JOINT ECON-S&P: Network Competition and Exclusive Contracts: Evidence from News Agencies; Dr Quan Le (Harvard Business School)

Abstract:

This paper studies exclusive vertical contracts in network industries and asks whether exclusive arrangements intended to be anti-competitive in one market segment can be pro-competitive in another. The setting is news agencies in the early 20th-century United States, which historically operated with exclusive territory contracts intended to create local newspaper monopolies. I examine whether exclusive territories granted by the Associated Press (AP) to member newspapers inadvertently created demand for and facilitated the growth of the AP's primary rival, United Press (UP). I introduce a model that captures the demand for news agencies, newspaper entry, and news agency network formation. I estimate the model using a unique dataset that includes news agencies' subscriptions, costs, and physical maps of their networks over time. I find that economies of scale and network effects form considerable natural barriers to entry for news agencies. Counterfactual simulations show that UP likely would have exited if AP exclusive territory contracts were illegal. In contrast, contracts that require AP newspapers to subscribe exclusively to the AP would have weakened UP as well as incumbent AP newspapers that can no longer bundle content from both news agencies.

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