Ad Pricing by Multi-Channel Platforms: How to Make Viewers and Advertisers Prefer the Same Channel?

Ad-financed TV channels are two-sided platforms where media houses provide communication from advertisers to viewers. Most media houses air several channels, some of which are particularly valuable to advertisers. At first glance, one might expect the ad volumes to be highest for the channels that are the advertisers' favorites. However, a crucial management challenge for media houses is to ensure that viewers go where the potential for raising advertising revenue is greatest. Because viewers dislike ads, we show that this implies that advertising volumes will be relatively low (and advertising prices relatively high) in such channels. Indeed, other things equal, the ad volume in a channel is inversely related to its attractiveness to the advertising market. Only if the costs of using alternative tools to attract viewers to the advertisers' favorite channels are sufficiently small will the advertising volume in channels with high demand for ads be larger than in channels with low demand for ads.