting

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Only two facts

The Internet has facilitated consumer switching between outlets There is imperfect tracking between outlets

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Switching

Browsing Free content Aggregators, social networks and search

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Single-homing consumers

Traditional media economics with single-homing consumers « cannot explain total ad revenue decline. Each outlet sells access to consumer as a monopolist (Anderson-Coate).

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Our assumptions

Consumers have two attention periods « and allocate attention to outlets based on quality « « with a probability of switching outlets between each. Advertisers want to impress each consumer once over the two periods « and have heterogeneous values on impressing consumers. Two outlets supply advertising space associated with each unit of consumer attention
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The impression game

Morning

Afternoon

Outlet 1

Outlet

If Starbucks single-homes, it misses impressions. If Starbucks multi-homes, it wastes impressions.
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The advertiser¶s dilemma

Wasted Impressions

Customer analysis of data provided to authors by CommScore of 30 recent large, cross-outlet campaigns

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Solving the dilemma

No switching Pure multi-homing No tracking (Bergemann-Bonatti) Coordination in time Perfect tracking
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Advertiser demand

To impress loyals, want to multi-home « at the cost of wasted switcher impressions To impress switchers, want to increase frequency « at the cost of wasted loyal impressions Higher value advertisers more willing to bear costs

Price Single-homing

Multi-homing Multi-homing + Frequency

Quantity (Advertisers)
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Market clearing

Price

The equilibrium impression price is set by a single-homing advertiser. The price also determines the mix of advertisers in µhoming¶ strategies

Supply

2a Quantity (Advertisers)
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More switchers

Price

More switchers reduces demand for multi-homing « but increases the demand for multihoming + frequency « can increase profits

Supply

Quantity (Advertisers)
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Endogenous ad capacity

Outlets compete in Cournot fashion due to presence of switchers Increase in switchers causes expansion in ad capacity in equilibrium µPotential¶ U-Shaped relationship

Profits

Share of switchers
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Perfect tracking

Profits

Under perfect tracking « inefficient matching is eliminated « but switchers create competition at the margin

Share of switchers
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Impact of blogs

Price

Blogs and other non-ad content « decrease available ad capacity in the market « and reduce adverse effect of switching « Causing impression prices to rise.

Supply

Quantity (Impressions)
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Paywalls

Subscription-based paywalls reduces switching (increase efficiency). Unilateral paywalls cost an outlet in readership but benefit both outlets in increased efficiency. Switchers magnify positive externalities so we expect lower equilibrium paywalls.
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Conclusions

Mergers may increase outlet ad revenue. Public broadcasting is an µattention¶ threat but involves less competition than commercial outlets. Paywalls may be a poor substitute to advertising.

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Future directions

Outlet asymmetries and competition for readers Platform market structure issues in perfect tracking Interactions with ad targeting

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