Advertising on Tv

Topics: Infomercial, Advertising, Television terminology Pages: 34 (9211 words) Published: September 5, 2013
Competition for Viewers and Advertisers in a TV Oligopoly

Hans Jarle Kind Norwegian School of Economics and Business Administration Tore Nilssen University of Oslo Lars Sørgard Norwegian Competition Authority

Abstract We consider a model of a TV oligopoly where TV channels transmit advertising and viewers dislike such commercials. We show that advertisers make a lower profit the larger the number of TV channels. If TV channels are sufficiently close substitutes, there will be underprovision of advertising relative to social optimum. We also find that the more viewers dislike ads, the more likely it is that welfare is increasing in the number of advertising financed TV channels. A publicly owned TV channel can partly correct market distortions, in some cases by having a larger amount of advertising than private TV channels. It may even have advertising in cases where advertising is wasteful per se. JEL classification: L82, M37 Keywords: Television industry; Advertising

Correspondence should be sent to Tore Nilssen, Department of Economics, University of Oslo, P.O.Box 1095 Blindern, NO-0317 Oslo, Norway. E-mail: We are grateful to Steve Wildman, three anonymous referees, and seminar participants in Antwerp, Helsinki, and Milan for helpful comments. We would like to thank the Research Council of Norway (the KIM program) for its financial support through SNF Institute for Research in Economics and Business Administration. Kind would like to thank CESifo in Munich for excellent working conditions while revising this work.


Competition for Viewers and Advertisers in a TV Oligopoly
The TV industry is important both in terms of the time people spend watching TV and the amount of advertising it transmits.1 However, advertising-financed channels are potentially a mixed blessing. On the one hand, TV commercials may be the most efficient way for firms to advertise their products and can generate a surplus both for individual firms and for society as a whole. On the other hand, viewers may dislike being interrupted by commercials.2 We thus have an ambiguity that raises the questions of whether there is over- or underprovision of advertising on TV and of whether there is a need for some kind of public intervention in the sector. Would it for instance be advantageous to restrict entry of commercial TV channels if consumers dislike ads? In this paper, we set out to provide answers to these questions with the help of a simple model in which TV stations sell advertising space to advertisers. The basis for the advertisers’ willingness to pay for such advertising space is the attention of the TV viewers that the stations attract. And in order to attract viewers, the stations offer TV programs. Thus, the TV industry is an example of a two-sided market: TV stations offer programs to viewers and advertising space to advertisers, with externalities in both directions.3 We find that there is too little advertising on TV when the channels’ programs are close substitutes, and that the scope for such underprovision of advertising becomes higher if the number of TV channels is enlarged. We further show that the more viewers dislike ads, the more likely it is that welfare is increasing in the number of advertising financed TV channels. Well-known discussions of the welfare effects of advertising, such as Dixit and Norman (1978) and Becker and Murphy (1993), do not take into account the role of media firms as transmitters of advertising.4 An early attempt to do so is in Spence and Owen (1977). However, in their discussion of advertising-financed TV versus pay TV, the presence of advertising is assumed to have no effect on viewers. Wildman and Owen (1985) extend the Spence-Owen model to take into account that commercials are a nuisance to TV viewers. Our analysis differs from the work of Spence-Owen and Wildman-Owen in that we model strategic interactions between TV stations in an oligopoly, whereas they assume...

References: 4
See also the work by Anderson and Coate (2005), who do a welfare analysis in such a Hotelling-style setting
See Motta and Polo (1997) for a survey of the media industry in Europe. See Armstrong (2005) and Armstrong and Weeds (in press) for some recent discussions on public service broadcasting.
See also Anderson and Coate (2005).
There are several studies of mixed oligopoly, see for example De Fraja and Delbono (1989) and Cremer, Marchand, and Thisse (1991)
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