INTRODUCTION
Media markets are special in many ways, and they take on an importance that is much
larger than their accounting contribution to GDP. First, on the consumer side, is the
astonishingly large fraction of leisure time devoted to them. Second, on the advertiser
side, they provide a conduit for firms to get consumers to buy goods, which supports
employment in the advertising industries and may foster economic growth by enabling
innovations to be brought quickly and profitably to market and rewarding risk-taking.
Third, the media plays a very special role in providing information on current events
and politics. However, the media by necessity systematically filters and biases this infor-
mation. How much and which information is transmitted is likely to affect wide range of
political, economic, and social outcomes, including political accountability, corporate
accountability, financial market performance, and educational and family choices.
Because of these effects, the media is a particular industry that is specifically regulated
in the constitutions of most democratic (and nondemocratic) countries.
Foremost, perhaps is the paramount role of informing the electorate, arising largely
as an externality to news consumption. In terms of market performance, medi a markets
may embody several key f eatures that give rise to specific types of market failure. Many
media have r elatively high fixed costs and low marginal costs, and hence a paucity of
equilibrium product offeri ngs, leading to preference externalit ies in content provision
whereby majority groups’ tastes tend to be catered at the expense of minorities. This
news bias also alters the tr ade-off in political competition and therefore introduces a
bias in public policy against the interest of minority groups. Moreover, the business
model of advertising finance is that of a two-sided market with media outl ets (platforms)
delivering eyeballs to sell to advertisers, which is a quite different market structure from
traditional market interactions.
This volume (1A and 1B) contains 19 chapters on the state of the art on the economics
of media. These chapters are divided broadly into three parts.
Part I. Media market structure and performance, covering theory and methodology.
Chapter 1 explores the implications of the high fixed costs and heterogeneous con-
sumer preferences endemic to media markets and the ensuing preference externalities in
media markets. Both the positive and the normative economics are developed through a
suite of theoretical models that are then illuminated empirically.
Chapter 2 covers the theory of two-sided markets as it relates to media markets. Plat-
forms realize a two-sided balance between the two sides, and in competition with each
other. The extent of consumer (viewer) multihoming is a key driver of positive
xiii
predictions. Advertising revenues ultimately underwrite programming content, and this
feature impacts performance measures from static market efficiency through genre choice
and equilibrium variety.
Chapter 3 reviews the techniques of empirical industrial economics most helpful for
the study of media markets. The chapter includes an extensive discussion of demand
modeling, as well as entry modeling. The chapter takes a more methodological approach
than others in the volume.
Much of the media sector is dependent on advertising for revenue. Chapter 4 takes a
detailed look (primarily theoretical) at the background to the economics of advertising.
It develops various conceptual roles that advertising may take, and it draws out the con-
sequences for evaluating the surplus associated to advertising. This is a key ingredient to
evaluating the performance of ad-financed media.
Chapter 5 takes a primarily marketing perspective to describe audience behavior and
consumer response to ads. It discusses recent innovations such as advertising avoidance,
advertising targeting and personalization, and reviews how the landscape has changed
over the last decade.
Chapter 6 explores merger policy and regulation of media industries. These industries
require a dedicated analysis distinct from standard markets because of their two-sided
nature and because of their pivotal place in providing information. The chapter exposits
the extant theory, delivers some empirical evidence on the consequences of mergers, and
discusses recent cases.
Part II. Industry sectors, covering the economics of particular media industries. The
first three chapters of this part give historical background and empirical results on various
pertinent aspects, with special emphasis on the US landscape. The last three chapters of
this part address various facets of the economics of the Internet.
Chapter 7 surveys the economics of television, the dominant entertainment medium
for most consumers. The chapter describes incentives for production and consumption of
content, recent trends in television and online video markets, and the state of economic
research on these industries. Topics emphasized include pay television, vertical relations,
the role of public television, and growing online video.
Chapter 8 on radio pays special attention to the effects of recent consolidation in the
United States. It also addresses the impact of the public sector and findings on the extent
of overentry in the sector. Another contribution is to depict the interaction between the
music and radio industries.
Chapter 9 on newspaper and magazines describes the history and structure of print
markets in the United States. The chapter discusses these sectors in the context of
two-sided markets. It includes discussions of whether or not advertising is a net nuisance
to print media consumers, antitrust issues in print markets, and the effect of the Internet
on these sectors.
xiv Introduction
Chapter 10 on media economics of the Internet is a primarily theoretical synthesis of
recent key advances as applied to this emergent sector. The chapter includes discussion of
such pertinent aspects as aggregators, search engines, and Internet service providers.
Chapter 11 covers the topic of privacy and the Internet, which has been an issue of
much public concern and debate. A conceptual framework is developed and related to
empirical estimates. Further topics include advertising, social networks, data security, and
government surveillance.
Chapter 12 addresses user-generated content and social media. It covers an eclectic set
of applications in a fast-moving sector, and pays particular attention to determining the
quality of the content.
Part III: The political economy of mass media, covering the effects of media on polit-
ical, economic, and social outcomes. Chapters 13–17 discuss the media’s political cov-
erage, bias and capture, and the resulting effects on political accountability. Chapter 18
covers effects in finance and Chapter 19 covers effects on social outcomes.
Chapter 13 presents a baseline model of how the information filtering caused by
media coverage affects political accountability. It discusses the welfare consequences
of private provision of news as well as regulation to solve the problem of underprovision
of news. The model also supplies an array of testable implications, used to organize the
existing empirical work. The key questions are: what drives media coverage of politics;
how does this coverage influence government policy, the actions and selection of pol-
iticians, and the information levels and voting behavior of the public?
Chapter 14 discusses how bias may reduce the informativeness of media, undermining
its positive role for political accountability. It surveys the theoretical literature on the
market forces that determine media bias. A simple model is used to organize the literature
on the determinants of bias, focusing first on supply-side forces such as political prefer-
ences of media owners, and then turning to demand-side forces working through con-
sumer beliefs and preferences. The chapter defines bias, analyzes its welfare consequences
and how these are affected by, for example, competition.
Chapter 15 surveys empirical studies of media bias, with a focus on partisan and ideo-
logical biases. The chapter discusses the methods used to measure media bias, the main
factors found to be correlated with media bias and measures of the persuasive impact of
media bias on citizens’ attitudes and behavior.
Chapter 16 surveys models of media capture and media power. In both cases, media
sources deliberately deviate from truthful reporting in order to affect electoral outcomes.
The chapter speaks of media capture when the government has an active role in capturing
the media, and media power when media organizations distort news reporting for polit-
ical ends. The chapter discusses theories of when news manipulation is more likely to
succeed and electoral outcomes are more likely to be distorted. It discusses how media
regulation can reduce the extent of these two phenomena.
xvIntroduction
Chapter 17 surveys the empirical literature on the determinants and the consequences
of media capture. It reviews the literature on the determinants of media capture. It dis-
cusses the methods used to control media, and examines the evidence on the effect of
media capture on media content. Next, it presents evidence on the effects of captured
media on the behavior of people, as well as the effects of independent media in captured
environment. It concludes by discussing the factors that limit the effect of propaganda.
Chapter 18 reviews and synthesizes a rapidly growing subfield that analyzes the rela-
tion between media and financial markets. The chapter discusses theories of the role of
information provided by media in financial markets. It describes new data and methods
that have enabled powerful tests of theories and have the potential to address longstanding
puzzles in finance, such as why trading volume and stock price volatility are so high. The
chapter presents evidence on, for example, the effect of the volume and content of media
coverage on market activity and stock prices.
Chapter 19 reviews the literature on the impact of media exposure on a wide net of
social and economic outcomes: education, family choices, labor and migration decisions,
environmental choices, health, crime, public economics, attitudes, consumption and sav-
ings, and development economics. It stresses five themes: (i) the key role of the demand
for entertainment; (ii) the importance of crowding out of alternative activities (substitu-
tion effect); (iii) identification of causal effects—credible estimates are available for some
topics and media but not for others; (iv) effects may differ by type of media; and (v) both
the substitution effect and the demand for entertainment play an important role for the
policy impacts.
Simon P. Anderson
Joel Waldfogel
David Str€omberg
xvi Introduction
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