Collusion and the political differentiation of newspapers

1. February 28th 2011 Research presentation Collusion and the political differentiation of newspapers Marco Antonielli MSc Economics Università degli Studi di Firenze NMa trainee

2. My work • Master thesis • Two-sided markets • Question: which is the effect of collusion on the political differentiation of the newspapers? is the advertising increasing or decreasing the likelihood of collusion? • Extension of a model of Gabszewicz, Laussel, Sonnac (2002) to study causes and implications of collusion in the newspapers markets

3. Introduction Two-sided market setting (Anderson and Gabszewicz, 2005) Media markets • High concentration: • collusion arising? • theoretical analysis: Rhumer (2010), Dewenter, Haucap and Wenzel (2010) • empirical analysis: Argentesi and Filitrucchi (2007) evidence of collusion in the Italian newspapers market

4. Introduction (2) Ruhmer (2010) analyses platform collusion in a two-sided single-homing market: she finds that collusion is harder to sustain when network externalities between the market sides increase. Dewenter, Haucap and Wenzel (2010) study the effects that collusion can have in a newspapers market where firms compete for advertising as well as for readership: they show that semi-collusion (i.e. joint operations in the advertising market only) can increase total welfare. Argentesi and Filistrucchi (2007) carry out an empirical analysis of the newspapers market in Italy: they find evidence of collusion on the cover price but not on the advertising tariffs.

5. Introduction (3) reasons of interest and theoretical framework Newspapers market: pluralism in the media Political orientation as a differentiation device Gabszewicz, Laussel, Sonnac (2002) Collusive behavior + political differentiation in a two-sided setting

6. Model: outline Sequential game played by 2 editorial firms in a newspapers market Gabszewicz, Laussel, Sonnac (2002) 3 steps: • publishers select the political orientation of their newspaper out of a unit interval representing the political spectrum • publishers compete for readership in price • publishers compete in the advertising market in price Hotelling spatial duopoly plus advertising

7. Model: outline (2) Infinite repeated game: publishers repeadetly play the sequential game • Aims of the model: • Analyse the properties of collusive agreements, in terms of pluralism and in terms of welfare • Study the incentives to cooperate in such multiperiodic framework

8. Collusive behaviour • 3 features of collusion in this model: • Two kinds of collusion are considered, depending on which variables of the strategy are chosen in agreement: • Political orientation and prices • Prices only. • Collusion agreements and sharing rule: the publishers find an agreement among the Pareto optimal pairs of strategies of the stage game. Common price. • Grim trigger strategies: each publisher is assumed to cooperate until the other publisher cooperates; if a publisher defects, the other will punish forever.

9. Stage game • Readers market • Unit interval as the political spectrum Reservation price Price of newspaper i Transportation cost Distance between favourite political opinion and political orientation of newspaper i • Single-homing • Market coverage condition

10. Stage game (2) is the marginal consumer = MARKET SHARE

11. Stage game (3) Advertising market Advertisers have preferences depending on the price of ad spaces in a newspaper and on the readership of such newspaper. Tariff applied by newspaper i Readership of newspaper i Intensity of the preference for an ad; with density 4k Each of them can advertise in: No newspaper One newspaper Two newspapers ..and obtain respectively utility :

12. Stage game (4) Each publisher can charge its advertising tariff taking into account only its readership, i.e. act like a monopolist

13. Stage game (5) Profit function Profit of publisher i Readership of newspaper i (y for publisher 1) Price of newspaper i Unit cost Advertising market dimension, here represents the advertising revenues per reader

14. One-shot competition Gabszewicz, Laussel and Sonnac (2002) identify two subgame perfect equilibria for the stage game. Maximal differentiation equilibrium Parameters set: Equilibrium profits: Equilibrium prices: 22

15. One-shot competition (2) Minimal differentiation equilibrium Parameters set: Profits: Equilibrium prices:

16. Collusion on prices and locations Finding the collusion agreement Publishers cooperatively decide how to play the game: selecting a state among the Pareto optima State = Pair of strategies • Characterize the Pareto optima • Select the one with common price (market sharing rule)

17. Collusion on prices and locations (2) 1) Pareto optima characterization Touch states

18. Collusion on locations and prices (3) 1) Pareto optima characterization Complete touch states

19. Collusion on locations and prices (4) Intermediate opinion differentiation State with:

20. Collusion on prices only Finding the agreement In this case publishers can not bind their whole strategy (e.g. locations are not perfectely observable). They can decide to coordinate on prices but not on locations (political orientations). In other word, they compete on locations and collude on prices. • Characterize the best common-price rule; a pricing rule takes locations as given • Does it select Pareto optima? • Subgame perfect equilibrium by using backward induction

21. Collusion on prices only (2) 1) Common-price rule Given a pair of locations, which is the best common-price? We have seen that if no consumer faces utility 0, the state can be improved only changing prices: publishers can therefore select the touch state with common price associated with the given pair of locations. Such a rule is uniquely identified as follows: I. II. III.

22. Collusion on prices only (3) III. Case: example 2) It can be shown that every state selected by the common-price rule is a Pareto optimum

23. Collusion on prices only Since prices will be equal, competition can only be made on the political orientation (location) 3) Backward induction Given the expectation on the location of the other, each publisher tends to locate as close as possible to the other in order to gain demand (as in common spatial competition models) The Nash equilibrium will be the one in which publishers locate in the middle of the unit interval

24. Collusion on prices only (4) Minimal differentiation State with:

25. Defection For collusion on prices and locations: it is assumed that the non-deviant publisher does not punish in the turn itself  the deviant simply chooses the best reply to the collusion strategy: • For collusion on prices only: • the non-deviant locates at ½ • thus, whatever the location of the deviant, she will set a price = • again, the deviant simply chooses the best reply: •  locates at ½ and undercuts the price of the other

26. Incentives to collude Critical discount factor depends on the parameters of the game Changes in... ...affect: Advertising market dimension Sustainability and profitability of collusion Reservation price Unit cost Transportation cost

27. Incentives to collude (2) Advertising market dimension: revenues per reader Different values of k mean different competitive equilibria, everything else being equal The punishment triggered depends on the starting value of k After calculations: the change in the critical discount factor depends on the punishment triggered and in turn on the starting value of k, no matter what kind of collusion is put into practice

28. Incentives to collude (3) Graph: critical discount factor in respect to k (collusion on prices only) Market is not covered Minimal differentiation equilibrium Maximal differentiation equilibrium

29. Incentives to collude (4) To conclude: If the one-shot equilibrium is a minimal differentiation equilibrium, an increase in the advertising market dimension makes collusion easier If the one-shot equilibrium is a maximal differentiation equilibrium, an increase in the advertising market dimension makes collusion less easy Interpretation: The advertising revenues are passed to the readers in form of discount on the cover price when the newspapers are distant on the political spectrum: colluding would allow the publishers to retain the advertising revenues. In an opposite way, the advertising revenues are retained in case the newspapers are very close on the political spectrum: defecting would be more tempting