Spilling Over and Crowding Out: The Effects of Public Sector/Private Sector Convergence and Competition, in the Provision of Public Goods

This paper develops an original model of product differentiation, to contribute to the debate about the regulation and finance of public television. It goes beyond the conventional analysis in this topic, by showing the spill-over effects that a public broadcaster can have upon commercial broadcasters. It shows how the existence of a publicly-financed, free-to-air channel (such as the BBC) can affect the behaviour of advertiser-financed, free-to-air channels (such as the ITV). In particular, it shows what happens if the output of the public channel converges with that offered by private firms, so that it becomes less distinctive; and or it introduces advertising. These are timely issues, given the extent to which public broadcasters are increasingly criticised for seeking popularity, losing distinctiveness, and in many cases, introducing advertising. These tensions are being felt in the television sectors of virtually every country of the world. To illustrate these and other questions of this nature, we develop a model that clarifies the interplay of the key issues. Moreover, the model has wider parallels to other sectors where services are also offered free at the point of access, but financed by advertising. The most obvious example is the internet. The following pages therefore develop an original model of product differentiation in two dimensions, following the tradition of Hotelling and Cournot competition. The horizontal product attribute is programme quality or type, and the vertical attribute is level of advertising. Broadcasters compete for viewers by altering their levels of advertising. The second novelty of this model is its pricing scheme, which captures the unusual nature of television advertising markets. Channels sell quantities of airtime to advertisers, the unit price of which is determined by the number of viewers. Relative demand therefore plays the role of price in a Cournot model, except there can be different prices for diff