Structure of the market TV Contents AdvertiserDistributor 1Distributor 2 Consumers

Structure of the market TV Contents AdvertiserDistributor 1Distributor 2 Consumers f f p1p1 p2p2 r

Structure of the market TV Contents AdvertiserDistributor 1Distributor 2 Consumers f f p1p1 p2p2 r Viewing time c

Main mechanism and implications Pay per view: – revenue of D depends on p (A,c), and on c People do not like advertising: – Thus not only: p   A  – but also: A   viewing time  Hence, given the structure of the model (advertising price r is controlled by the TV): – D increases p above the level TV would like – In particular, D may increase such that A =0 Not very surprising: – If TV content provider has all the bargaining power (= all downstream rents get extracted)  possibility to have A = 0

Optimal contracting Because of split decision rights: – profits not maximized – Consumer surplus? But, they can do better – Make upstream price f dependent on downstream price p – Has nothing to do with market = bargaining power – Why would you not (there are no frictions) – If you do not like f(p): offer contracts depennding on A*