payments in influencing market outcomes,
46
and analyzing content choice in television
markets.
47
Other unanswered questions include how consumers trade off price versus
quality, what factors influence firms’ (possibly dynamic) quality choices, and determining
what is the connection between competition and quality. These are all first-order inputs
into television market welfare that require substantially more empirical research. The
next section summarizes those extensions to the simple theory model that have been
made and the empirical research that relies on them.
7.4. EXTENSIONS TO THE SIMPLE MODEL: “THE FOUR BS”
While the simple model above gives important testable predictions about outcomes in
television markets, there are aspects of the industry that are not included in the model
that are important to understand its functioning, as well as how television markets differ
from other media markets. I call these extensions the “Four Bs”: Public Service Broad-
casters, Bargaining, Barriers to Entry, and Bundling. I introduce each, discuss their
theoretical consequences for the functioning of television markets, and provide evidence
of their effects.
7.4.1 Public Service Broadcasters
7.4.1.1 The Economic Rationale for PSBs
7.4.1.1.1 A History of PSBs
Especially in the era before pay TV, there was a clear danger of market failure in the
provision of television. Advertising intensity could have been excessive, the cost of
high-quality programming might not have been able to be recouped with advertising
revenue alone, limited spectrum meant there could be only few rivals, and those rivals
might anyway have offered duplicative content. One natural response to these problems
was to promote “public service broadcasting” (PSB), either with a single designated PSB
broadcaster or by imposing requirements on a number of commercial broadcasters.
46
Wilbur (2008) stands out as one of the few academic papers to incorporate both viewer and advertiser
demand into a model of television markets, but he does so only for the broadcast sector. By contrast,
Crawford et al. (2012a) estimate a model of advertiser (inverse) demand, but do not analyze viewer
demand. Similarly, recent papers in the pay-TV sector, like
Crawford and Yurukoglu (2012), incorporate
the advertising sector, but in a reduced-form way that prevents evaluation of advertiser welfare. This
surely reflects both the modeling challenges needed to account for the pay-television supply chain and
the difficulty obtaining the data necessary to analyze both the broadcast and pay-television branches
and the subscriber and ad-supported sides of the market, but these barriers are being progressively lowered
with time.
47
Again Wilbur (2008) stands out, finding the programs offered on broadcast television align more closely
with advertiser than viewer preferences. By contrast, research on program choice is common in radio
markets; see
Chapters 1 and 8 (this volume) for analyses of the impact of market size and market concen-
tration on product selection and program variety in radio.
302
Handbook of Media Economics
For example, many viewers might be made better off if advertising on television was
banned or reduced for some broadcasters, and the broadcaster’s funding shortfall met
from other sources. Viewers might benefit if expensive dramas or documentaries were
produced, which would not be offered in a laissez-faire broadcasting market.
Historically, the UK has had the best-known system of public service regulation in the
world. A useful way to discuss the rationale and experience of PSBs is briefly to trace its
early history in the UK, which is well documented through a number of committee
reports commissioned by the UK government over the years.
48
The first such report,
the 1923 Sykes Report, accompanied the formation of the BBC (initially the British
Broadcasting Company, and then, from 1927, the British Broadcasting Corporation).
The Sykes Report suggested that “the control of such a potential power [as radio held]
over public opinion and the life of the nation ought to remain with the state,” and it
should not become an unregulated commercial monopoly. The report recommended
that the BBC be funded using a license fee levied on owners of radio sets, and that
the BBC should not broadcast advertisements.
The Sykes Report only investigated the short-run issues associated with the formation
of the broadcasting service, and in 1925 the Crawford Committee was directed to for-
mulate guidelines for the longer-term operation of the BBC. This committee invited
John Reith, the first director of the BBC during the period 1923 until 1938, to present
a statement of his views of broadcasting. Reith, the son of a Scottish Presbyterian minister
and holding strong religious beliefs himself, presented firm opinions on the proper pur-
poses of broadcasting: “the preservation of a high moral tone is obviously of paramount
importance”; “He who prides himself on giving what he thinks the public wants is often
creating a fictitious demand for lower standards which he himself will then satisfy”; and so
on.
49
Reith also felt that radio had a social and political function, and could be a powerful
means to national unity. He cited a broadcast speech in 1924 by King George V, the first
time the monarch had been heard on radio, as having the effect of “making the nation as
one man.” Broadcasting could also provide the facts surrounding an issue of the day, as
well as the arguments on either side, and people could make up their own minds instead
of accepting “the dictated and partial versions of others.” Finally, Reith argued for “unity
of control”—i.e., the maintenance of the BBC’s broadcasting monopoly—so that “one
general policy may be maintained throughout the country and definite standards
promulgated.” The BBC was to keep this monopoly for the next 30 years.
48
This account is mostly taken from the excellent account by Scannell (1990). Parts are also taken from
Armstrong (2005) and Armstrong and Weeds (2007).
49
In private he was more trenchant. As reported on the BBC’s webpage devoted to Reith, he wrote in his
diary of his admiration for Nazi-era German broadcasting: “Germany has banned hot jazz and I’m sorry
that we should be behind in dealing with this filthy product of modernity.” After the war he was disgusted
at a broadcast of greyhound racing, “the most significant manifestation of public depravity that I have
seen.”
303
The Economics of Television and Online Video Markets
The first committee in the television era, the 1950s Beveridge Committee, had this
monopoly as its focus. In its submission to the committee, the BBC argued strongly
against ending its monopoly, since Gresham’s Law would operate “as remorselessly in
broadcasting as ever it did in currency. The good, in the long run, will inevitably be
driven out by the bad. […] And because competition in broadcasting must in the long
run descend to a fight for the greatest number of listeners, it would be the lower forms of
mass appetite which would more and more be catered for in programmes.”
The Beveridge Committee recommended that the BBC monopoly be continued, but
2 years later, a newly elected government rejected this, and in 1955 it established com-
mercial television in the UK, funded by advertising. This Independent Television (ITV)
had strict PSB obligations, and the new second television channel was not an alternative
to public service broadcasting. An advertising-funded commercial broadcaster could be
induced to supply specified kinds of programming in return for its license to operate.
Having one of just two television channels meant that ITV would enjoy significant scar-
city rents. (The phrase “a license to print money” was coined when the first ITV licences
were first awarded.) These rents could be used to fund programming that the regulatory
authority wished to see provided, but which would not be supplied voluntarily by
commercial broadcasters.
The next committee, the 1960s Pilkington Committee, was charged with how to
allocate a new, third television channel. Sir Harry Pilkington was very much a Reithian
in outlook and concerned with pervasive “triviality.” The committee found a lack of
variety and originality and unwillingness to try challenging subject matter, and identified
commercial television as the main culprit, which was unable to “understand the nature
of quality or of triviality, nor the need to maintain one and counter the other.” The
committee awarded the third channel to the BBC.
Finally, we fast-forward to 1986, the heyday of Margaret Thatcher’s government, and
to the Peacock Committee, which was set up to investigate alternatives to the BBC’s
license fee. This committee radically shifted the tone of the discussion in the UK, and
treated broadcasting more like any other product. It wanted a broadcasting system to offer
“full freedom of entry for programme makers, a transmissions system capable of carrying
an indefinitely large number of programmes, [and] facilities for pay-per-programme or
pay-per-channel.” The committee recommended that in the medium term (the 1990s)
the BBC should be funded by subscription, and that residual PSB requirements be
financed from a fund open to all broadcasters.
7.4.1.1.2 PSBs as a Response to Market Failure
Armstrong and Weeds (2007) analyze in depth the extent to which PSBs can be ratio-
nalized as a response to market failure. Quoting Gavyn Davies, they give credence to the
view that the mission of a PSB should not simply be to “inform, educate, and entertain,”
but to “inform, educate, and entertain in a way which commercial broadcasters, left
304 Handbook of Media Economics
unregulated, would not do.” They identify two possible market failures that PSBs might
solve: (1) satisfying viewer preferences that might otherwise not be served and (2)
accounting for externalities associated with various types of programming.
On the first point, they argue that while such concerns may have been reasonable in a
low-capacity world of the type present in the early days of the industry, they are much
harder to defend now given the growth in content across countries in pay-television
offerings. The second point, however, remains valid. While causality about the effects
of television viewing is very hard to establish, a growing body of research argues that
watching certain types of content negatively influences behavior.
50
Whether this has
increased or decreased with the widespread availability of multichannel television is an
open question. One thing is sure, however, while “in the early days of monopoly,
the BBC could effectively force people to consume an austere diet of organ recitals, pub-
lic announcements, and so on,” this is less true in today’s world, where audiences are
becoming ever more fragmented. This suggests that even if there remains a rationale
for PSBs, there is a reduced ability to implement those goals, making this a challenging
issue for both policymakers and the PSBs themselves.
Finally, granting the possibility of a market failure that a PSB could address, there is a
question of implementation.
Armstrong and Weeds (2007) argue that singling out fund-
ing for a single entity is potentially distortionary. While proponents have argued that such
a policy could force competitors to “raise their game,” there is no empirical evidence in
support of this view and there is the reasonable possibility that such a policy could
decrease rivals’ incentives to invest in programming, at minimum in the PSB’s program-
ming areas.
7.4.1.2 Effects of PSBs
Despite its significant role in the functioning of most media markets and a consensus
among academics, regulators, and the public at large about the importance of PSBs
for the functioning of a representative democracy, there is surprisingly little economic
research supporting these beliefs.
51
Following the widespread entry of commercial
broadcasters in media markets worldwide,
Prat and Str€omberg (2006) build a model
of a monopoly provider of broadcast television facing competitive entry and analyze
the impact that entry has on programming choices, channel selection, and individuals’
knowledge. They then test the implications of the model using Swedish survey data taken
before and after the entry of a commercial television station, finding those that start
50
See, e.g., Hamilton (2000) regarding the connection between television and violence.
51
Publicly supported broadcasters also arise in radio markets, where they are an important (sometimes lead-
ing) provider of news and information. See
Chapter 8 (Section 8.4.8, this volume) for an analysis of the
extent to which non-commercial content “crowds out” commercial content.
305The Economics of Television and Online Video Markets
watching the commercial station increase both their level of political knowledge and
their political participation.
While thought provoking, I share the views of
Prat and Str€omberg (2011) calling for
significantly more research on the impact of PSBs, and not just on political outcomes.
They argue that political information is a public good and that voters who spend
resources obtaining information to keep their political leaders accountable produce a pos-
itive externality, providing one rationale for public funding of PSBs. But how big is this
externality? Does a PSB provide a more valuable (e.g., less biased?) form of information
compared to commercial producers? Are there other positive externalities of PSBs
beyond disciplining politicians, for example on education or culture? What evidence
is there for this? I share their call for greater data collection and dissemination by public
broadcasters and greater emphasis on these questions by researchers.
7.4.2 Bargaining
One important feature of television markets that is frequently assumed away in theoretical
models is the impact of the supply chain on market outcomes. Pay-television channel
conglomerates like Disney or Viacom negotiate with pay-television distributors like
Comcast or DirecTV over the price the latter will pay to the former for the right to offer
the former’s television channels on the latter’s pay-TV bundles. Similarly, broadcast net-
works like ABC negotiate with stations (or station groups) over compensation for broad-
cast programming. This subsection describes the consequences such negotiations have on
outcomes in television markets.
7.4.2.1 Bargaining Theory
In television markets, it is reasonable to think that both content providers (channels) and
distributors have market power. In such cases, it’s unreasonable to think that either “sets a
price”; rather they bargain to determine a mutually agreeable price. In such settings, non-
cooperative bargaining theory has proven to be a useful tool to help understand market
outcomes.
The insights of bargaining theory can be most easily understood in the context of
bilateral monopolists, A and B, bargaining over a pie of size π.
52
The set of possible agree-
ments is given by
X ¼ x
A
, x
B
ðÞ: 0 x
A
π and x
B
¼π x
A
fg
:
Utility to player i from an agreement is u
i
¼U
i
(x
i
). If the players fail to reach an agree-
ment, each gets a “disagreement utility” or “threat point,” d
i
U
i
(0), with d ¼(d
A
, d
B
).
Let Ω be the set of utilities achievable through agreement, i.e.,
52
The exposition here broadly follows Muthoo (1999, Chapter 2).
306
Handbook of Media Economics
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