An Economic Theory of Censorship

Abstract

Broadcast regulation can exploit sunk costs as a means of exerting control over the content of broadcast speech to compel favored speech and to suppress disfavored speech. One conspicuous FCC policy that manifests rent extraction is the newspaper-television cross-ownership prohibition. A rent-extraction model of broadcast regulation shows how such seemingly structural regulation can facilitate the government's influence over broadcast content and, indeed, why it is advantageous for the FCC consciously to embed methods of influencing broadcast content within regulations that are likely to be subjected to lessened degrees of judicial scrutiny.

Federal regulators since the early 1930s have sought to control broadcast content. With that experience as prologue, the FCC's sustained inability to provide a persuasive rationale for the newspaper-television cross-ownership rule invites the question whether the rule serves a function that is politically expedient, opaque, and durable but constitutionally illegitimate. Through economic analysis, one can hypothesize such a function.

Though ostensibly a structural regulation of the broadcast industry, the newspaper-television cross-ownership rule increases a broadcaster's vulnerability to political efforts to control content. The rule does so by raising the amount of the broadcaster's investment in his station that is at risk of loss if the FCC does not renew his license. Asset-specific investment by the broadcaster exposes him to the risk that the regulator can influence the broadcaster's content choices by threatening to terminate the revenue stream necessary to recover the portion of the cost of his asset-specific investment that remains undepreciated at the end of the current license term. The regulator's ability to block cost recovery of the broadcaster's undepreciated asset-specific investments thus can provide the lever for government control of broadcast content.

Extreme skepticism is therefore warranted when the FCC represents that the newspaper-television cross-ownership rule has no potential to infringe freedom of speech or of the press. This economic theory of censorship is consistent with the words and actions of several U.S. Senators in 1987 who sponsored legislation subsequently found by the D.C. Circuit to violate the First Amendment rights of Rupert Murdoch. The News America case from 1987 is evidence that enforcement of the rule by the FCC is susceptible to influence by those in government who wish to punish publishers and broadcasters who criticize powerful public officials.

Keywords: censorship, regulation, media

JEL Classification: H00,H11,K0,K2,K23,L2,L22,L4,L5,L51,L9,L96,L98