Media Competetion When the Audience Dislikes Advertising A Theory of Vertical Alliances on the Internet

This paper presents a model of media competition in a situation where the media is advertising-financed, but where the media consumers dislike commercials. It is shown that equilibrium prices of advertising are actually higher, and the profit levels lower, the less differentiated the medias are perceived to be. We apply the model to analyze the incentives for Internet portals to form alliances with their advertisers, and find that there exists a prisoners' dilemma where portals that are close substitutes end up in an equilibrium with no vertical alliances and low profit.