Industrial Organization
Overview
The media industry is collectively represented by mass media in general, which is comprised of television, newspaper, radio, magazines, and currently the Internet is already regarded as a form of mass media. This industry commands billions of dollars in revenue from advertising and marketing placements. On the other hand, the media industry itself provides growth opportunity for other industries through paid exposures. As a very dynamic industry, media experiences stiff competition, which can be observed on television, as TV networks create interesting shows to capture higher viewer ratings. The same competition also exists in other media platforms such as radio, newspaper and even in the Internet. Online video channels allow exposure and the success rate of each advertisement depends on the number of views. However, a new entrant in the industry experience difficulties of taking a piece of the market pie, which makes an entry to the industry, is a challenging feat in its own right. These areas are the main focus of the article by Crampes, Harichabalet, and Jullien (2009).
The paper represented a model of competition given the condition that media platforms are getting financial gains from customer subscriptions and advertising receipts. The study encompasses the determination of the equilibrium between entry, advertising, advertising technology, and price levels. Given the constant increase in audience size, excessive level of entry and insufficiency in advertising level, it is apparent that price strategies and similar variables on the advertising market are interrelated. This assumption was stated in the article, which will be investigated by determining the question that the study is seeking to answer, the strategies employed in exploring the answers to the questions, and convincing evidences. In addition, the study will be compared to similar, but relevant studies and evaluate the similarities and differences found in the sample article.
The article focuses on creating a model that will establish the relationship the levels of entry, advertising, price, technology, and maximizing the level of welfare. Determining such relationship involves consideration of other variables such as constant returns on the size of the audience size and insufficiency in the advertising level. This correlation problem is represented in numerical values, which will be analyzed and identify extended dimensions to price as a strategic variable in the advertising market in relation to media platforms. Advertisers often seek for more cost-effective approach in marketing their products and the study emphasized the disparities between free website advertising and mainstream broadcast media in terms of cost. In addition, the gap between the two platforms in drawing the scale of audience is almost equal. The computer age allowed a much-diversified environment for advertisers to explore in terms of marketing their products given the wide audience availability of virtual audiences from millions of Internet users.
Establishing the correlation between all the aforementioned variables in the study, literatures in financing will be utilized to determine the reduced differentiation between media platforms. In addition, the study also employs the use of horizontal differentiation where pricing and entry strategies will be considered as primary factors in identifying quantity and deciding the amount of advertising spaces to be sold to the advertisers. In terms of welfare analysis, the correlation between price and competition ascertains the assumed excessiveness in terms of entry given the inefficiencies in the advertising level. This means that a lot of advertisers are flooding the different media platforms with campaigns to the point that it’s becoming excessive and exhausting the limited spaces that each media platform can provide. This results to advertising insufficiencies where the campaigns itself becomes less effective because the media platforms cannot provide enough spaces, which leads to increase in the number of new entrants that affects the price equilibrium, demand, and cost. In addition, the inadequacies, limited spaces, cost and competition exacerbates the imposition of advertising level or quantity setting and or price setting in order to maintain equilibrium.
Summary of strategies used in answering the research question
Finding the solution to the given problem employs setting models such as oligopoly model where n represents the media platform. The model is represented by the following equation distributed along the circle of length (1) ux;xi,ai-pi=u-tx-xi-λ ai-pi, moreover, i is represented by services in the media such as movies, news, and shows provided with a flat price of pi, which receives added revenues from advertisers represented as ai. To further interpret the model and its function in answering the given question of correlation, when the customer (x) subscribes to a platform (i) represented by xi the net utility can be determined using the above equation where u is the customer’s willingness to pay for the media service while t is the remoteness cost. The motivation involved in using the oligopoly model is to know whether the firm’s decision is correct and or interrelated by setting the price and determining the output of decision-making (Bajari, N.D; Riley, 2012). Using pros of using the model exhibits the entry barrier, which is a definitive variable in pointing the supernormal profits for the larger firms and in terms of operating in the periphery of the oligopolistic market (Riley, 2012).
The other method used in answering the given problem is the short run equilibrium where the maximization of profit is represented with first order conditions in defining the equilibrium level between advertising and price calculated using the following equation:
∂q∂pPn-c+qn+∂q∂prqqn, an=0, And ∂q∂pPn-c+rqqn, an+∂q∂prqqn, an=0. This equilibrium levels can be verified with the equation Pn*=c+tn-rq1n,an*,. The given equation encompasses the idea that as the platform becomes larger the subscription price goes below the marginal cost. The proof of that observation was justified using rq1n,an*, values, which converges to φ 0,a∞*>0 when the number of available platforms increases. Generating revenue in this model can be realized by looking into advertising market that leads the media platforms in maximizing the client-pair’s joint surplus (Crampes, Harichabalet, and Jullien, 2009).
Another proposition given using the short run equilibrium is that when the level of advertising increase or decrease or remain constant given the changes in the number of platforms, the solution can be represented by φaq>0, φaq=0 or φaq<0. This argument was justified using an*=a*(1/n). The results of the given formula follow the idea that increasing n translates into the reduction of audiences. In other word, the numerical approach provided by the short run equilibrium model suggest that the marginal revenue per customer increases or decreases depending on the size of the audience. For example, if the TV network is running less popular shows and the TV ratings reveal fewer amounts of audiences, the revenue side taken from the customers (advertisers) also decreases. In a simpler term, advertising revenue depends on the number of people using the media platform.
Inserting the fifth condition pertaining to verifying equilibrium level Pn*=c+tn-rq1n,an*,, the difference can be easily spotted between the net utility of the same consumer without any given advertisement and consumers located at x when the platform is financed by advertising placements using net utility formula of un, x-Pn. Pointing out the difference is represented by the equation:
un, x-Pn-u-c-tx-x1-tn=rq1n,an*)-λ(an*). The formula also suggests the way technology impact the equilibrium level in terms of consumers’ surplus and profit. Therefore, determines that technology is detrimental platform profits on advertising.
The impact of technology in profit of each of the media platforms insinuates correlational dependence on what technology works better in advertising and its effect on subscription price. For example, the Internet-based advertising platform encompasses a much better technological advantage over the traditional platforms. Therefore, it can be assumed that the Internet is far more financially feasible in terms of profit as compared to other platforms. However, mainstream media still appears to be more effective for advertisers despite the price of advertising placements due to the disparities in subscription price. In terms of welfare analysis, the study assumes that consumers that are related to advertising through the word of mouth encompass no informal externality (Crampes, Harichabalet, and Jullien, 2009). This assumption was computed by finding the sum of advertiser’s surplus and consumer surplus including the platform profit. The solution can write as follows, Wn,a=u-2n012ntxdx-λ(a)+0av1n,ydy-nk-c.
This equation represents the consumer benefits based from media consumption services as n and advertising quantity as a, while the term 0av1n, y represents the benefits that manufacturers gained from placing an advertisement. The other aspects and variables mentioned in the study that needs computation to establish correlation was explored by expressing the problem into mathematical models. In addition, the analysis made to the corollaries of each variable was justified with proofs and propositions, which explains the relation between the variables being analyzed. However, the manner of presenting the proof to the given assumptions was also expressed in mathematical terms, which for average reader would sound too technical to decipher. In addition, the narrative elements embedded in the calculations were not presented in such a way that examples were provided. However, the advantage of employing oligopoly model for answering the study question encompasses validity appropriate for the study.
Evaluating the convincing element of the study
Determining how convincing the research requires evaluating the model use of oligopoly model in presenting the solutions. The study focuses on establishing relevant relations between variables such as price, advertising level, platforms, and consumers. Exploring the market structure of media as an industry requires examination of oligopolies because of their predominant position in the modern business (bized.co.uk, 2003). In the media advertising business, oligopolies are described as a market structure where the dominant sellers are relatively a small group and in the advertising media’s market structure only small sellers or platforms are dominating the industry (Miller et al., 2013). Given the nature of oligopoly model used and the complex methodologies of computing the variables, the findings in the study encompasses a valid and presentation of data, which does not only provide accuracy, but rather convincing in h as way that the results command efficiency.
With regards to the results, the numerical values expressed in mathematical terms are precise, but too complex for average readers. For example, in presenting the findings about the correlation between the equilibrium levels whether increasing or decreasing as not relatively affecting change in the number of platforms was given in a similar manner with lesser emphasis given on narratively explaining what the numbers in the findings means in answering the research question. This method of presenting the findings may come as more than efficient for some, but rather vague for the rest. The research is convincing in such a way that the valid model and arguments were presented in a logical manner. The correlations were identified separately such as finding the cost parameters and general estimates. However, the research could have also employed statistical methodology in showing the correlations between variable. With additional information about the cost, conduct estimates and cost parameters can significantly improve when the model was used in a practical application (Clay and Troesken, N.D.).
Comparison to relevant literature
Other literatures shed light to light to the same problem in Crampes, Harichabalet, and Jullien (2009) research. Kind, Nilssen, and Sogard (2007) also explored similar area in their study of determining the correlation between the completion for viewers and advertisers in media industry. However, the study focuses solely in a TV Oligopoly, which encompasses a limitation in terms of presenting relevant information that can be applied to other sectors of media industries such as radio, print, and Internet. In this study, the authors looked into how advertisers compete for audience in a TV oligopoly. The problem that the research tends to answer is whether advertisers make lower profit as the number of TV channels increases (Kind, Nilssen, and Sogard, 2007). It encompasses the discovery of the connection between the increase in entrants in television media and the increase in profit. In addition, the study also emphasized that when the audience dislikes the ads, it translates into an effect where the welfare increases in the number of emerging new TV channels. This is because the audiences are likely to look for more options to view, which presents an opportunity for new entrants to exploit the possibilities of competing with the oligopolistic nature of the television media in terms of advertising welfare.
The reason for selecting the article is because of its area of study and focus of research to the article by Crampes, Harichabalet, and Jullien (2009). In addition, Kind, Nilssen, and Sogard (2007) used similar approach in finding the correlations between the variables. Furthermore, the study used the same methodology in terms of presenting correlative model that shows mathematical modeling. In terms of the problem being solved, the authors have found relative correlation between advertisers’ competition for viewers in the media industries, which Crampes, Harichabalet, and Jullien’s article is also aiming to resolve. The most observable difference when comparing the two articles is the equation used and variable placement in the formula, but nevertheless Kind, Nilssen, and Sogard were still able to present similar problem and solution.
Another literature that shows research problem to solve similar to Crampes, Harichabalet, and Jullien’s article is the economic analysis of advertising from the discussion paper by Bagwell (2005). The discussion paper was part of paper released by Columbia University’s Department of Economics that focuses on media and the underlying economic principles behind advertising. However, Bagwell’s (2005) discussion paper was presented in a more detailed analysis of advertising as a whole. This includes the different views about advertising, empirical regularities and the correlation between price and advertising. Part of the objective of Crampes, Harichabalet, and Jullien’s research objective is to answer the relationship between advertising level and price. Given that the research problem in the said article is mainly is mainly to identify the relationship between the aforementioned variable, Bagwell’s (2005) discussion paper suggests the same problem, which was explored through answered in a similar way as that of Crampes, Harichabalet, and Jullien’s.
Bagwell’s discussion paper was selected for this evaluation because of its significant component that relates to determination of positive correlation. In addition, the article constitutes detailed explanation as to why the relationship between price and advertising occur in both monopolistic and oligopolistic media platforms (Bagwell, 2005). It was found from the discussion by Bagwell that monopoly advertising is inadequate for the reason that monopolists do not have the ability to appropriated consumer surplus created by additional advertising as compare to oligopoly. However, in a very dynamic industry such as media, advertising is a vital instrument of competition as one may leverage on it to steal the business of another (Bagwell, 2005). On the other hand, the externality of business stealing creates the possibility of the business being excessive at some point, which is also part of the problem that Crampes, Harichabalet, and Jullien’s research is aiming to resolve. This characteristic made Bagwell’s discussion paper to be significantly relevant to that of the article in focus.
Similarly, Duke (2008) article about advertising and competition encompasses the same area of analysis in terms identifying correlation between product differentiation and advertising, which also includes analysis of economic of advertising. However, Duke’s (2008) article explores the legal issues pertaining to the anti-trust theories that directly involve advertising. Given the variables discussed in Crampes, Harichabalet, and Jullien’s articles, price, advertising levels, competition and media itself as an industry encompasses attributes of conduct, which Dukes discussed in his article. The problem statement presented in Duke (2008) article can be described as the narrative counterpart of the main article being evaluated. It was established in Crampes, Harichabalet, and Jullien article that price, advertising levels, and competition are correlated as the increase or decrease in values in one of the variable is likely to affect the others. The difference with Duke’s article is that the findings were based from empirical research and theories about advertising. This includes the models employed in examining correlations between variables.
In Duke (2008) article, the media platform’s incentive to advertise is dependent of the conditions of pricing decisions. Similarly, Crampes, Harichabalet, and Jullien’s article also encompasses greater emphasis on demand function, quantity, competition and how these elements affect price. Although there are mathematical models presented in the study, the narrative portion explaining the logic behind the numbers suggests much profound representation correlation problems that seeks to find connection and subsequent effect to different variables (Duke, 2008). In addition, the interaction between advertising strategies and competition was discussed by illustrating the way advertising is highly critical of new entrants. The research problem that Duke aims to answer in his study was illustrated in a manner that it represent the whole picture of advertising as an industry and its role in setting conditions to the media industry as a whole (Duke, 2008).
How is the literature?
Overall, the literature in focus by Crampes, Harichabalet, and Jullien including the other three literatures presented herewith was successful in delivering the essential information pertaining to the correlative attributes between advertising, price, competition and media platforms. The success of the discussed literatures was drawn from the effectiveness of the methodology employed in conducting the study, which is the use of mathematical models in presenting relevant findings. The information from the articles have helped in honing understanding of the issue, particularly in identifying the resulting effect of either increase or decrease in any of the variables. Similarly, the most important idea obtained from the research is appropriate determination of correlations between variables and how another affects each and showing the results using mathematical modeling. However, the articles could have added more narrative details on the discussion particularly in explaining the resulting values from using the mathematical models. There is still a profound need for providing information on the methodology can be used in simpler terms that is both easier to decipher and apply in other research in the field. On the side of issue being explored, there is still a lot that needs to be known such as the resulting effect whether positive or negative considering the given conditions attributed to the variables.
References
Bagwell , K. (2005). The Economic Analysis of Advertising (Discussion Paper No.: 0506-01). Columbia University, Department of Economics.
Bajari , P. (n.d.). Oligopoly Models. Retrieved January 4, 2014, from http://www.econ.umn.edu/~bajari/iosp10/lecture5.pdf
Bized.co.uk (2003, October 27). Biz/ed - Market Structure 1: Oligopolies - Activity. Retrieved January 4, 2014, from http://www.bized.co.uk/educators/16-19/economics/firms/activity/structure.htm
Clay, K., & Troesken, W. (n.d.). Further Tests of Static Oligopoly Models: Whiskey, 1882-1898. Retrieved from heinz.cmu.edu website: http://www.heinz.cmu.edu/~kclay/papers/whiskey.pdf
Crampes, C., Haritchabalet, C., & Jullien, B. (2009). Advertising, Competition and Entry in Media Industries & ast. Journal of Industrial Economics, 57(1), 7-31. doi:10.1111/j.1467-6451.2009.00368.x
Dukes, A. J. (2008). Advertising and Competition. Advertising and Competition, in ISSUES IN COMPETITION LAW AND POLICY 515 (ABA Section of Antitrust Law 2008). Retrieved from http://www-bcf.usc.edu/~dukes/Papers/Vol%20%20IChap%20%2022CompetitionLaw_m1.pdf
Kind , H. J., Nilssen, T., & Sørgard , L. (2007). Competition for Viewers and Advertisers in a TV Oligopoly. Journal of Media Economics, 20(3), 211–233. Retrieved from http://www.nhh.no/Files/Filer/institutter/sam/cv/papers/Kind-Nilssen-Sorgard.pdf
Miller, N. H., Ryan, C., Remer, M., & Sheu, G. (2013). On the First Order Approximation of Counterfactual Price Effects in Oligopoly Models. Retrieved from Georgetown University, McDonough School of Business website: http://www.law.northwestern.edu/faculty/programs/searlecenter/events/antitrust/documents/Miller_MRRS-2013_08_21.pdf
Riley, G. (2012, September 23). Oligopoly – Non Collusive Behaviour. Retrieved January 4, 2014, from http://tutor2u.net/economics/revision-notes/a2-micro-oligopoly-overview.html
