• Prices and Welfare: The total price to viewers (i.e., the subscription price plus the dis-
utility from advertising) is higher in pay TV than ad TV under both monopoly and
oligopoly, and so, conditional on the content being offered, viewers and advertisers
are worse off in pay TV, with broadcasters better off.
• Content Choice: Because of this increased profitability, broadcasters will offer more
content in a pay-TV environment. Furthermore, where both free and paid content
are available, lowest-common-denominator programming will be offered on free
channels and niche programming will be offered on pay. Finally, we should see max-
imal content differentiation in a pay-TV oligopoly.
• Quality and Regulation: Optimal quality increases with total price (and thus should be
higher in pay markets). Regulations that cap prices or advertising levels will lower
quality and viewer surplus.
Unfortunately, one cannot take these predictions directly to the data, as there is a sizeable
gap between the simple model’s maintained assumptions and the institutional character-
istics of TV markets, including multi-homing consumers, multi-dimensional prefer-
ences, multichannel firms, competition within and between commercial broadcasters,
public service broadcasters, and pay-television providers, and unmodeled heterogeneity
in utility of content, disutility of ads, costs of program production and quality choice, and
regulatory constraints across countries. As an example, a model allowing heterogeneous
disutility of ads and competition between a single broadcast and pay provider offering
identical content but with a different mix of advertising versus subscriber payments
would likely yield, in contrast to the first prediction above, (relatively) ad-loving con-
sumers facing a lower total price from the broadcaster, ad-hating consumers facing a
lower total price from the pay operator, and the consequent self-selection of consumers
into the environment that suited them best.
43
7.3.2.2 What Can We Learn?
The theory instead has been useful in at least two distinct ways: identifying both the vari-
ables of economic interest and the mechanisms by which different economic environ-
ments (e.g., broadcast vs. pay support, monopoly vs. oligopoly) determine welfare
outcomes in television markets, mechanisms that are likely to continue to operate in
richer theoretical environments, and identifying relevant model primitives on which
to focus empirical research. As examples of the first type, I highlight several data patterns
from
Section 7.2.
43
My thanks to Simon Anderson for this example. As a historical note, the television theory literature’s focus
on the tradeoffs between broadcast and pay-television regimes going back to
Steiner (1952) and Beebe
(1977)
reflects the combination of capacity and regulatory constraints that limited the development of
the pay-television sector. Pay television’s large and growing dominance of television markets evident
in
Figures 7.9, 7.12, 7.13, 7.14, and 7.16 has, however, largely mooted this as a policy question. We
all want our MTV.
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Handbook of Media Economics