CESifo working paper: Industrial Organisation 3524
We study a two-sided markets model of two competing television stations that offer content of differentiated quality to ad-averse consumers and advertising space to firms. As all consumers prefer high over low quality content, competition for viewers is vertical. By contrast, competition for advertisers is horizontal, taking into account the firms' targeted advertising motive. We analyze the impact of both the strength of mutual externalities and advertisement regulation policies on the viewers' equilibrium demand for high quality content. We find that, although consumers dislike advertisements, an advertising ban in the high quality medium reduces its viewer market share and thereby the equilibrium reception of high quality content.
horizontal and vertical product differentiation two-sided externalities advertising ban