Vertical Integration in Two-Sided Markets: Exclusive Provision and Program Quality

We study distribution and investment in content quality in a two-sided media market. We show that a content provider prefers to provide the premium content exclusively to a platform, no matter what the vertical structure of the industry is. However, a vertically integrated content provider has fewer incentives to invest in quality than an independent one. When downstream platforms are asymmetric, the platform with a competitive advantage on the advertising market gets the exclusive content and the content provider invests even less in quality when it is integrated with it. When we endogenize the vertical structure of the industry, we find that the content provider acquires the platform with a competitive advantage on the advertisers market. Vertical integration reduces both consumer surplus and total welfare. Our results suggest that, in merger control,authorities should carefully assess the effects of the integration on the incentives to invest in content quality. Moreover, a policy intervention at the distribution stage that enforces non-exclusive provision might have adverse effects on consumer surplus and welfare. Also advertising cap could have the effect of reducing quality.