1. 1 Exclusive Quality (work in progress) Johan Stennek Research Institute of Industrial Economics, Stockholm CEPR

2. 2 Example: Sweden

3. 3 Example: U.S.

4. 4 Example: Summary 1.Exclusive distribution – Competition 2.Exclusive distribution – Quality

5. 5 Questions 1.Why and when exclusive distribution? –Role of quality? –Competing distributors 2.Effect of ban on exclusive distribution?

6. 6 The Model: Agents One producer of (a single) TV-channel Two TV-distributors Viewers

7. 7 The Model: “ Timing” 1.Producer invests in quality 2.Producer and distributors negotiate over distribution rights 3.Distributors compete for viewers

8. 8 3. Competition for viewers Setup Given –Quality –Distribution (prices fixed) Timing –Two distributors set subscription fees –Each viewer subscribes to one distributor Hotelling

9. 9 3. Competition for viewers Subscription revenues Quality Aggregate subscription revenues Non-exclusive dist. Exclusive dist.

10. 10 3. Competition for viewers Advertising revenues Quality Advertising revenues Non-exclusive dist. Exclusive dist.

11. 11 3. Competition for viewers Subscription vs. advertising revenues Quality Revenues Loss of advertising rev. Gain in subscr. rev.

12. 12 2. Bargaining for Distribution Rights Setup Given –Quality Timing –Alternating offers –Offer = price & type of distribution rights –If non-exclusive rights, bargaining continues

13. 13 2. Bargaining for Distribution Rights Form of distribution “Efficiency” Exclusive rights if –High quality –Intense competition Intuition: Quality ↑ –Gain in aggregate subscription revenues ↑ –Loss of advertising revenues ↓

14. 14 2. Bargaining for Distribution Rights Prices 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 ↑

15. 15 1. Investment in Quality Setup 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

16. 16 1. Investment in Quality Optimal qualities, given distribution Optimal quality Marginal cost of quality Optimal quality is always higher under exclusive distribution than under non-exclusive distribution, given any cost Optimal quality is higher the smaller is the cost of quality

17. 17 1. Investment in Quality Optimal 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 lowhigh

18. 18 Policy Experiment Given quality: –Ban on exclusive distribution good for all viewers Reduced quality: –Ban may harm all viewers __________________________________ Excluded households No ban: - can’t watch high quality channel - but very low price Ban: - can watch low quality channel __________________________________

19. 19 Policy Implications “Efficiency defense” –Especially important when quality is high –Investment incentives may be too strong –Time consistency