Undergraduate Thesis - Bias and Competition in the Market for News

8/3/2019 Undergraduate Thesis - Bias and Competition in the Market for News

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Bias and Competition in the Market for News

Diego Daruich, Toms Hamudis, Nicols Kiguel,

Universidad Torcuato di Tella (UTDT)

Presented to the Department of Economics in fulllment of the requirement

for a Final Graduating Thesis

August 6th 2010

Abstract

We study the interaction and competition in the market for news under

two basic assumptions on how this particular market works: (i) people have

certain beliefs which they like to see conrmed and (ii) newspapers, or any news

provider, can slant news towards any beliefs in a similar fashion to Shleifer and

Mullainathan (2005). The households buy news in order to obtain information

and the news providers have to choose where to locate themselves in a left-

right spectrum in order to maximize their prots. We show that when the

news providers decide both weather or not to enter the market and where to

locate afterwards, they rely almost exclusively on competitive issues, giving less

importance to how the readers are distributed in the horizontal space. Finally,

we nd that the revenue from advertising, the market size and the xed costs

are the main sources of bias in the market for news.

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1 Introduction

"Fair and balanced, as always."Fox News slogan

Media outlets have always played a key role in modern societies. These

outlets produce news that people hear, read or watch, which for most of them

are the one and only source of information regarding economics, politics, sports,

entertainment and many other issues. While these media outlets do seek to max-

imize prots, the same news often carries dierent weights among the dierent

providers. They contain some sort of bias directed to catch people with a de-

ned position in the left-right ideology spectrum (which is often assumed to

contain hippies, liberals, radicals and conservatives). In the United States, con-

servatives complain about the liberal slants on the big three networks1 , CNN,

and MSNBC. Similarly, the left complains about the conservative slant on FOX

News.

In spite of these complaints, Josh Harper and Thom Yantek (2003) argue

that the mass media is still providing its democratic input in its attempt to pro-

vide citizens with the necessary news and views on political aairs. However,

the signicant question might be: even if the bias is, in fact, present in the news,

what can we do about it? People can probably do little directly, but they can

certainly encourage governments to set policy regarding competition. While

nowadays questions regarding public media policy are arising internationally,

we will make an attempt to discuss the matter and examine it theoretically.

Our purpose in this paper is to provide an explanation to why media outlets

behave the way they do, and what the motivations are for dierent newspa-

pers to publish various angles when discussing the same issue. We believe this

understanding is the rst necessary step to improve the public media.

Our market of news analysis is based on the two typical sides: supply and

demand. While the former is represented by prot maximizing media outlets,

1 The big three television networks are the three traditional commercial broadcasters (over

the air) television networks in the United States: ABC, CBS and NBC.

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the latter is conformed by the readers or buyers of news.

Research in psychology and behavioral economics strongly supports thatpeople - far from being passive in their role of news receivers - consume news

from media outlets whose ideological positions are close to their own (Chan and

Suen, 2007). Individuals behave with conrmation bias, which is a tendency for

people to prefer information that conrms their preconceptions or hypotheses,

independently of their truthfulness (Maria Lewicka, 1998). Quoting Thomas

Jeerson2 , The moment a person forms a theory his imagination sees in every

object only the traits which favor that theory." This conrms that engagement

in conrmation bias has always been part of the psychological mechanism which

shapes behavior.

Another feature of this market, regarding the supply side, is that rms are

able to slant news. To slant means "to distort (information) by rendering it

unfaithfully or incompletely, in order to reect a particular viewpoint."3 Factual

reporting often gets an additional view or angle that each journalist adds to

capture the taste of his or her audience. For example, as shown by Gentzkow

and Shapiro (2006), when, in 2003, American troops fought a battle in the Iraqi

city of Samarra, there was a signicant dierence in the coverage oered by Fox

News, The New York Times and the Al Jazeera network.Fox News began its story on the event with the following paragraph:

In one of the deadliest reported reghts in Iraq since the fall of

Saddam Husseins regime, US forces killed at least 54 Iraqis and

captured eight others while fending o simultaneous convoy ambushes

Sunday in the northern city of Samarra.

The New York Times article on the same event began:

American commanders vowed Monday that the killing of as manyas 54 insurgents in this central Iraqi town would serve as a lesson

2 American 3rd U.S. President (1801-1809) and author of the Declaration of Independence.3 Slant. (n.d.). The American HeritageR Dictionary of the English Language, Fourth

Edition. Retrieved April 13, 2010, from Dictionary.com website.

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to those ghting the United States, but Iraqis disputed the death toll

and said anger against America would only rise.

Finally, the English-language Web site of the satellite network Al Jazeera

(AlJazeera.net) began:

The US military has vowed to continue aggressive tactics after say-

ing it killed 54 Iraqis following an ambush, but commanders admit-

ted they had no proof to back up their claims. The only corpses

at Samarras hospital were those of civilians, including two elderly

Iranian visitors and a child.

This reects how three dierent outlets can, in fact, report, on the same

issue, dierent stories by ommiting facts and choosing dierent words.

It is easy to nd further examples of slanting just by comparing how any

given fact is treated by dierent media outlets. For instance, in the United States

there has been polemic regarding the liberal bias of some newspapers. Quoting

a journalist in response to an accusation on The New York Times liberal bias

Of course it is....These are the social issues: gay rights, gun control, abortion

and environmental regulation, among others. And if you think The Times plays

it down the middle on any of them, youve been reading the paper with youreyes closed.4

Therefore, our work consists of analyzing the market under both assumptions

of media outlets slanting news and rational readers seeking information close to

their priors or beliefs5 . In this sense, our consumers are rational and biased.

These two characteristics of consumers will result into a utility function which

has also been widely used in the literature.

To investigate how prot and news content are related, we consider a media

market in which media outlets are facing dierent market structures. We build

4 Daniel Okrent, New York Times Public Editor, in a July 25 th , 2004 column asking, Is

The New York Times a Liberal Newspaper?5 Vast amount of research on the market for news has been based upon these assumptions,

including Dyck and Zingales (2002), Shleifer and Mullainathan (2005) and Gentzkow and

Shapiro (2006).

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up on the Hotelling model framework, where rms choose a location in the

horizontal space as a result of xed costs. Under the classic example of theHotelling model, rms were located in a linear city and consumers preferred to

buy from the rms nearer to where they lived; if they bought from a rm not

located in the point where they lived, they had to incur in a transportation

cost, a loss in utility. Thus, consumers priors regarding their ideology can be

interpreted as transportation costs when purchasing the newspaper (they incur

in a loss of utility if they do not consume their ideologically identical newspaper).

The principle of dierentiation implies that rms do not want to locate at the

same place in the product space, since goods are perfect substitutes and they

are only dierent from each other because they lie in a dierent place on a

continuum. In our case, facts are always the same and media outlets slant on

them to capture the fact that people have priors or beliefs which they like to

see conrmed.

We use a more complex version of the Hotelling model, as in our case rms

entrance is sequential and endogenous to the model. If a rm decides to enter

the market, it will have to choose a slanting strategy to maximize prots. Entry

stage will hold until a potential player decides not to enter the market. After the

entry stage is completed, price competition takes place. When there is more thanone media outlet in the market, they all announce prices simultaneously (after

all newspapers have revealed their slanting strategy). The slanting strategies

are public and, thus, common knowledge for all market participants.

Our research starts with the monopoly case, where we determine a measure

for the slant and we solve for price charged, market share and rm benets

to fully characterize a partial equilibrium. Although the monopoly case seems

trivial, we introduce a second rm to model both competition and the rms

strategies to deter the entrance of other media outlets into the market. More

precisely, given an existing rm operating in the market, we allow for a second

rm to enter the market. Then, we describe whether or not it is optimal for

this rm to enter and why (i.e. under which parameters). Lastly, we introduce

a third rm which will also seek to enter the market. This will provide the

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theoretical framework to analyze how this threat changes the bias of the news

providers and give an insight of the barriers to entry in this particular industry.To have a meaningful discussion on the implications of sequential competi-

tion in this market, we analyze the output of our model with special attention

to the diversity of the news (where rms are located in the left right or liberal-

conservative spectrum) and the degree of competition (how many rms are in

the market).

Our work is related to dierent strands of literature. With regards to how

rms engage in competition and how this determines bias, Shleifer and Mul-

lainathan (2005) propose a two rms model with dierent types of readers, in

which - for topics where readers beliefs diverge, such as politically divisive is-

sues - the news outlets tend to segment the market and slant towards extreme

positions. Using this result, they conclude that reader heterogeneity is more

important for diversity and accuracy of the news than competition. On the

contrary, we assess more importance to competition, since our model allows for

several rms to enter the market. Even though we assume readers are distrib-

uted with a uniform function, we conclude that, when competition is increased,

slant is reduced. Furthermore, since we use the conservative assumption of uni-

formly distributed beliefs, we can expect our results to be even stronger withthe more usual idea of normally distributed beliefs. Finally, since media outlets

tend not to express extreme positions, our ndings seem more realistic.6

The remainder of this paper is organized as follows. Section 2 highlights the

role of our model in accounting for some qualitative stylized facts and issues

that motivated our interest in this area of research. In section 3, we formally

6 Regarding the ndings of our model we reckon that it is worth mentiontiong that we are

just proposing a new model that gets dierent results from previous work showing the lack

of robustness of other peoples conclusions. Though valid, our model is not the only way to

endogenize the number of rms in market with this characteristics and although it can explain

some qualitive observations, we are not sure what will happen if we chose other way (equally

valid) of modelling this market.

Of course this a eld that is not well explored and further research may come up with

stronger conclusions.

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introduce our model and describe the market behavior. Section 4 presents our

basic results. Finally, section 5 contains some concluding remarks and we alsointroduce some unsolved issues that may be key in future research and in the

understanding of the industrial organization of the market for news.

2 Regularities of the media industry

In recent years, the literature regarding media economics has expanded consid-

erably. Although this paper focuses mainly on theoretical aspects of the media

market, the following section summarizes the results of dierent studies in order

to present some regularities which will then try to be explained.

First of all, the literature includes a large number of studies reporting a

positive correlation between the degree of competition and the diversity of the

contents oered by the media outlets. A study by Albarran et al. (1991) exam-

ined the entrance of Fox News in the television industry and its consequence on

programming diversity. The results showed that the entrance of a new rm pro-

vided a wider oer of views to the audience thus resulting in a positive relation

between competition and media diversity. Similar results were found by Dim-

mick and McDonald (2001) while studying the radio industry. Their research

used network dissimilarity of contents in order to account for diversity. They

concluded that competition in the radio market has also a positive relation with

the diversity of views. Moreover, another study by Johnson and Wanta (1993)

gets the same results in the newspapers industry.

Secondly, a positive correlation is often seen between the size of the market

and the diversity of contents. As the xed costs of the media industry tend to

be considerably high, the size and wealth of the market seem to be essential

in determining whether this market can operate in equilibrium as a natural

monopoly, duopoly or any other form of oligopoly.

Research carried out by Gentzkow and Shapiro (2006) regarding the amount

of time spent talking about the dierent candidates during the 2000 national

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elections in the U.S. highlighted how important the size of the demand is. Their

study concluded that the correlation between the populations log and the num-ber of news broadcasts was about half a point. This result illustrates the fact

that the size of the demand plays an important role in dening the number of

rms that operate in the market.

The comparison of dierent European countries can serve as a less rigorous

but still interesting example of this pattern. Countries with stronger nancial

backgrounds such as the United States, Germany, England or France oer a

great opportunity for media rms to develop and thus oer greater diversity. On

the other hand countries such as Ireland or Hungary present the exact opposite

scenario, resulting in a less developed media industry and being the consumers

the ones who most suer this lack of variety (Doyle, 2000).

Thirdly, recent developments of the media industry regarding mainly

the advances of the internet seem to support the idea that lower xed costs

encourage competition and therefore increase the diversity. Although no major

studies have been carried out to test for this hypothesis probably due to the lack

of information available regarding private costs- the technological advances of

the last decade serve the purpose of what could have been a planned experiment

in this direction.Nowadays, the media industry, which has classically been one of high xed

costs and strong barriers of entry, is evolving into a dynamic and massively

diversied market. The main cause for this phenomenon is the Internet. Along

with the online publication of most newspapers and the online broadcasting of

radios, the appearance of blogs, forums and websites has created a new genera-

tion of media suppliers; with lower xed and variable costs.

As the xed costs were reduced, the media industry has experienced a highly

signicant expansion in recent years. This granted small rms the opportunity

to enter the market, gain their share of readers and make a prot. Thus, the

evolution of the media industry into a digitalized and less expensive one results

in a wider range of views available to the public, whether it is in the form of an

online newspaper, a blog or an online radio.

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These regularities will serve as a benchmark to test for our models validity.

3 The Basic Framework

In order to facilitate comparability, we use Shleifer and Mullainathans (2005)

setup. Readers are interested in some underlying variable d, regarding certain

controversial issue such as health care or education, which is distributed uni-

formly over the segment [1; 1]. The density and the total population is M.

As each consumer has a unit demand, M is also a measure of the market size.

Since readers hold beliefs about d that are distributed uniformly over the same

segment [1; 1], they are potentially biased about the real value of d:

Media outlets make prots from reporting news about t. They receive some

data d = t, where, since E(t) = 0, we know that E(d) = 0: We assume that they

then report the data with a slant s(d), so the reported news is n = d + s(d):

3.1 Reader utility

Suppose readers are rational but biased. On the one hand, they want informa-

tion and they dislike slanting because it is costly both in eort and the time

it takes to read the slanted news and understand the truth. Therefore, a

rational readers utility should be decreasing in the amount of slanting. On the

other hand, a biased reader gets disutility from reading news inconsistent with

his beliefs. We model consistency as the distance between the news and the

readers beliefs, b, measured as (n b)2. Therefore, if reader i with beliefs bi 2

[1; 1] decides to read the newspaper j, his utility is:

(1) u sj (d)2 (

nj z }| {d + sj (d) bi)2 pj

where > 0 and > 0: Moreover, it is assumed that > , in order to model a

situation where the population is heterogenoues and their beliefs are signicant.Otherwise, if > ; the model would reect a situation where the population

is more similar to homogeneous one, since they would dislike the slant so much

that their beliefs could become less important.

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3.2 Newspaper Strategy

Before seeing the data d, a newspaper decides whether to enter the market or

not and announces its reporting strategy n, which implies an slanting strat-

egy s(d), and the price p it charges. Potential readers will buy the paper if

the price p is lower than the expected utility (gross from the price) associated

with reading the paper, Ed[U(s(d))]: To form expected utility, expectations are

taken over d. As explained by Shleifer and Mullainathan (2005), this approach

crudely captures the idea that this is a long-run game. Readers get a general

sense of how much pleasure the paper provides them and make their purchasing

decisions accordingly. Moreover, this also captures the idea that if the mediaoutlets were capable of changing their slanting policy frequently, they would

suer from a reduced reputation. A newspaper is expected to report on many

news before both building a reputation and selling enough papers to make a

prot. For instance, if a right winged newspaper changed its slanting policy to

become a liberal newspaper, we would expect that both liberals and conserva-

tives would dislike the paper, either because of its past or its present slanting

reputation. Quoting Benjamin Franklin, It takes many good deeds to build a

good reputation, and only one bad one to lose it.

In this paper, we analyze a variation of Hotellings model of dierentiated

products where rms locate sequentially in the product space and subsequently

all choose prices simultaneously. This is a model of Stackelberg leadership in

the choice of locations, followed by a stage of simultaneous price choice. Since,

in most cases, prices can be revised after the entry of a new rm, a simultaneous

Nash equilibrium seems indeed to be appropriate to model price competition.

Moreover, since pricing and production decisions are taken simultaneously, a

rm that locates rst does not have the possibility to sell rst or capture con-

sumers. However, such a rm can choose to position itself in the product spacemost advantageously. Depending on the ideological location and the price each

newspaper chooses, newspaper j sells mj papers, where mj 2 [0; M]:

Moreover, we also take into account the eect of advertising. Since more than

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75% of newspapers income comes from advertising (Donica Mensing, 2007), we

know that this should be a very relevant factor in this industry. Since we usuallyconsider the advertising value to be related to number of people who see that

advertisement, it is important that the advertising revenue for the newspaper

is positively related to the amount of readers. Taking this into account, we

include this element by multiplying the sales revenue by a, which will make the

advertising revenue positively related to the amount of readers

Finally, rms endure a xed cost, f; in order to enter the market. Although

this cost is not analyzed internally, it could include both the infrastructure

required to print and distribute the papers, as well as the money spent to build

a reputation. Once they pay the entrance cost, marginal costs are normalized

to cero. Consequently, newspaper js prot function, if it enters the market, is

j = apj mj f

On the other hand, if newspaper j decides to stay out of the market, its

prot will be cero.

Timing of the full game is as follows:

(a) The newspapers go through a sequential and endogenous entry game

to decide whether to enter the market. If they do enter the market, they also

commit to a reporting strategy (and, consequently, to a particular slanting strat-egy). In other words, a rst potential newspaper evaluates whether to enter the

market or not and chooses its slanting strategy. Afterwards, a second potential

rm goes through the same process and then a third rm, and so on. Entry

occurs as long as a rm can realize a non-negative post-entry prot. It is im-

portant to notice that every rm considers the entrance of further rms (and

possible strategies to discourage their entrance) when it chooses its own slanting

strategy. The number of rms that enter the market will be hereafter known as

J:

(b) After the entry stage is completed, price competition takes place.

When there is more than one newspaper, they all announce prices simultane-

ously, after every newspaper has revealed its reporting and slanting strategy.

(c) Individuals decide whether to buy the newspaper based on the aver-

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age utility given by its slanting strategy s(d) and price p. It is assumed that

every individual buys one and only paper.(d) Newspapers receive the data d and each of them reports news nj =

d + sj (d), with j = 1; : : : ; J : Moreover, it is assumed that there are no marginal

costs for reporting or selling the news.

(e) Individuals buy the paper, they read the news and receive utility.

Since we seek subgame perfect Nash equilibrium, we solve the game by back-

ward induction. Moreover, as newspapers locate sequentially, the ideological

choices of the newspapers that act earlier inuence the locational choices of

subsequent actors. Taking this into consideration, newspapers that locate early

in the game carve their locational niche anticipating the subsequent choices of

locations. We are particularly interested in the game where rms can use their

reporting positioning (by choosing a strategy with reduced expected slant) to

deter the entry of subsequent rms. With ideological location as the strategic

variable, newspapers prot from participating in entry deterring activity.

By separating the price choice to a later stage, we assume that prices are

more exible than entry and slanting strategy. Once again, this can be explained

by the fact that building a reputation as a conservative or liberal newspaper

takes a long time, which translates into money because of periods of reducedsales (though this is not shown in our model). If they were able to change their

ideological opinion frequently, they could suer from a poor reputation which

would reduce their sales.

3.3 Cases Considered

We consider three dierent cases regarding the possible number of rms. Al-

though we let the market endogenously determine the number of newspapers,

we limit our analysis to three potential rms. First, we study the monopoly

situation. Secondly, we study the case when two rms decide to enter the mar-

ket. As we will later show, the monopoly has no possible strategy to dissuade

the second rms entrance, so this case is not particularly interesting for our

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objective. Finally, we study the case when a third rm threatens to enter the

news market. This will make the rst rm that entered the market consider thepossibility of dissuading the third rms entrance by choosing a slanting strategy

with reduced expected slant (and taking into account the second newspapers

slanting strategy).

We assume that beliefs are distributed uniformly in the segment [1; 1],

and potential reporting strategies are distributed over the same segment. This

will capture a case where there is substantial disagreement regarding the issues

analyzed by the papers.

As mentioned earlier, this style of industry structure is similar to a Hotelling

model. Firstly, readers beliefs resemble consumers locations. Their dislike

of ideologically distant news resembles transportation costs. Secondly, rms

choice of a slanting rule resembles a location choice. Therefore, our utility

function, as well as the one used by Mullainathan and Shleifer (2005), implies

quadratic transportation costs and our distribution of reader beliefs is equivalent

to a uniform distribution of consumers.

3.4 Dening Bias

Media bias usually refers to the bias of journalists and news producers within

the mass media, in the selection of which events and stories are reported (and,

thus, which are omitted) and how they are covered. We can think of omission

as being news that should have been reported but is left out of the news we

read, see and hear. When important news is omitted, we get a skewed per-

spective. Obviously no news organization can cover every newsworthy story

from every possible perspective. But news organizations and their reporters do

have an obligation to seek the truth and be reasonably comprehensive in their

reporting. The information citizens need to make informed decisions comes, to

a signicant extent, from news organizations. If important stories are ignored,

are reported incompletely, or present facts that are not adequately veried, then

the obligation to seek the truth is undermined. Given its importance, we are

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focusing our interest in the degree of newspaper bias in the market.

Denition 1 Letni be the news read by reader i 2 [1; 1 ]. The average reader

bias is then dened as:

ARB =

Zi

Ed[(ni d)2]

This sums the bias of every newspaper weighted according to their market

share. Therefore, this measure considers both the amount of expected bias of

each newspaper and the size of the audience would receive their biased report.

For instance, even if a media outlet is extremely biased its eect in the ARB

could be very insignicant if its audience is small enough. On the other hand, amedia outlet with less bias could be more signicant in the ARB if its audience

is bigger. Thus, the ARB measures the average bias met by the readers

4 Results

4.1 Solutions

Since readers dier in their beliefs, newspapers must decide which one of the

dierent reader groups is its target audience. For all the following results, and

most importantly for the monopolist case, it will be assumed that the utility

gained by the readers from buying any paper is high enough so that the market

will be completely covered by the newspapers. Even though we use a sequential

entry model and Shleifer and Mullainathan (2005) use a simultaneous entry one,

our rst two propositions are compatible with the results they nd.

Proposition 1 Supposing there is only one newspaper, then this monopolist

will report without any expected slant.

Suppose the entry cost is high enough (f > am(5)2

36)to prevent a second

newspaper from entering the market. Therefore, the monopolist maximizes

prots by choosing:

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(4) nm = Ed [sm (d)] = 0

(5) pm = u

Proposition 2 Supposing there are only two newspapers, they will maximize

the dierence between their expected slants.

Since the entry cost decreases enough (f < am(5)2

36) in order to allow a

second rm to enter, the rst rm already knows that a second rm can enter

if he chooses the monopolist slanting strategy (which is also the best one to

dissuade the second rms entry). Therefore, the rst rm should change its

optimal strategy. If there is only one more rm that can enter the market, the

optimal strategy for the second rm will be the following:

(6a) n2 = Ed [s2 (d)] =6

(+) n1

However, since 6(+) > 3; for every n1 2 [1; 0] we know that the second

rms best reporting strategy will be the right extreme (assuming, without loss

of generality, that rm 1 slants toward the left and rm 2 slants toward the

right),

(6b) n2 = Ed [s2 (d)] = 1

Consequently, the rst rms optimal reporting strategy will be the opposite

extreme:(7) n1 = Ed [s1 (d)] = 1

Each duopolist positions himself as far away from the other as possible.

This is analogous to the standard Hotelling result with uniform distributions

and quadratic transportation costs (Tirole, 1998). As in the standard Hotelling

model, the monopolist caters to both audiences, while duopolists maximally

dierentiate. This occurs because the more dierentiated the duopolists, the

higher the prices they can charge. In other words, dierentiation softens price

competition because the temptation to undercut each other diminishes as the

rms move farther away from the marginal consumer (who is located between

them).

Mullainathan and Shleifer (2005) use these results to conclude that compe-

tition increases the bias, making the news sources as extreme as possible. In

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this sense, competition would tend to polarize the news. However, we take the

study one step farther to take into account that leaving the ideologically centrallocation free would increase the incentives for a third rm to enter the market.

Moreover, if this third rm actually entered, this would signicantly reduce the

benets of the two previous rms. Since the rst rm can anticipate this situ-

ation, it should choose a more central location either to prevent the other rm

from entering or, even if this rm does enter, in order to be the newspaper to

have the most valuable ideological position in the market.

Proposition 3 Supposing there is a third newspaper threatening to enter the

market, the rst newspaper will reduce its slant policy in order to dissuade thisrm from entering (under some parameter conditions).

If a third rm can threaten to enter the market, the rst rm to enter the

market has the chance to dissuade the third rms entry. By taking into account

how the second rm will respond, the rst rms optimal strategy will compare

the possibility of dissuading the third rms entry from allowing it. Therefore,

its optimal strategy will depend on how high the entry deterrence benet is

compared to the entry deterrence cost.

For f >am(3+)2

18 ; entry is blocked since the optimal duopoly slantingstrategy considered earlier would make the third rm unprotable if it decided

to enter the market.

For f < am(3+)2

36 ; entry cannot be dissuaded, since no matter what the

rst newspaper does, the third rm will prot from entering the market. In

this situation the rst rm takes a central reporting strategy (with no expected

slant), while the other two rms take extreme and opposite reporting strategies.

For am(3+)2

36< f 3; for every n1 2 [1; 0] we know that the second

rms best reporting strategy will be the right extreme (assuming, without lossof generality, that rm 1 slants toward the left and rm 2 slants toward the

right)

(8b) n2 = Ed [s2 (d)] = 1

Taking into account how the second rm will respond, the rst rm will

maximize its benet subject to limiting the benet of the third rm -if it decided

to enter- to a non-positive value. There is one implicit solution for this problem

(9) n1[n2; n3 (n1; n2) ;m ;a ;f ]

which follows the expected pattern of slant reduction with reduced entry costs,

increased market size and, increased advertising revenues. In other words, the

reporting strategy of the rst rm becomes more central with lower entrance

costs, bigger market or higher advertising benets, until a point where the ex-

pected bias is reduced to cero and the entrace of the third media outlet becomes

impossible to dissuade.

The rst rm could have allowed the second rm to be the one to actively

dissuade the third rm from entering. However, this was not the optimal strat-

egy. By comparing the alternatives of actively dissuading and of letting the

second rm do so, the rst rm prefers the rst one. Given that some rm hasto reduce its slant, it is better to be the one that does so since it allows it to

charge a higher price and have a bigger audience.

Finally, there is no entry cost for which the rst rm prefers to allow the

entry of the third one (having the possibility to block it), since once it gets

to the center of the market (because the entry costs are lower) all it can do to

dissuade the entry is stay in that location. Moreover, that location is its optimal

one if a third rm actually enters in the market, since it is the best location in

terms of the amount of potential buyers.

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4.2 Corollaries

Corollary 1 Competition reduces the average reader bias of the market.

ARBwith threat < ARBwithout threat

Once we allow for other rms to threaten to enter, the rst rm has to reduce

its bias in order to reduce the benets from entering. Therefore, the average

reader bias in the market is reduced.

Although we only considered the case with two rms actively selling in the

market and one more threatening, it is reasonable to extend this idea to further

number of rms. Economides et al. (2002) nds out that once we allow for a

rm to threaten to enter the market, the rms already in the market tend to

locate closer to the center. Moreover, since they use a utility function that does

not decrease with the distance from the center (as ours does), we believe that our

utility function would actually increase the results found by them. Therefore,

it is reasonable to expect that, given an amount of rms in the market, if a new

rm is introduced to threaten to enter, the average reader bias of the market

will be reduced.

Corollary 2 A bigger market reduces the average reader bias of the market.

@ARBwith threat@m

0

A bigger market increases the benets of entering the market. Since the

population is bigger, every newspaper can increase its sales (ceteris paribus).

This forces the rst rm to enter to reduce its bias in order to dissuade the

entrance of new rms.

Corollary 3 Higher entry costs increase the average reader bias of the market.

@ARBwith threat@f

0

Opposite to market size, the higher the entry costs the lesser the benets

from entering. Therefore, the menace of the entrance of further rms is reduced,

which allows the rst rm to take a more biased position (in order to reduce

price competition). Since this industry is one of particularly high xed costs, not

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only in terms of infrastructure but also in terms of reputation, higher nancial

costs could, actually, be a possible source of bias. For instance, higher interestrates could make the investments necessary to enter the market unprotable

(Copeland, Koller and Murrin, 2000), assuring the rst rms to enter that no

other newspapers will ever enter. This could allow them to have a bigger bias.

Once again, although we only tested this for the case with two rms actively

selling in the market and one more threatening, it is reasonable to extend this

idea to further number of rms. Economides et al. (2002) uses a numerical

analysis to prove that when the xed costs are reduced, the rms already in the

market tend to locate closer to the center. Moreover, since they use a utility

function that does not decrease with the distance from the center (as ours does),

we believe that our utility function would actually increase the results found by

Economides et al. (2002). Therefore, it is reasonable to expect that given an

amount of rms in the market, if the entry costs are reduced (or become more

nancially accessible), the average reader bias of the market will be reduced.

Corollary 4 Higher advertising benets reduce the average reader bias of the

market.

@ARBwith threat@a 0

The higher the revenue generated from advertising, the greater the benets

for other rms to enter the market. Given an amount of rms in the market, this

increases the threat of other rms entering. Taking this into account, the rst

rm should reduce its bias to prevent this new rm from entering the market.

Therefore, the average reader bias of the market is reduced.

5 Concluding Remarks

We have examined the role of competition in promoting accuracy in the media.

In contrast to Shleifer and Mullainathan (2005), we have found that this is a

very signicant force toward accuracy. Having a xed number of competitors,

competition might increase the bias since the rms use this to dierentiate

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themselves and lighten price competition. However, we nd that allowing for

further competitors induces exactly the opposite. Our model of the market fornews with endogenous and sequential entry provides a new way to understand

media bias. Bias arises from the barriers to entry and from the factors that

inuence the prot once inside the market.

We nd that the revenue generated from entering the market is negatively

related to the bias in the market. Firstly, the greater the population, the greater

the amount of potential readers. Corollary 2 shows that this increases the

threat of new rms entering the market and, consequently, reduces the benet

of dierentiation through increased bias. If the previous level of bias were held,

a new rm could enter and take a highly protable slanting policy. Secondly, the

greater the benets from advertising, the greater the benets from entering the

market. Corollary 4 shows that this, once again, forces the rst media outlets

to reduce their bias, in order to prevent a new rm from entering.

With regards to the barriers to entry, the higher they are, the higher the

optimal level of dierentiation through bias for the media outlets. We nd that

higher entrance costs or, possibly, higher nancial costs could induce a higher

bias in the news. Since this is an industry with highly signicant entrance

costs due to the infrastructure required to report, print, and distribute thenews, higher entrance costs -or the unavailability of credit- would lessen the

threat of new media outlets telling the truth. Similarly, since building a

reputation takes time, an extended period of negative prots can be expected

before reaching the required break-even number of readers. Higher risks -or

higher nancial costs- could cause a signicant increase in the discount rate

(Copeland, Koller and Murrin, 2000). This could turn the uncertain and distant

benets of entering the news market unsatisfying when evaluated against the

certain and earlier long period of losses.

In the current international debate of media regulation, the main argument

in favor of limits on consolidation has been the importance of independent

voices in news markets. Governments are, nowadays, considering the possibility

of interfering directly in this market, either by creating new media outlets or

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by forcing the current ones to reduce their participation. Corollary 1 conrms

the idea that if we allow new rms to enter the market, new voices will beheard and the bias will be reduced. However, given the elevated entrance costs

of this industry, it is important that we actually make the entrance of new

media outlets possible. Corollary 3 shows that reducing infrastructure costs is

essential to reduce the bias. Internet has provided a private-market solution

for this problem, since new voices can now participate through blogs -and other

forms of online journalism- without major costs. Nevertheless, for the traditional

mass medias still high start-up costs -including the negative prots during the

periods with reduced number of readers- credit opportunities and risk reduction

are fundamental. These would ease the discount rate the media outlets take

into account when comparing the distant income with the earlier costs.

Further research should allow for a better understanding of the media. For

instance, building an analytical model with a bigger number of rms could be

interesting to prove the extension of our results. Moreover, introducing other

distributions to the peoples beliefs and/or the data, could result in dierent

conclusions regarding the inuence of these variables in the media bias. We

believe that introducing normal distributions for these variables could actually

strengthen our results, but further research is necessary to prove that. Finally,analyzing the cost of starting a new media -paying important attention to the

period of losses until the break-even is reached- would be essential to understand

the barriers of entry.

However limited our study might be, we wish to highlight the policy impli-

cations of our results. Governments trying to reduce the bias in the market,

could concentrate their eorts in some of their more typical objectives. Reduc-

ing both country and market risks, through trustworthy and reliable policies,

would reduce the risk of entering the news market and force media outlets to

be more consistent with the truth.

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Appendix

PROOF OF PROPOSITION 1:

Consider the monopolists maximization problem. Readers utility from reading

this paper is

u sm(d)2 (

nm z } | { d + sm(d) b)2 pm

Since the monopolist can extract all surplus, he maximizes expected utility

(gross from the price),

maxs

m(d)

u Zd

sm(d)2 Z

d

[d + sm(d) b]2

From nm = d+ sm(d); we know that

sm(d) = nm d

which, since E[d] = 0; implies that the strategy of monopolist is to bias around

point nm: Therefore,

maxnm

u

Zd

[nm d]2

Zd

[d + nm d b]2

Using that E[d] = 0 and E

d2

= vd, we reach

maxnm

u

n2m + vd

n2m + b2 2nmb

Dierentiating with respect to nm produces the rst order condition2 ( + ) nm + 2b = 0

Since we assume that every person buys the newspaper, the expected utility

from buying the newspaper must be non-negative for every person. Moreover,

we know that if the expected utility from the person whose beliefs are most

dierent from newspaper is non-negative, everyone elses must also be non-

negative at least. Therefore, we should consider the cases where monopolists

reporting strategy is biased to one side and maximize the expected utility of the

person in the opposite extreme.

Using the rst condition previously found, if the monopolists reporting strat-

egy is biased to left side (nm 0), we should maximize the utility of the person

farthest to the right (b = 1) :

2 ( + ) nm + 2 = 0

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Using that > 0 and > 0; this can be transformed into:

nm =

+ > 0which, since nm 0, results in the corner solution nm = 0:

Similarly, if the monopolists reporting strategy is biased to right side ( nm

0), we should maximize the utility of the person farthest to the left (b = 1) :

2 ( + ) nm 2 = 0

Using that > 0 and > 0; this can be transformed into:

nm =

+ < 0

which, since nm 0, results in the corner solution nm = 0:

Therefore, the optimal reporting strategy for the monopolist is

nm = 0

Moreover, taking into account that sm(d) = nm d and E[d] = 0;

Ed [sm(d)] = nm = 0

The optimal strategy is therefore to completely reduce the expected slant.

In other words, since readers only dislike slanting and E[d] = 0, a newspaper

gets no benet from slanting and only pays costs. Therefore, increasing the

expected slant makes no sense for the monopolist.


We proceed by backward induction in several steps.

1. We calculate x, the bias of the reader who is indierent between reading

the two papers if paper j charges pj and has bias sj (d): This allows us to

determine the market share of each rm for that location and price pair.

2. We then calculate p1 and p2, the best response functions for rms 1 and 2,

respectively. These are the best price responses of each rm to the others

price (given the biases which are chosen earlier). We then calculate the

equilibrium prices and market shares.

3. Using these prices and market shares, we calculate the best reporting and

slanting strategy for the second rm given the rst rms strategy.

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4. Given all these information, the rst rm chooses its optimal reporting

and slanting strategy.

5. Calculating the minimal entrance cost that blocks the second rm from

entering.

Step 1: Calculating x.

A reader with bias x receives the utility:

u sj (d)2 (

nj z }| {d + sj (d) x)

2 pj for j = f1; 2g

from reading paper j. Taking into account that the actual value ofd is unknown,

we solve by using the expected utility:

u

Zd

sj (d)2

Zd

[d + sj (d) x]2 for j = f1; 2g

Since nj = d+ sj (d); we know that sj (d) = nj d;which, as E[d] = 0;

implies that the strategy of paper j is to bias around point nj . Therefore, the

expected utility from reading the paper j is

u

n2j + vd

n2j + x2 2nj x

for j = f1; 2g

If the reader with bias x is indierent between papers 1 and 2 -and takinginto account that E[d] = 0-, then the utilities from reading the two papers are

equal:

un21vd

n21 + x2 2n1x

p1 = un

22vd

n22 + x

2 2n2x

p2

This equality can in turn be simplied to:

x =p1p2+n

21n

22+n

21n

22

2(n1n2)

Step 2: Calculating price best response functions pj (pk; nk; nj ).

Since the indierent reader is located at x, rm js prots -if it enters the

market- are given by

j = aM pj (pj pk + (nj nk)((2+ nj + nk) + (nj + nk))) f for

j;k 2 f1; 2g and j 6= k

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The rms best price response can be derived by dierentiating prots with

respect to its own price. For rm j, this rst-order condition is@ j@pj

=aMpj

4(njnk)+1

2aM

1+pjpk+n

2j n

2k+n

2j n

2k

2(njnk)

forj;k 2 f1; 2g

and j 6= k

So the best response function is

pj (pk; nk; nj ) =2(njnk)

am2

amn2j

4(njnk)+

amn2k

4(njnk)+

ampk4(njnk)

amn2

j

4(njnk)+

amn2k

4(njnk)

aMfor

j;k 2 f1; 2g and j 6= k

Finally, the Nash equilibrium of prices can be calculated from the best re-

sponse functions by solving

pj = pj (pk; nk; nj ) for j; k 2 f1; 2g and j 6= k

where we reach the equilibrium prices

pj =13

(nj nk) [(6 + nj + nk) + (nj + nk) ] for j; k 2 f1; 2g

and j 6= k

and the equilibrium market share

mj =M[(6+nj+nk)+(nj+nk)]

12 for j; k 2 f1; 2g and j 6= k

Step 3: Calculating the slanting strategy by rm 2.

These prices and market share allow us to backward induct and examine the

rms decision in stage 2. Taking the rst rms bias as given, they can be usedto calculate the second rms prots for each bias chosen. Specically, prots

by rm 2 in stage 2 are

2 =aM(n2n1)[(6+n1+n2)+(n1+n2)]

2

36 f

Dierentiating with respect to its own slanting strategy, the rst-order con-

dition for this problem, @2@n2

; is found. However, we are interested in the sign of

this derivative. Dene sign(x) to be the function that equals +1 if x > 0 and

1 if x < 0. Assuming that 1 n1 0 n2 1, the function results in

sign( @2@n2

) = +1

Using the boundary conditions we know that, for every n1 2 [1; 0],

n2 = Ed [s2(d)] = 1

is the optimal strategy. Therefore, the slanting strategy, once the real data is

revealed, will be

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s2(d) = 1 d

so that the news reported is the one that maximized the expected utility.


Using the prices, market share and best slanting response by the second rm,

the rst rm chooses its optimal slanting strategy by dierentiating its benet

with respect to its own slanting strategy. Its benet function is given by

1 =8aM[(3n1)+n1]

+ f

Dierentiating this with respect to n1 results in

@1@n1

= 8aM

Once again we are interested in the sign which, with the previously usedassumption that 1 n1 0 n2 , results in

sign( @1@n1

) = 1

Therefore, the rst rms optimal slanting strategy will be so that this rms

report is on the opposite extreme.

n1 = Ed [s1(d)] = 1

Consequently,

s1(d) = 1 d

will be the optimal slanting strategy for rm 1.

The resulting average reader bias from this situation is

ARBwithout threat = 1

since all the market buys from newspapers located at the extremes of the market

and Ed [d] = 0.

Step 5: Calculating the minimal entrance cost that blocks the second rm

from entering.

Taking the results from proposition 2 we calculate the minimal entrance costs

that could support the monopoly in the market. The monopolists slanting

strategy is optimal as long as no other rm nds it protable to enter this

market given the monopolist slant. Therefore, the minimal entrance cost that

could support this result would be the benet (gross from xed costs) from

entering in this market.

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27/35

As we have just proved, if a rm decided to enter, its optimal slanting

strategy would be to locate in one of the extremes of the market. Using theoptimal pricing policy we can nd that the benet (gross from xed costs) from

entering would be:

aM(5)36

Therefore, for

f aM(5)36

the second rm will stay out of the market and the rst rm will remain a

monopolist.


Similarly to the proof of proposition 2, we proceed by backward induction in

several steps. The dierence will be that the rst rm will have to choose

between dissuading the entrance of the third rm and allowing it. Moreover, if

it is optimal to dissuade its entrance, it will have to choose between being itself

the one that changes its slanting strategy to do so or letting the second rm be

the one that does so. Since it is better to locate in the center of the market, the

rst rm will be the one to actively dissuade the third rm from entering (sincethis would bring her closer to center of the market, instead of being the second

rm the one that does so).

1. We calculate x1 and x2, the bias of the two readers who are indierent

between reading the papers i andj if paper i charges pi and has bias si(d)

and paper j charges pj and has bias sj (d). This allows us to determine

the market share of each rm for that location and price pair.

2. We then calculate pj (pk; pl; nk; nj ; nl), the best response functions for

rms 1, 2 and 3. These are the best price responses of each rm to the

others prices (given the biases which are chosen earlier). We then calculate

the equilibrium prices and market shares.

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3. Using these prices and market shares, we calculate the best slanting strat-

egy for the third rm given the rst and second rms slanting strategy.

4. Given all the previous information, the second rm chooses its optimal

slanting strategy.

5. Given all the information, the rst rm chooses its optimal slanting strat-

egy.

6. We then calculate the rst rms optimal slanting strategy if it decides

to dissuade the third rms entrance. This will be similar to the proof of

proposition 2, with the only dierence that a new constraint is added: the

third rms benet (if it decides to enter), given the slanting strategies of

rms 1 and 2, should be non-positive.

7. Finally, we compare the benets of the rst rm if it decides to dissuade

the third rm from entering the market to the one where it allows it.

Evidently, the one with the bigger benet will be the optimal choice.

8. Calculating the minimal entrance cost that blocks the third rm from

entering.

9. Calculating the maximal entrance cost that allows dissuasion of the third

rm from entering.

Step 1: Calculating x1 and x2.

A reader with bias x1 receives utility:

u sj (d)2 (

nj z }| {d + sj (d) x1)2 pj for j = f1; 2; 3g

from reading paper j. Taking into account that the actual value ofd is unknown,

we solve by using the expected utility:

u Zd

sj (d)2

Zd

[d + sj (d) x]2 for j = f1; 2; 3g

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Since nj = d+ sj (d); we know that sj (d) = nj d;which, as E[d] = 0;

implies that the strategy of paper j is to bias around point nj . Therefore, theexpected utility from reading the paper j is

u

n2j + vd

n2j + x2 2nj x

for j = f1; 2; 3g

If the reader with bias x1 is indierent between the papers j and k -and

taking into account that E[d] = 0-, then the utilities from reading the two

papers are equal:

u n2j vd (n2j + x

21 2nj x) pj = u n

2k vd (n

2k + x

212nkx1)

2

pk for j; k = f1; 2; 3g and j 6= k

This equality can in turn be simplied to:

x1 =pjpk+n

2j n

2k +n

2j n

2k

2(njnk)for j; k = f1; 2; 3g and j 6= k

Similarly, taking the other paper, if the reader with bias x2 is indierent

between the papers j and l (assuming j is the paper in the middle of the location

spectrum), the indierent reader with bias x2 will be

x2 =pjpl+n

2j n

2l +n

2j n

2l

2(njnl)for j; l = f1; 2; 3g and j 6= l

Step 2: Calculating price best response functions, pj (pk; pl; nk; nj ; nl).

Since the indierent readers are located at x1 and x2, rms prots -if they

enter the market- are given by

1 =aMp1fp3(n1n2)+p2(n1+n3)+(n2n3)[p1+(n1n2)(n1n3)(+)]g

4(n1n2)(n1n3) f

2 =aMp2fp1+p2(n1n2)[(2+n1+n2)+(n1+n2)]g

4(n1n2) f

3 =aMp3fp1+p3(n1n3)[(2+n1+n3)+(n1+n3)]g

4(n1n3) f

The rms best price response can be derived by dierentiating prots with

respect to its own price. For rm 1, this rst-order condition is

@1@p1

= aMf2p1(n2n3)+p2(n1+n3)+(n1n2)[p3+(n1n3)(n2n3)(+)]g4(n1n2)(n1n3)

while for the other two rms is,

@2@p2 =

aMfp1p2+(n1n2)[(2+n1+n2)+(n1+n2)]g4(n1n2)

@3@p3

= aMfp12p3+(n1n3)[(2+n1+n3)+(n1+n3)]g4(n1n3)

So the best response function for the rst rm is

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p1 (p2; p3; n1; n2; n3) =p2(n1n3)(n1n2)[p3+(n1n3)(n2n3)(+)]

2(n2n3)

while for the other two rms is,p2 (p1; p3; n1; n2; n3) =

12 fp1 + (n1 n2) [(2 + n1 + n2) + (n1 + n2) ]g

p3 (p1; p2; n1; n2; n3) =12

fp1 + (n1 n3) [(2 + n1 + n3) + (n1 + n3) ]g

Finally, the Nash equilibrium of prices can be calculated from the best re-

sponse functions by solving

pj = pj (pk; pl; nk; nj ; nl) for j;k;l = f1; 2; 3g and j 6= k 6= l

where we reach the equilibrium prices

p1 =(n2n1)(n1n3)[(4+n2n3)+(n2n3)]

3(n2n3)

p2 =(n1n2)f[(2+n2)(2n1+3n2)2(5+n1+n2)n3n23]+(n2n3)(2n1+3n2+n3)g

6(n2n3)

p3 =(n1n3)f[n22+2n1(2+n2n3)3n3(2+n3)+2n2(5+n3)]+(n2n3)(2n1+n2+3n3)g

6(n2n3)

and the equilibrium market share

m1 =M[(4+n2n3)+(n2n3)]

12

m2 =M[(2n2)(2n1+3n2)+2(5+n1+n2)n3+n23]M(n2n3)(2n1+3n2+n3)

24(n2n3)

m3 =M[n22+2n1(2+n2n3)3s3(2+n3)+2n2(5+n3)]+M(n2n3)(2n1+n2+3n3)

24(n2n3)


Knowing that rm 1 will prefer to take a more central location if rm 3

enters, we know that rm 3 should locate in the left side of the market. These

prices and market share allow us to backward induct and examine the rms

decision in stage 3. Taking the rst and second rms bias as given, they can

be used to calculate the third rms prots for each bias chosen. Specically,

prots by rm 3 in this stage are

3 =aM(n1n3)f[n22+2n1(2+n2n3)3n3(2+n3)+2n2(5+n3)]+(n2n3)(2n1+n2+3n3)g

2

144(n2n3)2



; is found. However, we are interested in the sign of

this derivative. Dene sign(x) to be the function that equals +1 if x > 0 and

-1 if x < 0. Assuming that 1 n3 < n1 0 n2 1, the function results in

Sign( @3@n3

) = 1

Using the boundary conditions and assumptions, we know that

30


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n3 = Ed [s3(d)] = 1

is the optimal reporting strategy. Therefore, its slanting strategy should bes3(d) = 1 d

so that the news reported is, in fact, the one that the readers expected when

they agreed to buy the paper.


These prices, market share and optimal slanting strategy by rm 3 allow us

to backward induct and examine the rms decision in stage 2. Taking the rst

rms bias as given, they can be used to calculate the second rms prots for

each bias chosen. Specically, prots by rm 2 in this stage are

2 =aM(n2n1)f[11+2n1(1+n2)+n2(4+3n2)]+(1+n2)(1+2n1+3n2)g

2

144(1+n2)2



, is found. However, we are interested in the sign of

this derivative. Applying the function sign(x) and assuming that 1 n3 allowing

10; dissuading1 <

allowing1

The resulting average reader bias from the situation where a third rm is

dissuaded from entering is

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ARBwith threat < ARBwithout threat = 1

since most of the market buys from a newspaper located with a slant policy closerto the expected value of the true data. Therefore, the competition brought

from the menace of entrance of the third rm reduces the average reader bias

in the market.

Step 8: Calculating the minimal entrance cost that blocks the third rm from

entering.

Taking the results from proposition 3 we calculate the minimal entrance costs

that could support the duopoly in the market without any entry deterrence

activity. The duopolistic slanting strategy is optimal as long as no other rmnds it protable to enter this market given the duopolistic slant. Therefore,

the minimal entrance cost that could support this result would be the benet

(gross from xed costs) from entering in this market.

As we have just proved, if a rm decided to enter, its optimal reporting

strategy, given the slanting strategy of the duopoly, would be to locate in the

center of the market since this is the most protable location. Using the optimal

pricing policy we can nd that the benet (gross from xed costs) from entering

would be:

aM(3+)218

Therefore, for

f aM(3+)2

18

the third rm will stay out of the market without any entry deterrence activity.

Step 9: Calculating the maximal entrance cost that allows dissuasion of the

third rm from entering.

On the other hand, also taking the results from proposition 3, we calculate

the maximal entrance cost for which the entrance of the third rm can be

dissuaded by the rst rm. This is reached by calculating the benet (gross from

xed costs) from entering the market when the rst rm has such a reporting

policy that prevents the third rm from entering in the center of the market but

cannot prevent it from entering in the left side of the market. Therefore, using

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the pricing policy and the slanting policy in this case, the third rms benet

from entering would be:aM(3+)2

36

Therefore, for

f aM(3+)2

36

the third rm cannot be dissuaded from entering in the market.

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Undergraduate Thesis - Bias and Competition in the Market for News

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