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Exclusive Quality(work in progress)

Johan StennekResearch Institute of Industrial Economics, Stockholm

CEPR

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Example:Sweden

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Example:U.S.

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Example:Summary

1. Exclusive distribution – Competition

2. Exclusive distribution – Quality

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Questions

1. Why and when exclusive distribution?– Role of quality?– Competing distributors

2. Effect of ban on exclusive distribution?

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The Model:Agents

One producer of (a single) TV-channel

Two TV-distributors

Viewers

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The Model:“Timing”

1. Producer invests in quality

2. Producer and distributors negotiate over distribution rights

3. Distributors compete for viewers

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3. Competition for viewersSetup

• Given– Quality– Distribution (prices fixed)

• Timing– Two distributors set subscription fees– Each viewer subscribes to one distributor

• Hotelling

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3. Competition for viewersSubscription revenues

Quality

Aggregate subscription revenues

Non-exclusive dist.

Exclusive dist. se se

2sne

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3. Competition for viewersAdvertising revenues

Quality

Advertisingrevenues

Non-exclusive dist.

Exclusive dist.

ane

ae

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3. Competition for viewersSubscription vs. advertising revenues

Quality

Revenues

Loss of advertising rev.

Gain in subscr. rev.se se 2sne

ane ae

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2. Bargaining for Distribution RightsSetup

• Given– Quality

• Timing– Alternating offers

– Offer = price & type of distribution rights

– If non-exclusive rights, bargaining continues

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2. Bargaining for Distribution RightsForm of distribution

• “Efficiency”

• Exclusive rights if – High quality – Intense competition

• Intuition: Quality ↑ – Gain in aggregate subscription revenues ↑– Loss of advertising revenues ↓

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2. Bargaining for Distribution RightsPrices

• If exclusive rights– Fierce bidding competition

• In non-exclusive rights– Distributors don’t have to compete

• Note: • Note: Increased quality

– Exclusive distribution ”more likely”– Price for distribution rights ↑

p e se se

p ne sne se /2 ane ae/2

p e 2p ne

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1. Investment in QualitySetup

• Producer chooses quality– Benefits

1. Price for distribution rights ↑- Better bargaining position- Increased subscription revenues (if exclusive)

2. Advertising revenues ↑ (if exclusive)

• May induce exclusive distribution

– Costs

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1. Investment in QualityOptimal qualities, given distribution

Optimal quality

Marginal cost of quality

Optimal quality is always higherunder exclusive distribution thanunder non-exclusive distribution,given any cost

Optimal quality is higherthe smaller is the costof quality

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1. Investment in QualityOptimal quality

Optimal quality

Marginal cost of quality

threshold

Positive relation: Quality – Exclusive Dist.

1. low cost → high quality → exclusive dist.2. exclusive dist. → high quality

low high

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PolicyExperiment

• Given quality: – Ban on exclusive distribution good for all viewers

• Reduced quality: – Ban may harm all viewers

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Excluded households• No ban: - can’t watch high quality channel

- but very low price• Ban: - can watch low quality channel__________________________________

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PolicyImplications

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