TV Advertising as a Giffen Good

TV Advertising as a Giffen Good
Substitution Effect, Income Effect
and the Paradox of
the Gentiloni Draft Bill
Augusto Preta
Università di Sassari
SIDE Conference 2007, 9-10 novembre 2007
Università Bocconi, Milano
Giffen goods and
the income effect
• In the XIX century Scottish economist Robert Giffen
observed the rise in price of certain goods (inferior goods)
led to an increase of their consumption and a consequent
reduction of luxury goods
• For example higher chips price result in less money available
for fish and therefore in a decline of its consumption.
Adversely, lower chips price provides more money available
for fish and a decline in consumption of chips
• Giffen paradox based on income effect (as opposed to
substitution one) has long been a matter of debate among
economists
• But, even if it can be accepted for some inferior goods, does
Giffen paradox apply to advertising TV for mainstream
television?
Augusto Preta, TV Advertising as a Giffen Good
SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano
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Giffen paradox and substitution
effect in voice communication
• In the XXI century people set a budget for voice
communication
• Evidence shows that fixed-to-fixed calling exhibits the
fastest decline in volume and spend
• On the other side, mobile voice calls display the the fastest
rate of growth in volume and spend.
• Consumers tend to maximise their consumption of mobile
voice, even though they could save money with cheaper
fixed calls
• As VoIP will make fixed telephony even cheaper, the effect is
likely to continue: cash is freed up for more desirable kinds
of calls, such as mobile originated and fixed to mobile.
Augusto Preta, TV Advertising as a Giffen Good
SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano
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Fixed Voice as a Giffen Good
30%
Change (1Q2004-2Q2006)
20%
10%
0%
Fixed to fixed
calls
Fixed to mobile
calls
Mobile voice
calls
All
-10%
Spend per minute
Volume
Spend
-20%
-30%
-40%
Source: Analysys
Augusto Preta, TV Advertising as a Giffen Good
SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano
4
DDL Gentiloni
• The Gentiloni draft Bill intends to correct excessive
concentration in the TV market through a quantitative
intervention
• The shift of one channel from analogue to digital for Rai
and Mediaset with the negative impact on their ads
revenues and the reduction of commercials imposed to
the dominant player on the TV advertising market should
release resources for other broadcasters and media,
such as press.
• Substitution effect is at the basis of the relevant market
analysis envisaged by DDL Gentiloni
Augusto Preta, TV Advertising as a Giffen Good
SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano
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Dominant positions
and remedies (1)
Art. 2.
Limiti alla raccolta pubblicitaria nel settore televisivo e altre
misure a tutela della concorrenza e del pluralismo nella fase di
transizione al digitale
1. Fino al 30 novembre 2012 e comunque fino alla completa conversione
delle reti alla tecnologia digitale, il conseguimento, anche attraverso
soggetti controllati o collegati, di ricavi pubblicitari superiori al
45% del totale dei ricavi pubblicitari del settore televisivo,
riferito alle trasmissioni via etere terrestre in tecnologia analogica e
digitale, via satellite e via cavo, costituisce una posizione
dominante vietata […]
3. Nell'anno solare successivo all'accertamento, ciascuna emittente
televisiva in ambito nazionale via etere terrestre su frequenze
analogiche, facente capo a soggetti in posizione dominante ai
sensi del comma 1, trasmette pubblicità in misura non superiore
al 16% del tempo di ciascuna ora di programmazione. Le
disposizioni di cui al presente comma non si applicano ai soggetti
che, all’esito dell’accertamento, trasferiscono su una diversa
piattaforma trasmissiva una o più emittenti televisive già
operanti su frequenze terrestri in tecnica analogica ovvero, che
cessino la trasmissione di pubblicità su una o più emittenti
Augusto Preta, TV Advertising as a Giffen Good
SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano
6
Dominant positions
and remedies (2)
A new provision of the Bill will also include
tele-promotions* in the bundle of commercial
communications, whose broadcasting time is
limited to 18% of each broadcasting hour
Tele-promotions are any kind of advertising consisting in displaying or showing goods or
services made by the broadcaster within a programme, with the purpose of promoting the
provision, against payment, of the displayed goods and services
Augusto Preta, TV Advertising as a Giffen Good
SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano
7
The expected effect of Gentiloni Bill
Before DDL Gentiloni
Other
12.5%
Rai
29%
Expected impact
Other
27%
Mediaset
58.5%
Mediaset
48%
Rai
25%
Source: ITMedia Consulting
Augusto Preta, TV Advertising as a Giffen Good
SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano
8
- Rich
+ Poor
Total adv share and TV share
Radio share
Effect of TV inflation onto radio
Source:OMD
Augusto Preta, TV Advertising as a Giffen Good
SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano
9
Effect of TV inflation onto radio
TV Inflation
More Radio??
Competitiveness of
other + Poor
complementary
media increases:
Sat TV
Other analogue
Digital Scenario
TV +5%
Radio – 0,3%
TV +10%
Radio – 0,9%
TV +15%
Radio – 1,3%
Less
Radio!
- Rich
Source:OMD
Augusto Preta, TV Advertising as a Giffen Good
SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano
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TV Advertising as a Giffen Good
• An increase of TV price causes a reduction of Radio revenues,
thus proving that:
a. In TV advertising income effect prevails against
substitution effect
b.
Since demanded quantity of Giffen goods is an inverse
function of income, a price increase of TV advertising will
cause higher demand for TV advertising. This trend
concerns especially big investors, that, however, represent
more than 70% of the market.
• A shock caused by negative externalities, such as the
proposed Gentiloni Bill, may consolidate the power of those
players whose
dominance it intended to limit
Augusto Preta, TV Advertising as a Giffen Good
SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano
11
The dominant players
expected behaviour
• Once compelled to transfer one channel on digital networks,
and to reduce broadcasting time devoted to advertising
[tele-promotions= commercials], response of the dominant
players may be as follows:
a.
To increase the appeal of analogue programmes, so to
recover losses caused by the digital shift through higher
audience
b.
To increase price (up to 10%), so to reduce losses from
tele-promotions
Augusto Preta, TV Advertising as a Giffen Good
SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano
12
Spot + Telepromotion
S < 18%
Mediaset
+
TP
S
= 20%
RAI
= 12%
+
TP
P
CURRENT SITUATION: Quantity (Q0)
completely absorbed. Price (P0) is the
most efficient price for both players,
as for available capacity.
P0
D
Mediaset
RAI
Q0
Augusto Preta, TV Advertising as a Giffen Good
SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano
Q
13
Spot = Telepromotion (Mediaset)
S
+
TP
Mediaset
P
= 18%
RAI
S
+
TP
DDL GENTILONI IMPACT: Negative
externalities reduce total available
capacity (Q1). Demand curve moves
upwards, and so does Price (P1). ,
Mediaset further reduces the
negative externalities because
higher value of slots shifts even
more upwards the Demand curve
(P2).
P2
Med
P1
Med
+ RAI
P0
= 12%
D1
D
Mediaset
RAI
Q1
Q0
Augusto Preta, TV Advertising as a Giffen Good
SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano
Q
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The possible effect of Gentiloni Bill
Before DDL Gentiloni
After DDL Gentiloni
Other
12.5%
Rai
29.0%
Other
14.2%
Mediaset
58.5%
Rai
28.5%
Mediaset
57.3%
Source: ITMedia Consulting
Augusto Preta, TV Advertising as a Giffen Good
SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano
15
Conclusion
• In spite of strict legal intervention, the market for TV
advertising will not change
• The draft Bill acts according to a substitution principle,
while the TV advertising market works following the income
one
• The two main players will retain their market shares
• No new entrants are expected within this scenario
• Competing media, such as publishing, will not benefit
from released resources
Augusto Preta, TV Advertising as a Giffen Good
SIDE Conference, 10 ottobre 2007, Università Bocconi, Milano
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