ANTITRUST ISSUES IN MEDIA MARKETS ANTITRUST ISSUES IN MEDIA MARKETS Chief economist Lars Sørgard Norwegian Competition Authority

Background and motivation Media markets are important Hours spent watching TV or listening to radio The amount of advertising transmitted through media such as TV, radio and Internet Rather new field of economic research Some earlier contributions concerning location and (lack of) product differentiation Recent research on the interplay between advertising and media; two sided markets Challenging welfare issues When is ownership concentration bad in media markets? Is it bad with a switch to pay TV?

The structure of my talk 1.Competition and product differentiation in media markets Hotelling still alive? 2.Advertising and media markets How to understand the structure of the market? 3.Pay-TV versus advertising-financed TV Is it bad for consumers with a transition towards more pay TV? 4.Some concluding remarks Any antitrust implications possible?

Hotelling – still alive? Simple and rather intuitive idea The viewers/listeners/readers located on a line Example: Popular versus classic If monopoly with two channels, optimal (not maximal) differentiation Minimize ’transport’ costs Example: Profile of radio channels ClassicPopular

Competitive effects and location If duopoly, ambiguity concerning location Direct effect: Can capture customers by moving close to its rival Strategic effect: Dampening competition by not being close to its rival If # of viewers/listeners decicisive for profits, direct effect relevant Example: Advertising-financed media firms? Could pay-TV be better for special interest groups? Popular Classic

Radio market in Norway: Positioning according to Kanal 24 Edu- cation Primary school Univer- sity Kanal 24 at the outset: ’Female 32 years with medium education is our ”first” listener’ Age NRK: Public financed Three channels

Antitrust implications Product variety of large concern in these markets, so such factors should be important? If media firms maximize # viewers, coordination is good? High concentration may lead to variety, or a U-shaped relationship? Not a strong argument for antitrust intervention? Political argument for intervention (against Berlusconi) Coordination an argument in an acquisition in the Norwegian TV market in 1997 Pay-TV complements advertising-financed TV? Pay-TV more tailor-made to specific groups, but on the other hand more capturing of pot. consumer surplus? What is not captured by such a simple model? Competition for quality Media firms as transmitters of advertising

Advertising and media markets Media firms a platform that plays a two-fold role Entertainment for viewers, listeners or surfers (on the Internet) Channel for transmitting advertising, which can be an efficient way to reach the consumers Two-sided market But advertising is a nuisance for the audience The more advertising on TV, the less attractive is the channel for a viewer How, then, do advertising-financed media compete? Must have advertising to finance its activity, but it does not attract audience

The structure of the market Prod/adv 1 Prod/adv n Media firm 1 Media firm 2 Audience/Consumers Prod/adv 2 ……

Competition between media firms A monopoly media firm must strike the balance Some advertising will give revenues, but too much will lead to (almost) no audience Competition may lead to less advertising Each media firm would like to be attractive Competition for having the lowest amount of advertising Competition  high prices for commercial slots? The low amount of advertising leads to a high equilibrium price on the slots Less differentiation leads to higher prices More media firms may lead to lower prices

Media competition – effects The advertisers might be hurt by competition between media firms Few slots and high prices is detrimental to those who advertise their products Competition might lead to underprovision Too little advertising from a social point of view If close substitutes and much advertising, then likely that the media firms collude on advertising? Depends on the specific market structure If competition with a public channel, then more likely with underprovision? If high nuisance cost, then welfare improving with more media firms?

Public policy measures If overprovision, upper limit on advertising may solve the problem As in many European countries on TV But possible to escape regulatory restriction (TV3 from London)? Can ensure no overprovision if a public media firm with no advertising? Restricts the amount of advertising on the advertising-financed media firm Alternatively, promote entry of new advertising- financed media firms? But what if underprovision? Allow mergers, to trigger more advertising?

The financing of media firms Could pay-TV be better than advertising-financed TV? Some earlier study of such an important question Spence and Owen (1978) Owen and Wildman (1985) But earlier studies ignored important aspects Strategic interaction and/or Advertising as a nuisance But why advertising-financed media firms when the audience dislikes it?

Ads versus consumer payment Consumer payment is (as expected) strategic complements A rival responds to a price cut by also cutting prices Advertising prices are strategic substitutes A rival responds to a price cut by setting higher prices Caused by the fact that advertising has a disutility for the users Competition more fierce with strategic complements The closer substitutes, the more the media firms gain from shifting to advertising financing If close substitutes, we will observe mostly advertising financed media firms?

Anti trust implications Beneficial with a shift towards consumer payment? Less nuisance cost More intense rivalry on prices But is such a conclusion robust? Can consumer payment channels as such be more differentiated (more consumer lock-in)? Could it be that consumer payment makes price discrimination more viable? Is such a development then detrimental to consumer welfare, or not?

Two examples 1.TV2 bought the exclusive TV rights to the Norwegian soccer league Given that it is sold by one supplier (Norwegian Soccer Association), is it a problem with only one buyer? A problem that matches are shifted over to pay per view channels? 2.Digital Terresterial Television network is planned in Norway Greater technological scope for detailed payment Is this a problem?

Some concluding remarks All industies argue that they are special, and we should be sceptical to that But media firms might have more idiosyncratic features than others? Very hard at present to find any robust antitrust recommendations Theory is still rather new Potential for more empirical research Is the theory so far neglecting important dynamics? Competition may promote R&D, for example investment in programming If close substitutes (hor. diff), intense rivalry on quality (vert. diff.) which might be good