TV Advertising as a Giffen Good Substitution Effect, Income Effect and the Paradox of the Gentiloni Draft Bill

1
TV Advertising as a Giffen GoodSubstitution
Effect, Income Effectand the Paradox of the
Gentiloni Draft Bill

• Augusto Preta
• Università di Sassari
• SIDE Conference 2007, 9-10 novembre 2007
• Università Bocconi, Milano

2
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?

3
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.

4
Fixed Voice as a Giffen Good

• Source Analysys

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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

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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
• 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
• 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,
  allesito dellaccertamento, 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

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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
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The expected effect of Gentiloni Bill
BUT...
Source ITMedia Consulting
9
Effect of TV inflation onto radio
Total adv share and TV share
Radio share
SourceOMD
10
Effect of TV inflation onto radio
Less Radio!
More Radio?? Competitiveness of other
complementary media increases Sat TV Other
analogue Digital Scenario
SourceOMD
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TV Advertising as a Giffen Good

• An increase of TV price causes a reduction of
  Radio revenues, thus proving that

1. In TV advertising income effect prevails against
   substitution effect

1. 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.

PARADOX

• 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

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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

1. To increase the appeal of analogue programmes, so
   to recover losses caused by the digital shift
   through higher audience

1. To increase price (up to 10), so to reduce
   losses from tele-promotions

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Spot Telepromotion
S lt 18
S
20
12
Mediaset
RAI


TP
TP
P
CURRENT SITUATION Quantity (Q0) completely
absorbed. Price (P0) is the most efficient price
for both players, as for available capacity.
P0
D
Q
Q0
RAI
Mediaset
14
Spot Telepromotion (Mediaset)
S
S
18
12
Mediaset
RAI


P
TP
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
D1
D
Q
Q0
Mediaset
RAI
Q1
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The possible effect of Gentiloni Bill
Source ITMedia Consulting
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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