Content-distribution strategies in markets with locked-in customers

Abstract

We study how the presence of locked-in customers in a downstream market affects the distribution choice of an upstream content provider. Two asymmetric distributors compete in a mature market and the content provider sells its rights using lump-sum fees. A higher number of locked-in customers reduces the need to resort to exclusivity to relax downstream competition. The content provider therefore sells its rights to both distributors when there is a sufficiently-high proportion of locked-in customers. We show that an exclusive affiliation with the smaller rather than the larger distributor facilitates distributors’ rent-extraction, in particular for low-quality content. When there are few locked-in customers, the content provider sells low-quality content to the smaller distributor and high-quality content to the larger distributor. Our results suggest that competition authorities should cautiously evaluate the effects of lower switching costs on consumer welfare. By encouraging exclusive distribution, a lower proportion of locked-in customers may reduce consumer welfare.