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Industrial Organisation: Why is there never anything worth watching on TV?
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Industrial Organisation: Why is there never anything worth watching on TV?


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An Hotelling's location model …

An Hotelling's location model

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  • When I say ad-supported TV, I am referring to the how broadcasters earn their source of revenue. In this case, they earn their revenue through advertising.TV programmes have some attributes of a public goodNon excludability (people who have not paid for it can still watch it) and non rivalry (two people can watch the same program simultaneously)
  • They do not pay to watch TV (P = 0)Hence, pricing is efficient (P = MC)Artificial scarcity of TV programmesA more precise definition of allocative efficiency is at an output level where the price equals the Marginal Cost (MC) of production. This is because the price that consumer's are willing to pay is equivalent to the marginal utility that they get. Therefore the optimal distribution is achieved when the marginal utility of the good equals the marginal cost.
  • Money is earned by TV producers through advertisementsMore viewers, more moneyBroadcasting companies incur fixed cost in the form of buying the distribution rights for the tv program but they do not incur any marginal cost.Cost is independent of number of viewersUsually C(q), but here C is not a function of qProducers seek to maximise number of viewersFor example any viewers within the broadcast range can just watch the tv without the firm incurring any additional cost.
  • Unlike how we normally calculate our surplus which is the area under the curve.surplus = number of viewers multiplied by the advertising cost per viewer.
  • Transcript

    • 1. Why is there never anything worth watching on TV? Daniel Song Kenneth Ho Zhong Xian
    • 2. Nature of TV Industry • Ad-supported TV Marginal Cost of an additional viewer is approximately 0 (MC = 0) Public good • Programmes are FREE to watch P = 0
    • 3. Nature of TV Industry • Allocative efficient pricing P = MC • Artificial scarcity of TV programmes
    • 4. Market Structure Ad-Supported TV • Revenue is earned through advertisements  More viewers, more revenue • Fixed Cost  Cost is independent of number of viewers  Usually C(q), but here C is not a function of q
    • 5. Market Structure Ad-Supported TV 6 5 Firm chooses program 1 over program 2 when P = 0 4 Price 3 2 1 0 0 0.5 1 1.5 2 Quantity 2.5 3 3.5
    • 6. Inefficiencies Ad-Supported TV
    • 7. Inefficiencies Ad-Supported TV • Welfare is measured by variety in programming, NOT just PS + CS • Bias is defined as DEVIATIONS from the optimal choice of programs – Failure to respond to intensities of preference
    • 8. Inefficiencies Ad-Supported TV Viewer A 3rd Choice Action 4th Choice Sports Crime Fantasy Sports Horror Sports Deviation Romantic Deviation 2nd Choice Viewer C Comedy Deviation 1st Choice Viewer B Produce the COMMON DENOMINATOR program
    • 9. Inefficiencies Ad-Supported TV 1. Bias against programs with LOW price elasticity of demand  Consumers with inelastic preference and high willingness to pay 2. Bias against HIGH COST programs
    • 10. Inefficiencies Ad-Supported TV 8 7 Inelastic 6 5 Price Firm will show the program with the highest number of viewers when P = 0 4 3 2 Elastic 1 0 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 Quantity Surplus of inelastic demand > Surplus of elastic demand
    • 11. Inefficiencies Ad-Supported TV 9 8 7 6 5 Price Same number of viewers when P = 0, but firm will choose the program with the LOWER cost 4 3 2 1 0 0 0.5 1 1.5 2 2.5 Quantity Programs that yield greater total surplus may still be unprofitable because the revenue fail to cover fixed costs
    • 12. Inefficiencies Ad-Supported TV • Location model (linear)  Uniform distribution of preferences  Viewers will always watch TV Firm will just show one program at the center Action Comedy Sports Horror Fantasy
    • 13. Inefficiencies Ad-Supported TV • Location model (skewed)  In reality, preferences are non-uniform  Pooling occurs at crests  Competition will cause DUPLICATION Action Comedy History Musical Sports Classic Horror Fantasy Mystery
    • 14. Pay TV
    • 15. Market Structure Pay TV • Fixed fee is charged (T = A + pq) • P≠0 • Producers seek to maximise surplus rather than maximise viewers, since their revenue now comes from consumers
    • 16. Market Structure Pay TV • Can capture more surplus by producing programmes to cater to minority (less bias) Price 8 7 6 5 P 4 3 2 1 0 0 0.2 0.4 0.6 0.8 1 1.2 1.4 Quantity 1.6
    • 17. Inefficiencies Pay TV • TV programmes are no longer free  P > MC = 0 (Inefficient Pricing) • Price is not representative of consumer’s willingness to pay due to lack of perfect information
    • 18. Solutions • Must have a good balance of both • Cannot have solely ad-supported TV  Does not capture intensity of preferences  Bias against consumers with inelastic preferences • Cannot have solely Pay TV  Prices will be high  Burden will be shifted from advertisers to consumers
    • 19. Solutions • Increase number of channels (which will decrease bias / transportation cost) • Reducing asymmetry of consumer tastes will also reduce the bias  However, it is unlikely that this will happen
    • 20. Limitations • Artificial scarcity of channels created by governing bodies  MDA has tight restrictions on what can be shown in Singapore • Too costly to obtain perfect information regarding consumer preferences
    • 21. “Your preference is not written on your forehead. It is written in your heart.”
    • 22. Credits • Beebe, J. 1977. “Institutional Structure and Program Choices in Television Markets.” Quarterly Journal of Economics 91: 15–37 • Spence, M., and B. Owen. 1977. “Television Programming, Monopolistic Competition, and Welfare.” Quarterly Journal of Economics 91: 103–126.
    • 23. Questions?