stuhmeier scientific seminar 2017

Media market concentration and pluralism


Torben Stuhmeier

University of Munster

FSR C&M, CMPF, ENTraNCE Annual Scientific Seminar

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Introduction

Introduction

Diversity of opinion is seen as a major public objective for themedia sector, relating to

political aims like deliberation, participation, and democracyas well as to social aims like social cohesion and culturaldiversity (see, e.g., the early works of Hayek, 1945; Downs,1957)

Public interest in maintaining pluralistic media landscape

Securing pluralism is a basic general rule of media policy

Competition policy in media markets even more concernedwith market concentration than in other markets

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Introduction

Introduction

Media landscape is undergoing constant structural change

Change in media consumption habits has direct consequencesfor the markets, with traditional media outlets such asnewspapers continuing to be hard-hit

Structural change is causing a long-term trend of mediamarket consolidation in many traditional media marketsworldwide

Consolidation trend is spurring a debate on the consequencesfor pluralism in the markets, raising concerns for media policythat strive towards safeguarding pluralism in the markets

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Introduction

Introduction

There seems to be conjecture that market consolidation leadsto a reduction in pluralism

But economically, the connection between marketconcentration and pluralism is not clear

Empirical evidence on how market consolidation and mergersaffect diversity is mixed, mergers may even increase diversityin the market (see, e.g., Berry and Waldfogel, 2001; Sweeting,2010; Gentzkow et al., 2014)

Few theoretical papers that connect market concentration andpluralism in a two-sided market environment

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Introduction

Introduction: Research question

Research question

Does a single media outlet also find it profitable to offer avariety of views?

Does an increase in market concentration necessarily reducesthe variety of views offered at the market?

How does the market perform in terms of welfare?

Take two views on pluralism

Internal pluralism: Pluralism offered by a single media outlet

External pluralism: Market supply of pluralism

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Introduction

Introduction: LiteratureEarly normative works on media economics (Steiner, 1952;Spence and Owen, 1977; Wildman and Owen, 1977) concludethat external pluralism is low in a free marketGabszewicz et al. (2004) show that when there are negativeadvertising externalities, broadcasters are likely to differentiatetheir programs under competitionAnderson and Coate (2005) show that markets can providetoo few or too many programsBerry and Waldfogel (2001) find that ownership consolidationin US radio broadcasting reduces entry, but increases thenumber of radio formats broadcastGeorge (2007) demonstrates that increases in ownershipconcentration in the US newspaper market lead firms todifferentiate products to a greater extent and cover a largernumber of reporting topics

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The Model

Outlets

Two-sided market model, n ≥ 2 media outlets in the market,equidistantly located on a Salop circle

Outlets can expand coverage on the circle, which we interpretas internal pluralism, at quadratic cost (Alexandrov, 2008)

Profit of outlet i is given as

Πi = si (R(ai ) + pi )− δIP2i − f (1)

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The Model

Consumers and advertisers

ConsumersConsumers within the range of views offered by the outlets canconsume their preferred content

U ini = 1 + θIPi − γai − pi (2)

Consumers outside the interval incur additional disutility from notconsuming their ideal content

Uouti = 1 + θIPi − γai − pi − t(x − li ) (3)

AdvertisersAdvertising side follows Anderson and Coate (2005): R(a) isconcave in the advertising level a and achieves its maximum at a

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Market provision

Model results: Optimal financing regimeIf R(a) < t

n , outlets optimally choose a subscription regime with

ppayi =t

n− R(apayi ) (4)

∂R(a)

∂a|apayi

= γ (5)

If R(a) ≥ tn , outlets optimally choose an ad-financed regime with

aadi =t

nγ(1− ε) (6)

Intuition: A decrease in the nuisance cost of advertising makesadvertisement more profitable (the shadow cost of advertisementdrops), so that the media outlet offers free of charge subscriptions,making money only on advertisements

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Market provision

Model results: Optimal internal pluralismUnder the subscription regime, the optimal level of internalpluralism is

IPpayi = 2

θ + t

nδ(7)

Under the ad-financed regime (for R(a) ≥ tn ) optimal internal

pluralism is

IPadi = 2(1 +

θ

t)R(aadi )

δ(8)

Internal pluralism is higher in an ad-financed regime thanunder a subscription regimeIf advertising revenue per consumer is high, outlets have astronger incentive to compete for consumers by offering theirpreferred contentIn contrast to traditional wisdom that pluralism is low inadvertising funded media (Steiner, 1952, etc.) 10 / 23


Market provision

Model results: Optimal internal pluralismUnder the subscription regime, the optimal level of internalpluralism is

IPpayi = 2

θ + t

nδ

Under the ad-financed regime (for R(a) ≥ tn ) optimal internal

pluralism is

IPadi = 2(1 +

θ

t)R(aadi )

δ

Under subscription regime, can regulate advertising withoutaffecting pluralism (adverting revenues are passed into perviewer price)

Under ad-financed regime, advertising restriction lead to adecline in pluralism (if regulation causes R(a) to decrease)

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Market provision

Model results: Market concentration and internal pluralism

Internal pluralism is higher in more concentrated markets

Under subscription regime, direct effect via consumer side:With fewer outlets active in the market, the distance betweenthe indifferent consumer’s taste and the outlets’ positionsincreases and so do transportation costs

Under ad-financed regime, additional effect via advertisingside:

∂aadi∂n

= − t(1− ε)n2γ(1 + t

nγ∂ε∂a)

< 0 (9)

Results backed by empirical evidence from, e.g., Berry andWaldfogel (2001) and George (2007)

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Market provision

Model results: Market concentration and external pluralism

How should external pluralism be measured?

No sound and clear definition of pluralism; it remains aconcept which is very loosely defined in many countries

For many analysts or observers, media pluralism has come tomean, almost exclusively, plurality of ownership

But have seen from discussion on internal pluralism thatdefinition only in terms of ownership is too narrow, becauseeach outlet also provides internal pluralism

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Market provision


Quantify external pluralism as

EP = 1− 2n

∫ 1/2n

l∗i

txdx (10)

Look at the aggregate transportation costs for consumers inthe market

Market supply of pluralism is thus an increasing function ofboth the number of outlets and the variety of views offeredwithin a single outlet

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Market provision


External pluralism is lower in more concentrated markets

Although an individual outlet increases its variety of viewsoffered, the direct effect of a reduced number of outletsdominates

Important result for media policy taking care about pluralism

Public policy should be concerned with excessivelyconcentrated markets, not only because of reduced economiccompetition, but also because of lower pluralism

But, total effect of market concentration on social welfare is,however, still unclear because a total welfare perspective hasto take consider all interest groups, consumers, outlets, andadvertisers which may be affected differently

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Monopoly

Monopoly

In some media markets high ownership concentration

Media mogules such as Rupert Murdoch and Silvio Berlusconiare just two instances of concentrated media markets

The Australian newspaper market, for example, is one of themost concentrated worldwide: 98% of circulation comes onlyfrom three corporations, with Murdoch’s News CorporationAustralia controlling over 70% of metropolitan dailynewspaper circulation

General presumption that such a concentration of newspaperownership may pose a risk to overall media diversity

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Monopoly

MonopolyAssume all n outlets are owned by a single monopolist

IPM = 2θ + t

nδ= IPpay (11)

nM =1

2

√2√δf (δt − t2 − 2tθ − θ2)

δf< npay (12)

Monopolist sets same level of internal pluralism as outletsunder competition

But monopolist operates fewer outlets, and thus, externalpluralism is lower than under independent ownership

Justification for ownership restrictions applied in manyWestern countries

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Social provision

Social provision

Consider a social planner maximizes total welfare of

maxa,l ,n

W = 1 + θIP − γa− 2n

∫ 1/2n

ltxdx +

∫ a

0r(x)dx − nIP2 − nf

(13)Social optimal solution is then given as

r(a∗) = γ (14)

n∗ =1

2

(δ − 2t)√

t(f (δ − 2t)− 2θ2)

f (δ − 2t)− 2θ2(15)

IP∗ =4θ

δ − 2t(16)

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Social provision

Social provision

Excessive entry: Standard business stealing argument (Tirole,1988)

Internal pluralism insufficient, if the free-entry number ofoutlets is sufficiently large, i.e., if

npay >1

2

(δ − 2t)(θ + t)

δθ(17)

Likely holds if δ is large and θ is small

Then, outlets can avoid offering costly internal pluralismbecause consumers rarely care about it

Competition on pluralism is thus weak and thus, equilibriumprofits are large, which attracts entry into the market

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Social provision

Social provision

Comparison with respect to external pluralism then isambiguous

On the one hand, because entry is excessive, also externalpluralism might be excessiveOn the other hand, internal pluralism might be insufficient,and thus, also external pluralism might be insufficient

Can demonstrate that all kinds of market biases might exist

A rise in market concentration can enhance welfare

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Social provision

Social provision

Hitherto, there are plenty of sources people can get news from,external pluralism might be regarded as high at first glance

A study from the Pew Research Center highlights, though, theincreasing reliance on partisan and ideological news sources onthe right and left policy spectrum

Internal pluralism seems to be decreasing, outlets focus ontheir core to cater the taste of their target groups

According to Pew Research Center, fewer outlets offer amoderate and balanced view

Increased media options do not necessarily result in increasedpolitical knowledge or greater democratic cohesion but thereare even trends to more authoritarian democracy in someWestern countries

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Conclusion

Conclusion

Consolidation trend is spurring a debate on the consequencesfor pluralism in the markets

We contribute to this discussion and analyzes the connectionbetween economic competition and pluralism in media markets

Take perspective on internal and on external pluralism

Increased market concentration leads to higher levels ofinternal pluralism and lower levels of external pluralism

No clear cut free market bias with respect to social provisionof pluralism

Provide a somewhat counterintuitive effect that a rise inmarket concentration can bring the free market levels ofpluralism closer to their optimal levels and thereby, enhancewelfare

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Thank you for your attention!

stuhmeier scientific seminar 2017

Presentations & Public Speaking