Strategic Agents and Vertical Relationship in Media Markets

This paper introduces two modifications to standard models of two-sided media markets. In the first modification, we consider strategic agents by allowing advertisers to invest in the quality of their ads. This leads to qualitatively different econometric specifications to estimate group externality parameters. Moreover, relative to the case of passive agents, prices on both sides are lower, benefiting the agents at the cost of platforms. In the other modification, we introduce independent distributors between platforms and readers/viewers. We show that this modification has no impact on estimating the group externality parameters. However, equilibrium prices on either side depend on group externality parameters of both sides. In the special case where each platform is split into two independent divisions, in the equilibrium all 4 divisions charge a common price which depends on the product of the group externality parameters of the two sides