TiVoed: The Effects of Ad

-
Avoidance Technologies on
Broadcaster Behaviour
Simon P. Anderson (Virginia)
Joshua S. Gans (Melbourne)
Advertising and Consumers

Do consumers like ads?

Information view: will pay to buy ads (e.g., trade mags)

Nuisance view: will pay to avoid ads (e.g., television)

Rise in ad-avoidance technologies

VCRs

DVRs (e.g., Tivo)

Download TV (e.g., iTunes) and DVDs
Ad-avoidance is a threat to the traditional two-sided
model of selling content … it unbundles the product.
Will it cause a ‘death spiral’?
Research Question
How will broadcasters respond to DVR penetration?

Informal response:

will move to reduce the ‘cost’ to consumers so as to limit
incentives to purchase DVRs; decrease clutter

will try and target niche audiences to tailor more effective
advertising

Our formal result:

DVR penetration means that the marginal viewer has lower
ad disutility so broadcasters will increase clutter

will try and broaden the appeal of programming
Literature

Anderson and Coate (2005)

Armstrong and Weeds (2006)

Wilbur (2005)
Notation and Set-Up

Broadcaster (& content provider)

Monopolist

No marginal costs

Viewers

Located in (x, γ) space: Uniform on

Utility:

Advertisers

Price per viewer: r(a); various concavity assumptions

Revenue per viewer: R(a) = r(a)a
,
(1 )
x
U x a
y
u i y · +
[0, ] [0, ] x y ×
Equilibrium without AATs

Choose a to maximise
R(a)N

Anderson-Coate condition

Proposition 1: Equilibrium level
of advertising is unique.
( ) ( ) 1
a N
a a r r · <
R a
a R
o
o
N a
a N
o
o

Viewers
(θ+λ)/λ
x
y
Modeling AATs

Durable good

Consumers purchase AATs – fixed price, p

Broadcasters observe AAT penetration

Broadcasters choose advertising level

(Technical issue: look for rational expectations
equilibrium)

Rented good

Consumers rent AATs and adjust behaviour simultaneously
with the broadcaster choice of advertising level

Later in the talk …
Non-equilibrium Outcomes
ˆ / p a
Viewers
x
y
Viewers
x
y
AAT
Viewers
(θ+λ-p)/λ (θ+λ-p)/λ (θ+λ)/λ
AAT
Viewers
ˆ / p a
ˆ
a a <
ˆ
a a >
ˆ
a = Advertising level anticipated by consumers
(θ+λ)/λ
Equilibrium with AAT

Proposition 2: For a
given p, there is a
unique equilibrium:
ˆ / p a
Viewers
x
y
(θ+λ-p)/λ
AAT
Viewers
(θ+λ)/λ
ˆ
( ( ))
2( )
a
p
a p
p
r
u i
·
+
ˆ ˆ
( ) a a y ·
ˆ ˆ / p a y ·
Impact on Advertising

Proposition 3: A lower AAT price increases
equilibrium advertising.
High disutility viewers purchase AATs so the marginal
one has lower disutility. Hence, profit maximising to
increase their ‘price.’
ˆ
( )
2( )
a
p
a
p
r
u i
·
+
Increasing in p
Decreasing in a
Network Effects

As increase AAT penetration

Broadcasters increased advertising clutter

Marginal consumers purchase AATs

AAT purchases governed by a positive
network effect
Impact on Welfare

Decreased welfare

low disutility viewers;
including some who
purchase AATs

Broadcaster

Increased welfare

High disutility viewers;
increased viewership

Advertisers? When there
is low quality and mild
AAT penetration
ˆ / p a
Non AAT
Viewers (<)
x
y
(θ+λ-p)/λ
AAT
Viewers (>)
(θ+λ)/λ
ˆ ˆ / p a y ·
AAT
Viewers (<)
Without AAT
With AAT
Viewers
watch TV
Viewers stop
watching TV
Impact on Content

θ: vertical quality

AAT penetration decreases incentives to increase θ

λ: horizontal quality

AAT penetration decreases incentives to increase λ

Lower λ implies ‘flatter’ demand – switch to
programming with more mass market appeal

Marginal niche consumer has an AAT so focus on
average one that doesn’t.

Less targeted viewership
Extensions

Endogenous AAT pricing

Demand for AATs more elastic than an ordinary
good due to the negative externality imposed on
non-purchasers

Broadcaster competition

Results robust and simpler

Pay television

Advertising rates become linked to subscription
rates when there are AATs
Subscription-Based AATs

Proposition 6: For low
enough p, equilibrium
advertising is set to shut
out AATs.

Always profit
maximising to reduce
advertising by a little bit
to capture marginal
AAT users.
ˆ / p a
Viewers
x
y
(θ+λ-p)/λ
(θ+λ)/λ
ˆ / a p y ·
w/o AATs
Conclusions

Case of emerging substitutes on one side of a
two sided market.

Reaction to the substitute can be to
accommodate rather than deter it.

Suggests that two-sided markets cannot
viewed in isolation of a broader strategic
context.