Game In Broadcasting Industry - Rino Bernando

Game in Broadcasting Industry December 2007

Firms that provide broadcasting services are networks since they can broadcast the same programs in different locations. Governments generally limit the concentration of ownership to protect pluralism and democracy Broadcasting differs from cable TV or encrypted TV. The latter can disconnect unpaying consumers from the network Broadcasting companies cannot collect fees from their viewers or listeners  they generate revenues only from advertising  Revenues depend on “rating” (popularity, audience, number of viewers or listeners).

Broadcasters are engaged in “non-price competition”, since they cannot sell their services. Their goal is attracting the highest number of viewers or listener to raise their rating  maximize profits from advertising.  Scheduling of programs becomes their most important strategic variable. Each group of consumers has certain hours during which their major audience turns on their TV sets Examples:  Soap-opera lovers (1) early in the afternoon  People interested in news (2) between 6.30 and 8.30 (1) part-time workers

Many stations broadcast the same type of programs at the same time. This is uncommon, since generally firms tend to differentiate their products in order to acquire market power on their consumers (monopoly competition). But this happens in price competition. In non-price competition it is more rational to offer the same product at the same time (or to limit timing differentiation)

emonstration

gure 1. Distribution of viewers’ ideal time during prime time - Viewers will choose 100 100 100 100 100 the broadcasting time closest to their ideal time - Viewers are indifferent between channels  if all channels choose the 6.30 7.00 7.30 8.00 8.30 same hour, they will equally split the entire viewer population regular intervals - Profit of a TV station: p=r× q

wo broadcasting stations, five scheduling options

SCTV 6.30 6.30 250 7.00 400

RCTI

7.30 350 8.00 300 8.30 250

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7.30

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Both will broadcast their news at 7.30 (unique Nash equilibri

wo broadcasting stations , five scheduling options

SCTV 6.30 6.30 250 7.00 400

RCTI

7.30 350 8.00 300 8.30 250

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7.30

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Let us check whether any unilateral deviation of RCTI increases profits

wo broadcasting stations , five scheduling options

SCTV 6.30 6.30 250 7.00 400

RCTI

7.30 350 8.00 300 8.30 250

7.00

7.30

250

400 100

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Look at column 3  any other outcome is lower for RCTI!

wo broadcasting stations , five scheduling options

SCTV 6.30 6.30 250 7.00 400

RCTI

7.30 350 8.00 300 8.30 250

7.00

7.30

250

400 100

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350 150

250 250

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The same is true for SCTV, given RCTI’s choice (row 3)

emonstration

gure 2. Distribution of viewers’ ideal time during prime time

100 100

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100 - This time there are only four possible timing options - Other assumptions are identical

7.00 7.30 8.00 8.30 We can demonstrate that in this case there regular intervals are multiple Nash

wo broadcasting stations , four scheduling options

SCTV 7.00 7.00 200 7.30 300

RCTI

8.00 250 8.30 200

7.30 200

8.00 300

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There are four Nash equilibria: - both at 7.30 - both at 8.00 - SCTV at 7.30, RCTI at 8.00

wo broadcasting stations , four scheduling options

SCTV 7.00 7.00 200 7.30 300

RCTI

8.00 250 8.30 200

7.30

200

8.00

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Both TV stations must broadcast at adjacent periods. Otherwise one station would move toward the other and capture an additional time-period viewers. Broadcasting at the same time or at adjacent times are Nash equilibria

Nash equilibria are different, or may not exist, if we add a third, a fourth, etc. TV station. What is the consequence of this strategic scheduling choice on social welfare? Viewer’s utility function: Ui(t) = β - δ |t – t*| β > 0 : viewer’s basic utility derived from watching the program δ > 0 : viewer’s disutility from having to watch the program ½ hour earlier or later than her ideal time t : time of the program t* : viewer’s ideal time Social welfare function: sum of viewers’ utility functions + stations’ profits

Social welfare function: sum of viewers’ utility functions + stations’ profits But profit of a TV station: p=r× q r = revenue per viewer q = n° of viewers

In our examples: p = r × 500 p = r × 400

Therefore, total profit being given, social optimum coincides with a scheduling that maximizes aggregate viewers’ utility, i.e. a scheduling that minimizes aggregate disutility from deviation from viewers’ ideal time. Case of 5 scheduling options: - Social welfare is maximized when RCTI broadcasts at 7.00 and SCTV at 8.00 (minimum deviation) - Market failure, since both stations broadcast at 7.30

Type and nature of programs: this is the second dimension of strategic competition among TV stations. General remarks: • A monopoly offers a larger variety than an oligopoly: competing stations can gain from concentrating only on popular programs, where each station can capture viewers from its rivals. • If there is free entry all program types will be broadcasted if it is socially optimal to do so. If there are barriers to entry, the few broadcasters will concentrate only on the most popular programs  suboptimal social allocation.

Example:

81% would like to watch talk

shows 19% prefer to watch news Each broadcaster has 2 channels There is only a prime time scheduling option Case 1. Monopoly: both news and a talk show will be broadcasted at the same time (each on one channel)  81-19% = 100% viewers Case 2. Oligopoly (with two broadcasters): all the existing four channels will broadcast a talk show  81% / 4 = 20,25% > 19% Loss of social welfare:

Cable TV Cable TV operators rely on direct fees imposed on subscribers for transmitting a bundle of TV stations to their homes. The received policy view was based on the notion of “natural monopoly”: only one operator per area was licensed  Local monopolies are harmful to consumers of cable TV more than other monopolies in other industries! This derives from the fact that cable TV operators control the price of many channels and not only a single channel (or product in general). This induces cable TV operators to sell packages of

Example

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A monopoly cable TV operator 4 types of viewers 3 channels (HBO, Cinemax, ESPN) Maximum willingness to pay of viewer groups: Viewer group 1

HBO

Cinemax

ESPN

10

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10

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5

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10

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10

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The monopoly provider’s profit-maximizing prices when he sells each channel separately are: - pHBO = 10 (2 viewer groups - pCinemax = 10 are excluded from - pESPN = 5 consumption of Total profit = 20 + 20 + 10 = 50 each channel) Viewer HBO Cinemax ESPN group 1 10 1 2 2

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Let us consider the opposite case when the monopoly provider sells all channels jointly = pure tying (from “to tie”) The package profit-maximizing price is 13 (10+1+2) [it is the only solution not to exclude groups 2 and 5, which would reduce total profit]  Total profit = 4 × 13 = 52 > 50 (channels sold Viewer HBO Cinemax ESPN separately) group 1 10 1 2 2

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This demonstrates that monopoly cable TV industry enjoys a market power that is greater than the usual monopoly. This result is confirmed also in the case of mixed tying: 2 channels sold in a package and 1 channel sold separately Viewer HBO Cinemax ESPN group 1 10 1 2 2

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Conclusion: local monopoly on cable TV is beneficial to providers but in some cases (mixed tying) it is harmful for consumers. Technically they are not necessary with the introduction of access pricing an fiber-optics lines that can provide many services at the same time.

Spectrum allocation Radio spectrum is a good that is scarce and valuable (profitable). Goal of the regulator: to award licenses to the firms best able to turn the spectrum into valuable services for consumers. Economic theory shows that licensing spectrum access rights by means other than auction has been proved to be socially wasteful. Alternatives: • Administrative proceedings: comparative hearings (highly politicized) • Lotteries (inefficient)

Lotteries: they are inefficient since there is a strictly positive probability that frequency will be assigned to less efficient firms. Only if lottery winners are allowed to resell their rights, the system becomes efficient because the most efficient firms will be willing to pay more for the licenses. Auctions: Let us consider an open bid and two firms A and B. No firm would announce a bid which is larger than the maximum revenue it can generate from using the desired frequency If ρ A > ρ B and ε is the smallest currency denomination ⇒ A will raise its bid to ρ B + ε and win the auction. The State will get this sum but will leave to A a profit