Exclusive Quality: Why Exclusive Distribution may Benefit the TV-viewers

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Exclusive QualityWhy Exclusive Distribution may
Benefit the TV-viewers

• Johan Stennek

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ExampleSweden
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ExampleU.S.
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ExampleSummary

• Exclusive distribution increases with
• Competition
• Quality

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Questions

• Why and when?
• Role of quality?
• Competing distributors
• Effect of ban?

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The ModelAgents
One producer of (a single) TV-channel
Two TV-distributors
Viewers
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The ModelTiming

• Producer invests in quality
• Producer and distributors negotiate over
  distribution rights
• Distributors compete to sell subscriptions to the
  viewers

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3. Competition for viewersSetup

• Timing
• Two distributors set subscription fees
• Each viewer subscribes to one distributor
• Oligopoly model (Hotelling)
• Horizontal differentiation
• Distribution rights

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3. Competition for viewersSubscription revenues

• Note
• Exclusive distribution increases aggregate
  subscription revenues
• High quality increases this gain

Aggregate subscription revenues
Exclusive dist.
Non-exclusive dist.
Quality
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3. Competition for viewersAdvertising revenues

• Note
• Exclusive distribution reduces advertising
  revenues
• High quality reduces this loss

Advertising revenues
Non-exclusive dist.
Exclusive dist.
Quality
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3. Competition for viewersSubscription vs.
advertising revenues

• Note
• Low quality ? non-exclusive
  distribution maximize revenues
• High quality ? exclusive distribution
  maximizes revenues

Revenues
Gain in subscription rev
Loss of advertising rev
Quality
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2. Bargaining for Distribution RightsSetup

• Timing
• Alternating offers
• If non-exclusive rights, bargaining continues
• Bargaining as-you-go
• Offer
• Price
• Type of distribution rights

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2. Bargaining for Distribution RightsType of
results

• Conditions for exclusive and non-exclusive rights
• Prices for distribution rights

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3. Competition for viewersSubscription vs.
advertising revenues
2. Bargaining for Distribution RightsForm of
distribution

• Efficiency
• Exclusive rights if
• High quality
• Intense competition
• Explanation 1
• High quality ? Exclusive distribution

Revenues
Gain in subscription rev
Loss of advertising rev
Quality
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2. Bargaining for Distribution RightsPrices

• If exclusive rights
• Fierce bidding competition
• In non-exclusive rights
• Distributors dont have to compete
• Note
• Increased quality ? Increased price

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1. Investment in QualitySetup

• Producer chooses quality
• Costs
• Benefits

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1. Investment in QualityOptimal qualities, given
distribution

• Explanation 2
• Exclusive distribution ? high quality
• Intuition
• Marginal value of quality higher under exclusive
  distribution
• Quality ? ? Subscription revenues ?
• Captured by producer
• Quality ? ? Advertising revenues ?

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Investment and BargainingThe full picture

• Note
• Optimal quality is higher the smaller is the cost
  of quality
• Optimal quality is always higher under exclusive
  distribution than under non-exclusive
  distribution, given any cost

Optimal quality
Marginal cost of quality
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Investment and BargainingThe full picture
Optimal quality
Threshold
MC of quality
middle
low
high
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Summary

• Two explanations
• Bargaining
• Low cost ? high quality ? exclusive
  distribution
• Investment
• Exclusive distribution ? high quality

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PolicyExperiment

• Given quality
• Ban on exclusive distribution good for all
  viewers
• Reduced quality
• Ban may harm all viewers
• __________________________________
• Excluded households
• No ban - cant watch high quality channel
• - but very low price
• Ban - can watch low quality channel
• __________________________________

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PolicyImplications

• Efficiency defense
• Complications
• Especially important when quality is high
• Investment incentives may be too strong
• Time consistency