Optimal Regulation of the Media Industry

Abstract

This paper studies how a society should optimally organize and regulate its media industry. First, a political economy model of the media industry is developed. Second, a constitutional stage is considered and the optimal regulation of the industry is deduced. A simple but powerful normative message is derived from this analysis. The media should not be treated as a standard industry. Even if it operates under increasing returns to scale, this is not enough to conclude that the best solution is a media monopoly. Unless media productivity is extremely low, the optimal regulation is either to encourage entry with subsidies or to impose moderate entry limitations. It is worthwhile to pay the extra costs associated with several media companies obtaining and reporting the same news because competition avoids media capture and the corresponding dissipation of resources in the political system.

Keywords: Media, Capture, Principal-Agent, Optimal Regulation

JEL Classification: D43, D61, D78