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Rethinking the Commitment to Free, Local Television University of Pennsylvania Carey Law School Penn Law: Legal Scholarship Repository Faculty Scholarship at Penn Law 2003 Rethinking the Commitment to Free, Local Television Christopher S. Yoo University of Pennsylvania Carey Law School Follow this and additional works at: https://scholarship.law.upenn.edu/faculty_scholarship Part of the Antitrust and Trade Regulation Commons, Communications Law Commons, Economic Policy Commons, Economic Theory Commons, Law and Economics Commons, Policy Design, Analysis, and Evaluation Commons, Science and Technology Law Commons, and the Science and Technology Policy Commons Repository Citation Yoo, Christopher S., "Rethinking the Commitment to Free, Local Television" (2003). Faculty Scholarship at Penn Law. 847. https://scholarship.law.upenn.edu/faculty_scholarship/847 This Article is brought to you for free and open access by Penn Law: Legal Scholarship Repository. It has been accepted for inclusion in Faculty Scholarship at Penn Law by an authorized administrator of Penn Law: Legal Scholarship Repository. For more information, please contact [email protected]. EMORY LAW JOURNAL Volume 52 Fall 2003 Number 4 ARTICLES RETHINKING THE COMMITMENT TO FREE, LOCAL TELEVISION Christopher S. Yoo* INTRODUCTION ............................................................................................. 1582 I. UNDERSTANDING THE ATYPICAL ECONOMICS OF PUBLIC GOODS AND MONOPOLISTIC COMPETITION ...................................... 1587 A. Perfect Competition Among Undifferentiated Products as a Baseline Case..................................................................... 1587 1. Short-Run and Long-Run Equilibrium Under Perfect Competition............................................................. 1588 2. The Welfare Characteristics of the Equilibrium Under Perfect Competition.................................................. 1591 B. Nonrivalry and the Economics of Public Goods ....................... 1594 1. The Definition of a Public Good ......................................... 1594 2. Static Efficiency and Declining Average Costs ................... 1596 * Associate Professor of Law, Vanderbilt University Law School. I would like to thank the participants in workshops conducted at the Northwestern University School of Law, Georgetown University Law Center, and the Vanderbilt University Law School, as well as Mark Brandon, Tim Brennan, Angela Campbell, Steve Choi, Bob Covington, Greg Crawford, Andy Daughety, Paul Edelman, Shubha Ghosh, John Goldberg, Paul Heald, Claire Hill, Richard Nagareda, Erin O’Hara, Doug Lichtman, Bruce Owen, Bob Rasmussen, Jennifer Reinganum, Steve Salop, Herwig Schlunk, Warren Schwartz, Suzanna Sherry, Randall Thomas, Bob Thomp- son, Phil Weiser, Steve Wildman, and Andy Zimbalist for comments on earlier drafts of this Article. Financial support from the Vanderbilt Dean’s Fund is gratefully acknowledged. 1580 EMORY LAW JOURNAL [Vol. 52 3. The Unresolved Conundrum of Dynamic Efficiency ........... 1600 C. Product Differentiation and the Theory of Monopolistic Competition ............................................................................... 1602 1. Short-Run and Long-Run Equilibrium Under Monopolistic Competition ................................................... 1603 2. Static Efficiency and the Proper Allocation of Goods That Are Produced .............................................................. 1609 3. Dynamic Efficiency and the Number of Goods Produced.................................................................. 1610 D. The Complexity of the Welfare Tradeoffs.................................. 1616 E. Price Discrimination as a Way to Maximize Both Static and Dynamic Efficiency................................................... 1618 1. Perfect Price Discrimination............................................... 1620 2. Imperfect Price Discrimination........................................... 1622 3. Price Discrimination and Free Entry.................................. 1626 II. APPLYING PUBLIC GOOD ECONOMICS AND MONOPOLISTIC COMPETITION TO TELEVISION PROGRAMMING ................................. 1628 A. Television Programming as a Nonrival Good........................... 1628 1. The Problem of Equating Advertising Support with Efficient Pricing .................................................................. 1629 2. The Dangers of Assuming That Marginal Costs Are Zero............................................................................... 1631 B. The Applicability of Monopolistic Competition Theory to Television .............................................................................. 1633 C. Networks vs. Programs as the Proper Unit of Analysis ............ 1636 III. ANALYZING THE COMMITMENT TO FREE, LOCAL TELEVISION THROUGH A PUBLIC GOOD AND MONOPOLISTIC COMPETITION LENS ................................................. 1638 A. Decreasing Average Costs and Economies of Scale: Locally Oriented vs. Nationally Oriented Programming .......... 1650 1. The Regulatory Commitment to Locally Oriented Programming....................................................................... 1640 a. Analog Broadcasting..................................................... 1640 b. Cable Television............................................................ 1645 c. DBS ............................................................................... 1649 d. Digital Broadcasting ..................................................... 1653 2. Localism in the Face of Increasing Returns to Scale .......... 1657 3. Application to U.S. Television Policy.................................. 1659 a. Analog Broadcasting..................................................... 1659 2003] RETHINKING THE COMMITMENT TO FREE, LOCAL TELEVISION 1581 b. Cable Television............................................................ 1661 c. DBS ............................................................................... 1663 d. Digital Broadcasting ..................................................... 1664 B. Advertising Support and the Maximization of Total Surplus: Free vs. Pay Television .............................................. 1668 1. The Regulatory Commitment to Free Television................. 1669 a. Analog Broadcasting..................................................... 1669 b. Cable Television............................................................ 1671 c. DBS ............................................................................... 1673 d. Digital Broadcasting ..................................................... 1673 2. The Inefficiency of Untargeted Subsidies ............................ 1675 3. Distortions Resulting from Allowing Advertisers to Serve as Intermediaries ....................................................... 1677 C. Windowing as a Form of Price Discrimination: Protecting Incumbents vs. Promoting New Entrants and New Technologies............................................................... 1682 1. The Regulatory Commitment to Incumbents ....................... 1683 a. Analog Broadcasting..................................................... 1683 b. Cable Television............................................................ 1688 c. DBS ............................................................................... 1690 d. Digital Broadcasting ..................................................... 1691 2. An Aside on Competition Policy.......................................... 1692 a. Analog Broadcasting..................................................... 1693 b. Cable Television............................................................ 1694 c. DBS ............................................................................... 1697 d. Digital Broadcasting ..................................................... 1698 3. Windowing and Imperfect Price Discrimination................. 1701 D. Bundling as a Form of Price Discrimination: Single- Channel vs. Multi-Channel Television ...................................... 1703 1. The Regulatory Commitment to Single-Channel Television............................................................................. 1704 2. Bundling as a Form of Imperfect Price Discrimination..................................................................... 1706 IV. ASSESSING THE SECONDARY DISTORTIONS RESULTING FROM THE COMMITMENT TO FREE, LOCAL TELEVISION ............................. 1712 CONCLUSION................................................................................................. 1714 1582 EMORY LAW JOURNAL [Vol. 52 ABSTRACT Television policy has been viewed historically as posing an irreconcilable conflict between static and dynamic efficiency. Static efficiency requires that the price for television programming be set at marginal cost, which in the case of television programming is essentially zero. Dynamic efficiency dictates that the price be set high enough to allow the program to generate sufficient revenue to cover its fixed costs. Truly optimal (i.e., first-best) pricing was regarded as impossible, with any pricing decision necessarily reducing to a tradeoff between these two considerations. In this Article, Professor Yoo combines the insights of public good economics and monopolistic competition theory to advance a new approach to the regulation of television that brings these two seemingly contradictory forces into alignment. He then explores this framework by using it to evaluate one of the most longstanding and central commitments of U.S. television policy—the promotion and preservation
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