An alternative to the critical loss analysis is to derive the upward pricing pressure. Let
us extend the UPP approach to a two-sided market, consisting of market A and market R,
where firms 1 and 2 are operative. Following
Affeldt et al. (2013), we can derive the
upward pricing pressure after a merger between the two firms. To fix ideas, think about
a newspaper where A is the market for advertisers and R is the market for readers. We
consider how a merger would affect the prices of firm 1. We then have the following
UPP formulas for price for firm 1’s product in markets A and R, respectively:
UPP
A
1
¼ p
A
2
c
A
2
D
AA
12
c
A
1
c
AM
1
+ p
R
2
c
R
2
D
AR
12
+ c
R
1
c
RM
1
D
AR
11
(6.9)
UPP
R
1
¼ p
R
2
c
R
2
D
RR
12
c
R
1
c
RM
1
+ p
A
2
c
A
2
D
RA
12
+ c
A
1
c
AM
1
D
RA
11
: (6.10)
The first two terms are analogous to the ones in the one-sided market: the upward pricing
pressure from recapturing sales by the other firm on the same side of the market, and the
downward pricing pressure from the marginal cost reduction for firm 1 on that side of the
market.
The last two terms capture the cross-side effects. An increase (or decrease) in the num-
ber of units sold on one side of the market will affect the number of units that will be
demanded on the other side of the market. For example, in the newspaper market, it
is expected that more readers will attract more advertisers. A change in the price on
one side of the market will then translate into not only changes in the number of units
sold in that market, but also into the number of units sold in the other market.
The third term captures the cross-side effect from a change in the price of this firm’s
product in this side of the market on the other firm’s revenues on the other side of the
market. The change in revenue is the diversion ratio—the size of the change in the other
firm’s sale on the other side as a result of the change in this firm’s sale on this side of the
market—multiplied by the margin on the other side for the other firm. After the merger,
the merged firm will take this increase in revenues on the other side of the market into
account when considering a price change.
The fourth term captures the cost savings following the merger. It is the cost saving on
the other side of the market for this firm.
To illustrate the effect, consider a merger between newspapers 1 and 2 with no cost
reductions. After the merger, newspaper 1 sets a higher price to the readers. This leads to a
diversion of some readers to newspaper 2, and this loss of readers is therefore recaptured
after the merger. This is the traditional one-sided effect captured through the first term in
Equation
(6.10). In addition, a higher reader price leads to fewer readers for newspaper 1
and it becomes less attractive for the advertisers. This leads to a diversion of advertisers to
newspaper 2, who after the merger are no longer advertisers that are lost for the firm.
Such an indirect effect on the advertiser market from the reader market is captured
through the third term in Equation
(6.10). Interestingly, after the merger, newspaper
2 recaptures both readers and advertisers that had left newspaper 1. In contrast, in
249Merger Policy and Regulation in Media Industries
one-sided markets with only a reader side, it is only readers that are recaptured since there
are no advertisers.
Note that the formulas given in Equations
(6.9) and (6.10) do not include feedbacks.
We have only considered in isolation each of the two prices set by firm 1. However, since
there are four prices to be set, a change in one of the other three prices will feed back into
the optimal choice for the price in question. As shown in
Farrell and Shapiro (2010),ina
one-sided market this will not change the results qualitatively. For example, a higher price
on firm 2’s product will make a price increase on firm 1’s product even more profitable. But
in a two-sided market, feedback effects can reverse the price effects. For example, consider
a case where platforms 1 and 2 only overlap on side A of the market, and the demand on
side A is increasing in the number of units sold on side R. The platforms could be news-
papers, where the demand for advertising in each newspaper is increasing in its circulation.
A merger might then lead to an upward pricing pressure on side A of the market, since this
is where the firms overlapped, and the merger prevents them from competing on that side.
Since each reader is then more valuable in the advertiser market, the optimal response
would be to lower the price on the reader side of the market and thereby increase circu-
lation. Ignoring the possible feedback can in such a case imply that the possible price reduc-
tion on the product on the other side of the market is not fully taken into account, and in
that respect one might wrongly conclude that end consumers are worse off.
Finally, note that it is non-trivial to anticipate how consumers’ attitude toward adver-
tising might play a role. Dampening of competition on the advertising side might lead to
higher advertising prices simply because the traditional business-stealing effect is damp-
ened; the firms no longer reduce ad prices to attract advertisers. This might be true even if
consumers are neither ad lovers nor ad-averse. If consumers are ad lovers, a merger would
lead to an even larger upward pressure on advertising prices. As explained in
Section 6.2.1, this is because ad lovers on the reader side of the market will lead to tough
competition before the merger on having many ads and thereby low prices to advertisers.
On the other hand, ad-averse consumers would dampen the incentive to have many ads
in a competitive equilibrium. This is an argument for more ads after a merger and lower
ad prices. The latter implies that the idea of testing for a price increase following a merger
might be flawed; market power might lead to lower advertising prices and more adver-
tising. Therefore, from theory we cannot conclude that the consumers’ attitude toward
advertising is crucial for the effect on the advertising volume of a merger.
6.4.2 The Possible Price Effect of Media Mergers
We have presented the methods used in merger control by antitrust authorities. In this
section, we give some examples of how antitrust authorities have analyzed media
mergers. We then contrast this approach with how media mergers have been analyzed
by researchers in some recent empirical studies.
250 Handbook of Media Economics
6.4.2.1 Merger Control: Some Examples
In the previous section, we distinguished between the method used for one-sided mar-
kets and the method used for two-sided markets. It turns out that competition authorities
have used both methods in media mergers, and in some cases they have therefore failed to
take into account the two-sidedness of the market. In what follows, we will give some
examples of a one-sided approach, and then explain some examples of how the two-sided
approach has been applied in some more recent media mergers.
25
6.4.2.1.1 A One-Sided Market Approach
In merger control cases in media markets, the competition authorities have traditionally
used a one-sided market approach. One example is the UK competition authorities. Both
Durand (2008) and Wotton (2007) discuss several merger cases in the UK. Although they
disagree on to what extent two-sidedness is taken into account, they both point at cases
where the analysis has failed by only considering one side of the market, and then typ-
ically considering only the advertising market.
To illustrate this, let us consider the Archant/Independent News and Media merger case
from 2004. This is a merger between local newspapers. When the UK Competition
Commission, the phase II case handler in the UK, investigated the case, they focused
exclusively on the advertising side. An important issue was the market definition.
One piece of evidence was the results from a survey among advertisers. They were asked
how large the price increase would have to be before they would decide to divert to
advertising outside the local newspaper market. It was found that 23% of the advertising
outlay would be diverted to other advertising channels than local newspapers if adver-
tising prices increased by 5%. See
Figure 6.1 for an illustration of the results from the
survey.
This can be directly related to our formula for market definition (see Equation
6.3).
Twenty-three percent is an estimate of the actual loss from a 5% price increase, and it can
easily be seen that the local newspapers would be a relevant market if the price-cost mar-
gin is less than 17%. If so, the relevant market is rather narrow and the merger might lead
to an anticompetitive effect in the advertising market for local newspapers.
The
Competition Commission (2007)
discussed this in detail and decided that there was insuf-
ficient evidence to conclude that the merger would substantially lessen competition. As
pointed out in
Durand (2008) and Wotton (2007), the problem was that they considered
only one side of this apparently two-sided market.
Let us assume that the competition authority had found an anticompetitive effect on
the advertising side. This would most likely have led to an increase in the advertising
25
We draw heavily on the surveys in Filistrucchi et al. (2010, 2014), where they provide numerous examples
of how antitrust authorities have defined the relevant market. Since we focus on media mergers, we only
consider what they have defined as nontransactional two-sided markets.
251
Merger Policy and Regulation in Media Industries
prices, especially if the readers were ad lovers. Such a price increase would lead to a
downward pressure on prices in the reader market. The reason is that higher prices in
the advertising market would make each reader more valuable for the newspaper, and
the optimal response would be to lower reader prices to attract more readers.
The
Competition Commission (2007)
failed to take into account any effect on the reader side
of the market. As explained in the previous section, given that readers are ad lovers, the
Commission’s approach would tend to underestimate the market size.
According to
Durand (2008), a similar approach was used by the UK Competition
Commission in the Carlton Communications/Granada merger in 2002. There was no over-
lap on the viewer side and the Commission therefore focused on the potential anticom-
petitive effect in the advertising market. They then failed to take into account the possible
two-sidedness of the market. However, they did find that viewers might benefit from
fewer ads on TV (given that ads are a nuisance), since higher ad prices could lead to less
advertising. In this respect, the two-sidedness was considered to some degree. In line with
this,
Wotton (2007) claimed that the two-sidedness was an issue in this particular merger
case.
26
The problem is, though, that in such a market it is an even more fundamental
problem than in the newspaper market described above when the two-sidedness is
not taken into consideration. Since the Commission argued that viewers dislike
advertising, lower prices on advertising and thereby more ads after the merger
0 0.05 0.1 0.15 0.2 0.25 0.3
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
Critical price increase (%)
Proportion of respondents
Figure 6.1 Critical price increase for advertisers considering switching to other than local newspapers.
26
He also noted, however, that in another merger in the radio market in the same year, Capital Radio/GWR
Group, the Office of Fair Trading (OFT) focused exclusively on the advertising market and ignored the
audience market.
252
Handbook of Media Economics
(see Section 6.2.1) cannot be ruled out. The theory of harm—namely that the merger
leads to higher advertising prices—is then problematic. In fact, the theory of harm could
be reversed. The merger may lead to lower ad prices and more ads to the detriment of the
consumers that consider ads as a nuisance.
Three other examples from television are the takeover of ProSieben/Sat1 by Axel
Springer, BSkyB’s acquisition of 24% of KirchPayTV, and News Corporation’s acqui-
sition of 25% of Premiere.
27
All these three cases have in common that they are mergers
between one firm that is mainly financed by subscription and one that is mainly financed
by advertising. It was argued that with free-to-air television there is no need to define a
viewer market, since the TV channels have no direct revenue from viewers. It was also
argued that pay TV has no or very limited advertising revenues, and therefore its behavior
is not relevant for the advertiser market. However, as we know from the theory part, this
way of reasoning is flawed. For example, one would then fail to recognize that after a
merger the merged firm might have incentives to increase the advertising volume in
the channel that before the merger was mainly financed by subscription revenues. This
could be the case because the viewers regarded free-to-air and pay TV as fairly close sub-
stitutes, and this imposed a competitive constraint on the amount of profitable advertis-
ing. It is therefore misguided to consider the current financing structure, and from this
observation conclude that one side of the market can be neglected.
6.4.2.1.2 A Two-Sided Market Approach
Already in 1995, before the theory of two-sided markets was defined, the US Supreme
Court recognized the two-sidedness in the newspaper market
28
:
“Every newspaper is a dual trader in separate though independent markets; it sells the paper's
news and advertising content to its readers.”
In recent years, we have seen several merger control cases where the two-sidedness has
been discussed by parties and/or taken into account by competition authorities.
Evans
and Noel (2008)
extended the method for market definition to a two-sided market,
and they applied their method to Google’s acquisition of DoubleClick, two firms active
in the online advertising sector. Google operates an Internet search engine that offers
search capabilities for end-users free of charge and provides online advertising space
on its own websites. It also provides intermediation services to publishers and advertisers
for the sale of online advertising space on partner websites through its network
“AdSense.” DoubleClick mainly sells ad serving, management and reporting technology
worldwide to website publishers, advertisers, and agencies.
Evans and Noel (2008) argue
27
The first case was investigated by Bundeskartellamt in Germany, while the two other cases were inves-
tigated by the European Commission. For details concerning the cases, see
Filistrucchi et al. (2014).
28
See NAT’s acquisition of the local daily newspaper Northwest Arkansas Times in Times-Picayune Pub-
lishing Co. v. United States, see 892 F. Supp. 1146 (W.D. Ark. 1995).
253
Merger Policy and Regulation in Media Industries
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