Vertical Integration in Two-Sided Markets: Exclusive Provision and Program Quality

Abstract

We study how vertical integration in a two-sided media market affects investments in premium content. We show that a content provider provides the premium content exclusively to a platform, regardless of what the vertical structure of the industry is. However, a vertically integrated content provider has lower incentives to invest in quality than an independent one. With asymmetric platforms, the platform with a competitive advantage in the advertising market obtains the exclusive content, and the content provider invests even less when it is integrated with it. We determine that the content provider prefers to acquire the platform with a competitive advantage in the advertising market. Vertical integration reduces both consumer and total surplus. Our results suggest that authorities should carefully assess the effects of a merger on the incentives to invest in content quality, incorporating non-price measures in merger analysis. An intervention at the distribution stage that enforces non-exclusive provision reduces quality and may have adverse effects on consumer and total surplus. Advertising caps might also have the effect of reducing quality.