The Substitutability of Network and National Spot Television Advertising

By McCullough, B. D.; Waldon, Tracy | Quarterly Journal of Business and Economics, Spring 1998 | Go to article overview

The Substitutability of Network and National Spot Television Advertising


McCullough, B. D., Waldon, Tracy, Quarterly Journal of Business and Economics


INTRODUCTION

In 1946 the Federal Communications Commission issued regulations prohibiting television licensees from entering into agreements that allow a television network to influence or control the rates the licensees can charge for nonnetwork advertising time. This regulation is based on the belief that some advertising time offered by affiliates (national spot advertising) competes with advertising time offered for sale by television networks (network advertising). In 1959 the Commission adopted a regulation that strengthened the rule further by prohibiting independently owned television affiliates from being represented by their networks in the sale of nonnetwork advertising time. The FCC expressed concern that even though networks were rarely involved in the national spot advertising representation business, that national spot advertising provided a mechanism through which networks could influence the spot advertising rates of their affiliates.

At the time the latter rule was implemented the evidence that network advertising time and national spot advertising time were substitutes for each other consisted of statements of advertisers, advertising sales representatives, television licensees, and television networks. Since then many briefs submitted to the FCC have contained ad hoc regressions or correlation analyses purporting to demonstrate substitutability. On the basis of such anecdotal evidence some studies (FCC's Network Inquiry Special Staff Study, 1980; Owen, Beebe, and Manning, 1974; and Owen and Wildman, 1992) have asserted the substitutability of network and national spot television advertising. To date, however, no formal econometric study of this question has been conducted. Seldon and Jung (1993) thoroughly investigate the substitutability of advertising among various media (e.g., television and print) but they do not disaggregate television into network and national spot components.

This issue recently has increased in importance. The FCC currently is considering the continued necessity of rules restricting network involvement in the national spot advertising rates and sales of their affiliates. In addition, the Telecommunications Act of 1996 has raised national television ownership limits, thereby allowing a television broadcast network to own an unlimited number of stations in the national market as long as the stations reach no more than 35 percent of television households in the aggregate.(1) If networks choose to increase their station portfolios, the potential competitive impact on the advertising market will be of interest. Crucial to this analysis will be an accurate measurement of the degree to which the acquiring and acquired firms compete.

Because we expect the question to recur in future FCC proceedings, it is important that a formal basis for the assertion of substitutability be established. In the usual fashion, we employ the translog methodology to estimate the elasticity of substitution between network and national spot advertising. In this particular application of the translog, the cost function contains no parameters of interest and is not included in the estimated system. We consider the asymmetric Morishima elasticity of substitution rather than the more commonly-used symmetric Allen elasticity because symmetry is not a natural property of an elasticity of substitution when the curvature of the isoquant depends on the direction in which prices change (Blackorby and Russell, 1989). The Morishima elasticity has been used by Seldon and Jung (1993), Thompson and Taylor (1995), and Davis and Gauger (1996), among others.

In contrast to most translog studies, we check to ensure that the levels of the variables are not cointegrated and that we perform estimation on stationary variables, thus avoiding attendant problems of failure of the estimators to converge to their true values. Also in contrast to typical translog studies that evaluate elasticities only at one point, we estimate elasticities over the entire sample. …

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