Academic journal article Economic Inquiry

Media Concentration and Consumer Product Prices

Academic journal article Economic Inquiry

Media Concentration and Consumer Product Prices

Article excerpt

I. INTRODUCTION

Recent debates about concentration in the broadcast media industry have provoked concerns about the consequences for programming and advertising levels. What is not so obvious is how media concentration can affect the prices of advertised products. By some accounts, over two-thirds of advertising expenditures in the United States are channeled through commercial media such as radio and television (Leading National Advertisers Advertising Age 2002 and 2003). This fact suggests that the structure of the media industry and decisions taken within play an important role, not only in the market for advertising but also in the competition for advertised products.

The purpose here is to examine the interaction of commercial media and advertisers who are linked, not only through an advertising market but also through a set of consumers who make choices in the media market and in the product market. Specifically, I ask: How does concentration in the media industry affect the prices of advertised products and, consequently, the profits of advertising firms?

Common intuition suggests that advertisers should object to concentration in the media industry because it typically means higher prices for advertising. (1) My analysis challenges this notion by suggesting that media concentration may actually benefit producers of branded consumer products despite higher advertising prices. If concentration in the media industry makes it less likely for consumers to avoid persuasive advertising messages, then advertisers are more effective at differentiating their products and, consequently, enjoy higher prices for their products. It is thus possible for these producers to benefit from media concentration if higher product revenues offset the higher advertising prices.

This result is somewhat surprising in contrast to typical notions of vertical relationships, which suggest that less upstream competition leads to higher wholesale prices (advertising prices in this case) and lower profits for downstream firms. The distinction in the present context lies in the view that agents here are related in a circular way, rather than vertically. Consumers participate in both the media industry, through the choice of, say, a TV station, and the advertiser's product market.

To illustrate the result, I employ an equilibrium model of the media industry. In the model, competing media firms, referred to as stations, provide some service (news, music, entertainment, etc.) to a set of consumers and sell commercial advertising space to producers. These producers compete for the sale of advertised products to consumers.

Stations receive their revenues from advertising sales and enjoy higher advertising prices when they have a large audience. However, consumers in the model dislike advertising because they have presumably tuned in to a station for its programming. Stations choose an amount of advertising to sell, keeping in mind this trade-off. Stations can, in addition, attract audiences by making investments in programming quality.

An important aspect of the model is that advertising is used by a firm to differentiate its brand from that of its rivals. Much of the advertising seen on TV or heard on radio contains messages that are intended to associate an image with the product. The new "product" is then the physical product along with the associated image. Such images seem most prominent for conspicuously consumed products, like soda, beer, or automobiles, which are the most heavily advertised products (Leading National Advertisers Advertising Age 2002 and 2003).

Broadcast media can be seen as vehicles for these images in the form of commercials interspersed throughout regular programming. Viewers or listeners tune in for the programming and are subject to the effects of advertising. The strength of these effects depends on a variety of factors, which are emphasized in the model. …

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