Broadcasting, advertising finance and the rationale for public broadcasting by Anderson, Kind, Schjelderup Discussant: Giacomo Calzolari University of Bologna, CEPR

Advertising financed broadcasters

Main issue Advertising financed broadcasters –They lead to duplication of more profitable segments TV channels filled with soap and reality shows –They leave some segments uncovered Opera lovers will not watch TV Quite a realistic prediction …

The model K separate groups / segments of viewers (  i, v i, R i, N i ) Viewers in group i only watch at their preferred channel i or nothing –Extreme horizontal differentiation Viewers in a group have heterogeneous valuation r i uniform over [0,R i ] A viewer in group i obtains from his channel r i -  i a i –Notice advertising is like a “hedonic” price

Profit-maximizing firms Free-to-air broadcasting financed with advertising –Anderson and Coate (2005): since advertising is a price TVs avoid price/advertising competition TVs serve different segments Hence, no duplication issues in this model However, unprofitable segments may remain uncovered –What to do?

A Public firm It is obliged to serve one of the otherwise uncovered markets It is obliged to set welfare maximizing advertising The interesting question –What is the market to serve so as to max social welfare?

A public firm? Irrelevant whether it is public or private Just a regulated firm: –Must maximize Welfare Advertising a i  regulated price p i –Receives reimbursement for costs to balance the budget Regulatory transfer T i

Let’s exploit the parallel with the theory of regulation Once we accept regulation … … open the regulator’s toolbox Interesting issue: mixed-oligopoly –A regulated firm with profit-maximizing competitors BBC RAI Exactly the same problem of public utility services with competing unregulated firms Postal services

Theory of regulation TV exclusion of some segments of viewers Similar issues in regulation –Cream-skimming –Policy: Universal service obligations E.g. postal services –Unprofitable segments in low population density areas –Profitable segments in urban areas

Alternatives to the “public” TV? –Cost of public funds for balancing the budget deficit –Balancing the budget with no transfers may be preferable An example from price-cap regulation –Impose bundling channels: A broadcaster must serve a profitable segment but also an unprofitable one –And balance the budget –With an advertising-cap: e.g.  a i ≤A –Welfare properties of this regulation? Traditional regulation in the media

Asymmetric information? Asymmetric information on viewers preferences Asymmetric information on broadcasters’ costs –Again the literature on regulation is of help here –Also for regulation of quality of “public” TV … Traditional regulation in the media

Need for tight regulation of quality also on public / regulated TV