📈 economics

Upstream competition and exclusive content provision in media markets

Using a multilateral vertical contracting model that combines Nash bargaining and Hotelling competition, this paper analyzes how factors like content value, market differentiation, advertising revenue, and bargaining power influence the likelihood of exclusive contracts in media markets.

Original authors: Kiho Yoon

Published 2026-01-29

📖 5 min read🧠 Deep dive

CC BY 4.0

Original authors: Kiho Yoon

Original paper licensed under CC BY 4.0 (http://creativecommons.org/licenses/by/4.0/). ✨ This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer

Imagine the media world as a bustling marketplace with two main groups of players: Content Creators (the "Upstream" firms like movie studios or sports leagues) and Distribution Platforms (the "Downstream" firms like Netflix, cable companies, or streaming services).

This paper by Kiho Yoon explores a high-stakes game of negotiation between these two groups. The central question is: When do creators decide to sell their best shows to just one platform (an "exclusive" deal), and when do they sell them to everyone?

Here is the story of the paper, broken down into simple concepts and analogies.

The Setup: The "Hot Dog Stand" and the "Special Sauce"

Think of the two distribution platforms as two hot dog stands located at opposite ends of a long street (a concept called the Hotelling model).

Stand 1 is on the left.
Stand 2 is on the right.
Customers are walking along the street. They prefer the stand closest to them, but they will walk further if the food is better.

Now, imagine the Content Creators (let's call them Chef A and Chef B) have a "Special Sauce" (premium content like the Super Bowl or a hit movie).

If a stand has no special sauce, customers get a basic hot dog.
If a stand has one chef's sauce, the hot dog is much tastier.
If a stand has both chefs' sauces, it's the ultimate hot dog.

The platforms want the sauce to attract more customers. The chefs want to sell the sauce for the most money possible.

The Game: Who Holds the Cards?

The paper analyzes how the deal is struck using a "Nash Bargaining" approach. Think of this as a tug-of-war over the extra profit the sauce creates.

Bargaining Power: Who is stronger in the negotiation? If the Chef is famous and the Stand is desperate, the Chef has the power. If the Stand is huge and the Chef needs a buyer, the Stand has the power.

The Big Findings: When Do Exclusive Deals Happen?

The paper finds that exclusive deals (where a Chef sells their sauce only to Stand 1, leaving Stand 2 with nothing) become more likely under four specific conditions:

The Sauce is Super Tasty (High Value):
- Analogy: If the sauce is so good that it makes the hot dog a must-have, the stands will fight desperately to get it. They are willing to pay a huge premium to be the only one selling it.
- Result: High-value content leads to exclusivity.
The Stands are Very Similar (Low Differentiation):
- Analogy: If the two stands are right next to each other and customers can't tell them apart, the competition is fierce. To win, a stand needs a "secret weapon." If they can't get the secret sauce, they lose all their customers.
- Result: When competition is intense, platforms push harder for exclusivity.
The Chefs Don't Make Money from Ads (Low Advertising Revenue):
- Analogy: Imagine the chefs also make money by showing ads on their own TV channel. If they sell their sauce to everyone, they get ad money from everyone. If they sell it to only one, they lose that ad money.
- Result: If the chefs don't care about ad money, they don't mind selling exclusively. But if ad money is huge, they prefer to sell to everyone to maximize ad views.
The Chefs are Weak Negotiators:
- Analogy: This is the most surprising finding. If the Content Creators are weak in the negotiation (the Platforms hold the power), the Platforms will demand exclusivity.
- Why? Because the Platforms know they can squeeze the most profit out of the deal if they are the only ones with the sauce. If the creators are weak, they can't say "no" to the platform's demand for exclusivity.

The Twist: What Happens When Companies Merge?

The paper also looks at what happens when a Chef buys a Stand (Vertical Integration).

Scenario A: Two Mergers (Chef A buys Stand 1; Chef B buys Stand 2).
- Now, Chef A owns Stand 1. They have a choice: Keep their sauce for their own stand (Exclusive) or sell it to Stand 2.
- Result: Interestingly, when companies are fully merged, they are less likely to keep content exclusive compared to when they are separate. They often share the sauce to avoid a price war, or they trade sauces.
Scenario B: One Merger (Chef A buys Stand 1; Chef B and Stand 2 are separate).
- This gets messy. The merged company (Chef A/Stand 1) might try to starve Stand 2 of content to crush it.
- Result: The paper shows that if the "weak" upstream firms (the ones without a merged partner) have very little bargaining power, the market tends to end up with two mergers (everyone buys their own stand) to secure their own supply.

The Bottom Line

The paper argues that exclusive contracts are not just about the content being good; they are about the balance of power.

If the content is a "must-have" and the platforms are fighting a fierce war for customers, exclusivity wins.
If the content creators are weak negotiators, the platforms will force exclusive deals to gain an unfair advantage.
However, if the content creators are strong (or if they rely heavily on ad revenue), they will prefer to sell to everyone, keeping the market open.

In short, the paper explains why we sometimes see a show only on Netflix (exclusive) and other times see it on Netflix, Hulu, and Disney+ (non-exclusive). It depends on how valuable the show is, how much the platforms hate each other, and who holds the stronger hand at the bargaining table.

Technical Summary: Upstream Competition and Exclusive Content Provision in Media Markets

Problem Statement
This paper investigates the determinants of contractual arrangements—specifically the choice between exclusive and non-exclusive contracts—in media markets characterized by upstream competition among content providers and downstream competition among distribution platforms. While existing literature has extensively analyzed vertical integration and contracting, often assuming a monopolistic upstream provider or specific bargaining structures, this study addresses the gap regarding upstream competition and the explicit role of relative bargaining power. The central question is how the interplay between content value, horizontal differentiation, advertising revenue, and bargaining power shapes the equilibrium outcomes of vertical contracting in media markets.

Methodology
The author employs a multilateral vertical contracting model featuring two upstream content providers (Firm A and Firm B) and two downstream platforms (Firm 1 and Firm 2). The analysis covers three distinct vertical structures:

Vertical Separation: All firms are independent.
Full Vertical Integration: Firm A integrates with Firm 1, and Firm B integrates with Firm 2.
Partial Vertical Integration: Firm A integrates with Firm 1, while Firm B and Firm 2 remain independent.

The model utilizes a two-stage game analyzed via backward induction:

Downstream Competition: Modeled using the Hotelling location model. Consumers are uniformly distributed on a unit interval, and platforms compete for subscribers based on subscription prices and the utility derived from content. Utility depends on basic content ( $v$ ), the value of one premium content package ( $\alpha$ ), and the incremental value of a second package ( $\beta$ ). The parameter $t$ represents the degree of horizontal differentiation (transport cost).
Upstream Bargaining: The trade of premium content is determined by the Nash bargaining solution. The model introduces a parameter $\lambda \in [0,1]$ to represent the relative bargaining power of the upstream firm. The lump-sum fee is derived to maximize the Nash product, accounting for the "threat of replacement" (a "Nash-in-Nash with threat of replacement" approach), where the disagreement point considers the outcome if the upstream firm supplies the rival platform instead.
Contractual Strategies: Content providers choose between exclusive contracts (supplying only one platform) and non-exclusive contracts (supplying both).

Key Contributions
The paper distinguishes itself from prior literature (e.g., Armstrong, 1999; Weeds, 2014, 2016; Stennek, 2014) through two primary novel features:

Upstream Competition: Unlike models assuming a monopolistic content provider, this paper analyzes a market with competing upstream firms, allowing for scenarios where platforms acquire zero, one, or two premium content packages.
Endogenous Bargaining Power: The paper explicitly models the relative bargaining power ( $\lambda$ ) as a continuous variable between 0 and 1, rather than assuming the upstream firm holds all power (take-it-or-leave-it offers) or equal power. This aligns with industry practices where large firms on both sides possess market power.

Results

Vertical Separation:
- Exclusive Contracts: The possibility of exclusive contracts increases when the value of premium content ( $\alpha, \beta$ ) rises, horizontal differentiation ( $t$ ) decreases (intensifying downstream competition), advertising revenue ( $r$ ) decreases, and the upstream firm's bargaining power ( $\lambda$ ) weakens.
- Allocation of Exclusivity: When upstream firms offer exclusive contracts, they tend to offer them to the same platform if content value is high and advertising revenue is low. However, if the upstream firm's bargaining power is sufficiently weak ( $\lambda < \tilde{\lambda}$ ), they offer exclusive contracts to different platforms.
- Equal Bargaining Power: When $\lambda = 1/2$ , exclusive contracts to the same platform are a dominant strategy, contrasting with Stennek (2014) where non-exclusive contracts could prevail under monopoly. Upstream competition intensifies the downstream race for exclusivity, making exclusive contracts more likely.
Full Vertical Integration:
- The comparative static results regarding the factors promoting exclusive contracts (high content value, low differentiation, low advertising revenue, weak upstream bargaining power) remain consistent with the vertical separation case.
- Equilibrium outcomes include scenarios where integrated firms keep content exclusive or share it, depending on the parameters.
Partial Vertical Integration:
- The analysis yields complex, non-unambiguous comparative statics due to the asymmetry in vertical structure.
- In the absence of advertising revenue ( $r=0$ ), the model identifies three possible contractual arrangements depending on parameter values, including equilibria where the integrated firm shares content while the independent firm offers exclusivity, or vice versa.
Merger Incentives and Welfare:
- Merger Dynamics: If upstream bargaining power is strong, mergers involving the downstream firm with premium content may occur, or no merger happens. If upstream bargaining power is weak, mergers involving the downstream firm without premium content occur, often triggering counter-mergers, leading to full vertical integration.
- Welfare Implications: Vertical integration generally leads to less exclusive content provision compared to vertical separation. Consumer surplus is higher under partial vertical integration (specifically the $(N, E_2)$ equilibrium) than under vertical separation with exclusivity. Social welfare comparisons are ambiguous; while integration benefits consumers, vertical separation may generate higher industry profits when horizontal competition is intense (low $t$ ).

Significance and Claims
The paper claims to provide a unified framework for understanding how upstream competition and bargaining power interact to determine contractual forms in media markets. It argues that the "Nash-in-Nash" approach with a threat of replacement is essential for capturing the strategic incentives of competing content providers.

The author modestly notes that the model is highly stylized, assuming single-homing consumers and zero advertising revenue for platforms to facilitate analytical tractability. The paper does not claim to resolve all welfare questions or investment incentives but offers a baseline for understanding how market structure and bargaining dynamics influence the prevalence of exclusive content deals. The results suggest that policy assessments of vertical mergers (such as the Comcast-NBCUniversal case) must account for the relative bargaining power of the merging entities and the competitive intensity in the downstream market.

The Setup: The "Hot Dog Stand" and the "Special Sauce"

The Game: Who Holds the Cards?

The Big Findings: When Do Exclusive Deals Happen?

The Twist: What Happens When Companies Merge?

The Bottom Line

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