Numerous papers have examined the transformation of legacy media following the spread of social media in 2008. I will return to this topic. This post deals with an earlier period: the 80s and the advent of private, advertisement-financed television.
There exists a prevailing notion that the introduction of private, advertisement-financed television led to a decline in the standards of news coverage, the cheapening of entertainment, and the displacement of more reflective content with shallower, attention-seeking material. Henry Mance wrote an insightful feature on this in the FT during the pandemic.
Empirical analyses have attempted to quantify the validity of this notion. To cite but two studies, Gentzkow and Shapiro (2008) show that for the cohort of students born between 1948 and 1954 (as surveyed by the so-called Coleman study), television exposure causally raised test scores in the US. Using a similar study design, Durante, Pinotti and Tesei (2019) showed that children exposed to private advertisement-financed entertainment TV in the 80s in Italy were less cognitively sophisticated and civic-minded as adults. Although the countries under consideration are different, the studies collectively paint a picture whereby the entry of new competitors in television led to a decline in the quality of television programming.
What are the competitive forces that could cause this transformation? A reading through the lens of competitive equilibrium will disappoint the analyst. Seemingly, the transformation reflects poorly on consumers’ preferences. The competitive market, then, merely unveiled the true character of Western culture: fond of trite and trivia. The key observation is that quality is not the sole dimension of the change. What the cultural pessimist’s verdict fails to account for is the concurrent increase in content variety. Quality may have decreased, but the variety of tastes addressed increased. This points towards an almost obvious trade-off: product variety and quality cannot both be raised without increasing cost. How then does a (perhaps not perfectly competitive) market resolve this trade-off?
Chamberlin’s Theory of Monopolistic Competition
Those who completed their A levels in economics in the UK will be familiar with Chamberlin’s theory of monopolistic competition, a cornerstone of modern macroeconomic models. For an advanced theoretical treatment, refer to Zhelobodko, Kokovin, Parenti, Thisse (2012) .
Chamberlin (1933) outlines an economy where each firm occupies a distinct niche, whether due to differences in space and time or intentional product differentiation. Television serves as a perfect illustration of the concept of differentiation: One channel may specialize in telenovelas, another in broadcast sports, and a third focus on political news. Since no two channels focus on exactly the same content, this aligns with the first principle of monopolistic competition: each seller sets prices as a (local) monopolist would.
In the toy model that I now propose, a broadcasting corporation (BC) provides the BC variety of linear television programming. Greater content quality q attracts more viewers, modelled by increasing demand D(q)=d\cdot q for greater quality q\geq 0 . A larger viewership results in greater advertisement revenue ( p per viewer), denotes as d\cdot q\cdot p. To maximize profit, BC increases revenue by increasing quality q up to the point where marginal revenue equals marginal cost. Assuming quadratic cost C(q)=c_f+ q^2/2 with c_f a fixed cost, profit is given by
\max\limits_{q} d\cdot p\cdot q – c_f - q^2/2 = (d\cdot p)^2 /2 - c_f.
BC’s chosen quality is q=d\cdot p .
What sets monopolistic competition apart from the standard monopoly model is that the extent of product differentiation is determined endogenously. If BC were the sole provider of linear television programming, its profit would be significant initially. However, this cannot persist in the long run as profit incentives attract new entrants to challenge BC’s viewers and profit. Unlike standard competitive models (Bertrand or Cournot competition), entrant firms do not replicate the incumbent’s variety—they would be poorly advised if they did. Instead, they cater to previously unserved tastes. The number of product varieties increases, causing the demand curve for the incumbent seller to shift inward, meaning the same quality programming now attracts fewer viewers. The incentive to enter the market prevails as long as incumbent profit is non-zero, leading to the second principle of monopolistic competition: new entrants will keep contesting the market with different varieties until all profits have been competed away.
In our simple toy model, differentiation corresponds to the number of TV channels catering to exceedingly niche tastes. Differentiation rises as d falls. And the extent of differentation d is determined via the broadcasting company’s zero profit condition:
(d\cdot p)^2 /2 = c_f .
The Comparative Statics of Quality
Our discussion commenced with the advent of private, advertisement-financed television and its impact on quality. While these changes were primarily associated with deregulation, specifically the allocation of additional TV licenses, we can interpret deregulation as a substantial decrease in the fixed cost of operating a television channel. The question that follows is: can a decrease in fixed cost account for the simultaneous decline in quality and increase in variety observed in television markets in 80s?
Within our toy model, the answer is unequivocally yes: An exogenous decrease in c_f boosts short-run profits, leading to greater product differentiation in the long run as profits are competed away. Consequently, d falls and concurrently so does quality, given by q=d\cdot p . Once stated, this insight is hardly surprising: if there is a greater number of television channels that evenly split the market, the marginal return to raising the quality of programming diminishes. The increase in competition renders demand less responsive to higher-quality content, as many prospective viewers are now captured by competing broadcasters better catering to that audience’s niche taste. Truly a dilemma of greater choice!
Can Quality Be Regulated?
Can quality be regulated? One would rightly be fearful of any direct attempt. Can a regulator be trusted to pursue whatever high-minded notion of quality there is without being side-tracked by a personal agenda? I fear not.
Nonetheless the preceding suggests an indirect and impartial attack that shifts the resolution of the quality-variety trade-off in favour of greater quality and to the detriment of variety. If a system could be designed that caps the total content produced as measured in units of time, incentives to invest in quality per unit of time would increase. Indeed, within our toy model, any license that BC must acquire to broadcast for an additional unit of time is indistinguishable from a fixed cost. In effect, the fewer licenses are being awarded, the fewer content will be produced. And so, the greater will be BC’s incentive to invest in the quality of its broadcasting.
One way to implement such a system would be a grand broadcasting time emission trading scheme with centralized auctions where a capped amount of broadcasting licenses would be sold to the highest bidder. (Such a scheme is of course currently in existence for carbon permits.) But who would be subjected to such a regulation? I am concerned about the regulatory burden that this would create, not to speak of the fact that this is not exactly commensurate with freedom of expression. Caps on volume or time do exist, however: in academia, for instance, journal submissions are often subject to page limits, and top journals publish only a small fraction of all submitted articles. Would a similar system work in social media? Would content creators be willing to pay youtube.com or Instagram for broadcasting licenses if youtube.com or Instagram capped total content creation and thus guaranteed its creators a greater prospective audience? It seems worthwhile to investigate to me.
In the meantime, there is a welcome development underway for those who value more quality over variety. Incentives for greater quality provision are greater in larger markets. This is of course achieved by the expansion of global TV shows (e.g., Bluey or Peppa Pig) or global news media (e.g., the New York Times) that are facilitated by streaming technologies. If yours are median preferences, those are great times!
Comprehension Questions: (The Futility of) Taxation?
Caps on content provision as outlined above may seem unusual. The instrument of taxation is not. If the above was clear enough, you will hopefully be able to recognize that taxing advertisement revenue will be futile as far as quality is concerned.
A What is the short run implication of a tax \tau\in(0,1) that lowers advertisement revenue from p to (1-\tau)p on content quality?
B What is the long run implication of a tax \tau\in(0,1) that lowers advertisement revenue from p to (1-\tau)p on market concentration and content quality?
