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 7.00 7.30 8.00 8.30
250 400 350 300 250
6.30 250 100 150 200 250

100 250 300 250 200

7.00 400 250 200 250 300

150 200 250 200 150

RCTI 7.30 350 300 250 300 350

200 250 300 250 100

8.00 300 250 200 250 400
250 300 350 400 250
8.30 250 200 150 100 250

Both will broadcast their news at 7.30 (unique Nash equilibri

wo broadcasting stations , five scheduling options
SCTV
6.30 7.00 7.30 8.00 8.30
250 400 350 300 250
6.30 250 100 150 200 250

100 250 300 250 200

7.00 400 250 200 250 300

150 200 250 200 150

RCTI 7.30 350 300 250 300 350

200 250 300 250 100

8.00 300 250 200 250 400
250 300 350 400 250
8.30 250 200 150 100 250

Let us check whether any unilateral deviation of RCTI

increases profits
wo broadcasting stations , five scheduling options
SCTV
6.30 7.00 7.30 8.00 8.30
250 400 350 300 250
6.30 250 100 150 200 250

100 250 300 250 200

7.00 400 250 200 250 300

150 200 250 200 150

RCTI 7.30 350 300 250 300 350

200 250 300 250 100

8.00 300 250 200 250 400
250 300 350 400 250
8.30 250 200 150 100 250

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

wo broadcasting stations , five scheduling options
SCTV
6.30 7.00 7.30 8.00 8.30
250 400 350 300 250
6.30 250 100 150 200 250

100 250 300 250 200

7.00 400 250 200 250 300

150 200 250 200 150

RCTI 7.30 350 300 250 300 350

200 250 300 250 100

8.00 300 250 200 250 400
250 300 350 400 250
8.30 250 200 150 100 250

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

emonstration

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

100 100 100 100 - 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 7.30 8.00 8.30
200 300 250 200
7.00 200 100 150 200

100 200 200 150

7.30 300 200 200 250
RCTI 150 200 200 100
8.00 250 200 200 300

200 250 300 200

8.30 200 150 100 200

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 7.30 8.00 8.30
200 300 250 200
7.00 200 100 150 200

100 200 200 150

7.30 300 200 200 250

RCTI 8.00 250

150
200
200
200
200
300
100

200 250 300 200

8.30 200 150 100 200

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: In our examples:

p=r× q p = r × 500
r = revenue per viewer p = r × 400
q = n° of viewers

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

- A monopoly cable TV operator

- 4 types of viewers
- 3 channels (HBO, Cinemax, ESPN)
- Maximum willingness to pay of viewer groups:

Viewer HBO Cinemax ESPN

group
1 10 1 2

2 10 1 5

3 1 10 2

4 1 10 5
The monopoly provider’s profit-maximizing prices
when he sells each channel separately are:
- pHBO = 10 (2 viewer groups
- pCinemax = 10 are excluded
- pESPN = 5 from
consumption of
Total profit = 20 + 20 + 10 = 50
each channel)
Viewer HBO Cinemax ESPN
group
1 10 1 2

2 10 1 5

3 1 10 2

4 1 10 5
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 10 1 5

3 1 10 2

4 1 10 5
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 10 1 5

3 1 10 2

4 1 10 5
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