1. Broadcasting, Advertising Finance, and the Rationale for Public Broadcasting Simon P. Anderson Hans Jarle Kind Guttorm Schjelderup Bologna, 5 th Media Economics Conference October 16-17 2007

2. background 2-sided market performance: may not serve segments of low value to high-paying side Steiner, Beebe models Allow for viewers worth different amounts Role of public broadcaster Extension to ad competition (nuisance) Model the product differentiation structure Armstrong-Weeds; Anderson-Gabszewicz

3. Steiner, 1952 Principle of Duplication Single program type per viewer type 700,000 watch only game show 300,000 watch only opera People equally valuable to advertisers 2 stations, duplicate GameShow Monopoly would air both with 2 channels Public Broadcaster: air Opera (private airs GS) (do not succumb to pressure to serve majority)

4. Duplication Steiner. Duplication.

5. riddle Like Boulding Principle of Minimum Diff For spatial model Suppose 2 private, 1 public firms private: max market length Public: maximize social welfare What equilibrium locations ?

6. Differing values to advertisers (disenfranchised viewers) 51%, 20+, prefer Sitcom 49% OAPs prefer Nature 20+ are each worth 3 times as much 3 channels – all SitComs Make 1 Public; air Nature: 20+ no worse off; advertisers neither! Advertisers better off if Public accepts ads JUST replace market size with economic worth in S

7. LCD tastes Beebe. Lowest Common Denominator. Country-rock; talk-rock; news-rock Monopoly may provide only rock (LCD) Competition caters to individual groups

8. Beebe and the Lowest Common Denominator Group1 st choice2 nd Choice 1 (33.5% )SportsGame Show 2 (33.5% )NewsGame Show 3 (33% )DramaGame Show

9. Beebe Table 2 competing each air GS (LCD) Duplication, now at a lower level Make 1 Public – should air S or N More pronounced version:

10. Beebe and the Lowest Common Denominator (2) Group1 st choice2 nd Choice 1 (33.5% )SportsGame Show 2 (33.5% )NewsGame Show 3 (33% )SportsGame Show

11. Beebe Table (2) 2 competing each air S (not LCD) Make 1 Public – should air N; now all served! Variations of above when viewer worth differs … Next: intro ad nuisance and comp into above

12. Steiner: with ad nuisance u i = r – γ i a i i = 1,…,K; u 0 = 0 γ i nuisance/ad; a i ads on channel i, N i potential viewers on program type i Res price, r, uniform on [0, R i ] Hence number of viewers: D i = (1 – γ i a i /R i ) N i CS i = (R i – γ i a i ) 2 N i /2R i

13. Steiner; ad nuisance Profits: π i = v i a i D i with D i = (1 – γ i a i /R i )N i So choose a M i = R i /2γ i π i * = v i R i N i /4γ i So, if Bertrand in niche; choose those for which this is greatest Can consider Cournot variant (ad levels adjust) Next: Public Broadcaster; also, extending Beebe

14. Public Broadcaster in Steiner Public carries ads iff γ i < v i Surplus: S i = (v i a i + (R i – γ i a i )/2) (R i – γ i a i )N i /R i Gives optimal ads - below monopoly level as it internalizes the ad nuisance (ad market power effect has been shut down here) Which channel ? - where incremental surplus highest; e.g. high γ i

15. LCD structures 1 LCD program, M others “Hotelling” on each arm Can also do LCD with other duopoly models. Ad revenues proportional to ads Nuisance $γ i /ad: set γ i = 1 N i viewers per arm, worth v i each Suppose first all arms are occupied, later deal with “empty” arms

16. Preliminaries to Beebe- Hotelling Recall: u i = R + q i – a i – t|x - x i |, x i = {0, 1} x ind = ½ + [(q 0 – a 0 )- (q 1 – a 1 )]/2t Hence best-reply: 0 = ½ + [(q 0 – 2a 0 ) - (q 1 – a 1 )]/2t or a 0 = t/2 + [(q 0 - q 1 ) + a 1 ]/2 and a 1 = t/2 + [(q 1 – q 0 ) + a 0 ]/2 (strategic complements) So a * 0 = t +(q 0 - q 1 )/3 and a * 1 = t + (q 1 – q 0 )/3

17. For Monopoly segments For segments without a competitor: x ind = [R i + (q 0 – a 0 )]/t Hence best action. Putting together: markets linked through LCD, although not a direct strategic link.

18. Solution (qualities suppressed): a 0 = (4Σ E R i v i + 3t Σ F v i ) / (8Σ E v i + 3 Σ F v i ) Familiar forms when: - Single empty market: a 0 = R i / 2 -Single full market: a 0 = t Otherwise, multi-market contact spillovers. [non-LCD profit is simply v i [a 0 + t ]/4t, so tend to take high valuation slots] Now, suppose one private is rendered public

19. Setting one station public As with Steiner analysis, Public wants lower ad level to internalize viewer nuisance Here we have strategic complements, so Lower LCD ad level Lower ads on other stations Raises welfare throughout Which station? Add low value/nuisance; substitute one with a high nuisance.

20. Riddle solution 2 private companies at ¼ Public broadcaster at ¾ Public serves ½ the market Existence in pure strategies

21. conclusions Extend Steiner and Beebe to different viewer worth and Ad nuisance Illustrated performance shortcomings with public firm Further work needs to address Does monopoly perform better than comp? Which program type(s) to produce? Positive theory of Public Broadcaster NPR (voluntary contributions) business model

22. The role for Public TV Early history: control info (cold war, WWII) Weak ad demand, exclusion infeasible: public good Stronger ad demand: disenfranchisement problem With exclusion now possible, is there a role? Provide for disenfranchised poor -are these the programs we see? arts subsidy, cultural export, local content Altering performance of private sector Modeling issue: citizen candidate, SW max?