Effects of public broadcasting on the competition among private broadcasters and the total surplus

ABSTRACT

This paper analyses the effect of public service broadcasting on the competition among private broadcasters. A model is constructed to facilitate an evaluation of the effects on investments in the programmes broadcast and the selection of revenue models by private broadcasters: the pay-TV model relying on subscription fees versus the free-TV model relying on advertising revenue. It is shown that increased investment in programmes provided by public broadcasting may deter investments by private broadcasters and may compel broadcasters to change their revenue models from pay-TV to free-TV. Although a public broadcasting station may acquire a considerable number of viewers, it still may not contribute to the total surplus in the industry.

KEYWORDS:

• Public broadcasting
• choice of revenue model
• advertisement-supported broadcasters
• pay-TV broadcasting
• production value of broadcast programmes

Acknowledgements

Model analysis includes an extended version of the analysis in Torii (2014). I owe much to the comments from two anonymous reviewers. Nevertheless, possible remaining failures are solely my own responsibility.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. See Hargreaves Heap (2005), Hoggart and Tracey (1985) and Brown (1996), among numerous other papers. Besides these conventional approaches, Bardoel and d’Haenens (2008) stated that PSB adjusts its role as the “deinstitutionalising” intermediary for the convergence of media and communication policies facing digitalisation and increasing competition with commercial media companies.

2. For more information on this point of efficiency in the provision of programmes, please refer to the experience in New Zealand (Dunleavy, 2008, 2012).

3. Poort and Baarsma (2016) successfully identified and estimated the contribution of PSB in the Dutch TV broadcasting market through an empirical analysis. They estimated the contribution using outside options (other substitutable activities such as reading books or mowing the lawn) as the base. Also they adjusted the effects of various factors; quality score; the use of recording devices and web-based catch-up TV; website visits; the average income.

4. Cummins and Chambers (2011) defined the production value as one visible marker of programme quality often associated with the technical aspects of content.

5. “Quality of programmes broadcast” is used in this paper as an intermediary between the investments by stations and the number of viewers. In the analyses below, the positive association between the investments and the number of viewers is sufficient for model construction, and the association has been empirically detected. See Bagwell (2007) and Bourreau, Gensollen, and Perani (2002).

6. They considered cases where the amount of information does not increase by duplication, that is, a duplicated broadcast of the same contents such as specific professional sports games. The term duplication is used in this limited meaning here.

7. Similar and extended results are shown in Owen and Wildman (1992).

8. There are many works with a similar approach. See Anderson and Coate (2005), Gal-Or and Dukes (2003), Anderson and Gabszewicz (2006), Gabszewicz, Laussel, and Sonnac (2002), Rothbauer and Sieg (2011), and Kind, Nilssen, and Sørgard (2007), among others.

9. Recently, Drufuca and Battaggion (2014) explicitly analysed a monopoly and duopolistic competition in the quality of TV stations. They adopted the traditional definition of quality in vertical differentiation following Shaked and Sutton (1982). The traditional definition of quality is a characteristic of products such that consumers agree that a “high-quality” product is more desirable than a product with lower quality. In the context of TV programmes, it might be controversial to claim that such a characteristic really exists. This paper tries to capture a different facet of the quality of TV programmes.

10. This assumption is set for simplicity, and is easily loosened, as the stochastic production of programmes is assumed below. See also footnote 11.

11. This construction of the model is very restrictive and may sound unrealistic. However, it is not inconsistent with other factors of model construction. A more basic and fundamental model that rationalises these assumptions can be shown. The model presented here is considered as a reduced form of the basic model. See the discussion below as well as Appendix B for the basic model.

12. The concept of merit goods by Musgrave (1959) assumes a similar unstable attitude of TV watchers. The hypotheses of behaviour externalities in TV programmes also assume the same tendency. For discussion about the passivity in TV viewers’ behaviour, see also Miller (2006) and Andrejevic (2008), although the passive attitude is expected to change as new communication technology is introduced in the TV system.

13. Unlike other assumptions, this basic setting of the model, that is, the passive attitude of viewers, is crucial to the conclusion. If viewers of TV programmes make a positive effort to attain the optimal TV-viewing life (high-cost decision of Kirchgässner and Pommerehne, 1993), the assumption of constant utility from viewing programmes should also be changed. There should be competition in investments to attract viewers with programmes that bring higher utility if the attitude of consumers becomes positive. Then the number of viewers may not be proportional to the level of investments, and the strategic effect should be changed, which means changing the equilibrium.

14. This assumption of no disutility from advertisements is set for simplicity again, is not crucial to the results, and is easily loosened. Please see Appendix C.

15. This assumption is set because the model is constructed as a one-shot game. A sequential game is appropriate to simulate reality. Learning the strategy of stations, viewers are assumed to know the probability of finding their favourite programmes.

16. Without assumption 3, stations who offer pay-TV service set the price of subscription just below the additional surplus for a viewer. The analysis would not be much altered, but the expression of equilibrium would be more complicated.

17. Assumption 4 is set because the branding or differentiation of station characteristics is neglected from the model. However, it is easy to drop this assumption. Considering situations where there is a preference order in case a certain genre is covered by plural stations, the demand structure is not as affected as is seen where PSB provides programmes that bring higher utility to viewers.

18. Mankiw and Whinston (1986).

19. This setting is again for simplicity, and it is easily loosened without altering the nature of the equilibriums. In reality, Poort and Baarsma (2016) empirically proved that PSB provides programmes with higher willingness to pay. In those cases, viewers are supposed to select programmes provided by PSB when their preferences are covered by both PSB and private broadcasters. In Appendix D, the results are given to show that the characteristics of the outcomes remain the same as long as the differences in utilities are not so large.

20. If payments to PSB from viewers appear explicitly in the definition of the total surplus, the margin of PSB, the revenue net of investment cost should appear at the same time. The payments then cancel out; they are treated as a transfer that does not affect the total surplus.

21. The total surplus at equilibrium in which three pay-TV broadcasters compete against one another is:

which is greater than .

22. The share of pay broadcasting in total sales was only 19.74% in 2003. In the same year, the share was 65.48% in the US (Ministry of Internal Affairs and Communications, Japan. “Report of Research Committee on Digitalization and Public Policy” Reference Material 3, 2007. In Japanese. Retrieved from http://www.soumu.go.jp/main_sosiki/joho_tsusin/policyreports/chousa/digi-sinten/pdf/061005_2_si3.pdf).

23. Ministry of Internal Affairs and Communications, Japan. “Outlook of Production and Distribution of Contents and Policy of Report of Ministry of Internal Affairs and Communications” (2015 WHITE PAPER Information and Communications in Japan). Retrieved from http://www.soumu.go.jp/main_content/000143545.pdf.

Additional information

Funding

This work was supported by the JSPS KAKENHI: [Grant Number C23530314 and C26285098].

Notes on contributors

Akio Torii

Akio Torii is currently Professor of Economics, Faculty of Economics, Chuo University, Tokyo, Japan, and Professor Emeritus, Yokohama National University, Yokohama, Japan. He has co-authored Industrial Efficiency in Six Nations, MIT Press, 1992. He has authored, co-authored, and co-edited papers and books in the field of Industrial Organisation, Theory and Empirical, in Japan. He has research experience in various fields in economics and business administration: industrial organisation theory, growth theory, retail/wholesale distribution systems, regulatory economics, energy industries, tele-communication industries, and TV broadcasting industries.