Specialized advertising media and product market competition

Abstract

This paper studies the strategic relationship between a specialized communication medium and a product market. To that end, we formulate a model of informative advertising and price competition where the advertising fee is endogenously determined by the interaction between two firms producing a horizontally-differentiated good and a communication platform. We find that (i) when the subscription to the medium is free, the platform asks for high prices for its advertising services, which allows firms to raise their prices to the level where the marginal potential consumer achieves zero utility and (ii) a positive subscription fee generates cross-side externalities between the firms and subscribers, which can increase or decrease the equilibrium advertising fee. In particular, under a positive advertising externality, the platform tends to charge low advertising fees, thus triggering strong price competition between firms. We also show that less product differentiation or a lower consumer valuation of the goods can increase firms’ profits, so a strategic connection between the product and the media markets can substantially affect the functioning of a differentiated product market.