Media competition enhances new-product entry: On the market for fake observations

- Two firms, an incumbent and an entrant, offer products of different qualities.
- The products exert network externalities.
- To attract customers, the firms use advertising, which is sold by a media firm.
- Advertising affects consumers' beliefs on how many other consumers buy each product.
- More competition in the media market facilitates entry in the product market.

We show how increased competition in a media market may have implications for the competition between firms that are advertising in that medium. We apply a simple model of a product market with network externalities where firms buy advertising space in a media market and find that entry in the product market of a new and superior product is more likely, the more competitive the media market is. The paper is the first combining a study of media markets with a behavioral foundation of how advertising affects the demand for the advertised products.