Media competition on the Internet

Abstract

This paper presents a model of competition between two advertisingfinanced media firms, and we apply the model to analyze competition between portals on the Internet. First, we show that equilibrium prices of advertising are actually higher the less differentiated the portals are perceived to be. Second, we show that aggregate profit for the portals increases if they form each their vertical alliance with advertisers. This is true even if there is perfect competition between the advertisers for advertising space. However, we also demonstrate that it may be individually profitable for one of the portals not to form a vertical alliance if the portals are close substitutes. In that case we end up with an asymmetric equilibrium with only one vertical alliance. This happens despite the fact that aggregate profit would be higher with two vertical alliances.