Two-Sided Network Effects and Competition : An Application to Media Industries

Intermarket network externalities take place when the utility of a good produced in a givenindustry varies with the size of the demand for a good produced in another. A particularlysignificant example of this phenomenon is provided by the interaction between the media andadvertising industries. Media consumers vary according to their willingness to pay for themedia good, which depends on the advertising volume. Advertisers vary according to theirwillingness to pay for an ad, which also depends on the audience reached. We model asituation of competition between two content providers who are rivals in both the media andadvertising industries, choosing simultaneously the newspapers prices and the advertisingrates. We characterise the equilibria of the game and explore how they depend on audienceattitudes towards advertising. Our main finding is that two-sided interactions may induce exitby one of the media companies from either only the advertising market or both markets.