An Economic Framework for Retransmission Consent

Abstract

With the rising cost of broadcast programming and the high-profile of “blackouts,” Retransmission Consent has earned a place at the forefront of the modern communications policy debate. To provide a framework under which to evaluate the issue, we present in this PAPER an economic theory of Retransmission Consent. Taking into account the social contract between the government and broadcasters to serve the “public interest” (e.g., provide “local” programming and a “diversity of voices” to as many Americans as possible), we show that the “market” outcome for the license fee under the Retransmission Consent paradigm may not be socially efficient. Broadcast regulation creates a type of positive information externality, and private transactions do not typically account for externalities, meaning the market price for the retransmission fee is theoretically “too high,” both relative to the socially-optimal price and the market price of an otherwise-equivalent cable network. This “spread,” which we do not quantify, is a consequence of a disharmony between the historical and continuing policy of the broadcast social contract and the “market” approach embodied in the Retransmission Consent regime. In light of our findings, we review some of the policy proposals to modify Retransmission Consent. We find that because it is public policy that has caused the conflict, proposals to move to a less-regulated broadcasting market may be sensible, but it remains to be seen whether or not such legislative fixes sufficiently address the efficiency issue revealed by our theoretical model.

Keywords: Television, Broadcasting, Regulation, Retransmission Consent, Cable Television

JEL Classification: L96