Are natural monopolies legal

5 The financing of media goods as a cause of market failure In addition to the quality of media goods, different aspects of their financing are often cited as the cause of a market failure. At first glance, these aspects seem to have little in common with subadditivities in media production - as supply-related market failure - and with the collective good character of media goods - as demand-related market failure. In the following part, the first step will be to investigate whether the specifics of the financing of media goods can be used to justify a market failure in a scientifically valid manner. When discussing these seemingly different causes for a market failure, a far-reaching structural equality between the eories will become clear. In a second step, based on considerations on the optimal price setting in terms of welfare economics in the isomorphic individual theories, advertising and tax financing as a regime for the direct financing of television programs will be compared with one another. 5.1 Media - an (in) natural monopoly? 5.1.1 Subadditive costs as a cause of natural monopoly The market for isolated television programs as a natural monopoly a. Subadditivities in media production as the cause of a natural monopoly Subadditivities in the financing of media goods are regularly cited as the first reason for a market failure, and some authors even describe them as the core problem of media. ? It is often argued that, in contrast to ordinary goods and services, with media goods significant parts of the production costs are incurred very early. Already in the creation phase of the media good, a relatively large, indivisible block of fixed costs arises in relation to the variable costs, which are to a high degree specific to the respective good. This block of fixed costs, which cannot be allocated to individual customers in a causal manner, leads to the fact that a large part of the costs before the second, the? In his detailed presentation of the degression of fixed costs in media goods, L speaks of the "core problem of the economic organization of media on free markets". Lud wig (1998), p. 15, analogous to Messmer (2002), p. 85., Doyle (2002), p. 13, Kops (2005), p. 346 f., Kruse (2004a), p. 119 f 118 II. Chapter 5 - The financing of media goods as a reason for market failure The sales phase has already arisen and has "sunk" in the business sense. For example, a television show was completely produced before it was broadcast, and a game was filmed, edited and completed. The costs that are ultimately incurred for broadcasting or selling the goods are usually considerably lower than the production costs, which have already been sunk, as transmission or copier costs. This shows the theoretical reason for a market failure: As a result of the cost structure, concentration tendencies can arise in the relevant market that lead to the sole offer of a supplier, a “natural” monopoly. If the market fails in practice with a natural monopoly, intervention by the state may be required, beginning with the regulation of the market, through a state-secured supply to the completely state-run production of the good. This logic of argumentation can be illustrated in detail using Fig. 5-1, which shows the market constellation in a natural monopoly. The figure shows the course of the average (DK) and marginal costs (GK) on the market for a media good, such as a radio or television broadcast. It is assumed that there are fixed costs in production in the amount of KF is incurred before consumers can be served at the low marginal costs of using GK. The degression of fixed costs along the market volume x, in this case the number of viewers of the program, reduces the average costs DK of the media producer, the provider of the program, over the entire range of his output volume x. Since the item does not have to be produced again when it is broadcast or in the process of copying, there is theoretically no demand that the supplier cannot satisfy after the actual production phase. This - as will be shown - supposed peculiarity of the production of media goods is illustrated in Fig. 5-1. The average costs do not only fall to the point at which further (xe) costs arise due to the exhaustion of all fixed cost advantages, but they decrease with every increase in quantity. Since “sunk costs” are understood in business administration to mean your own costs that have accrued in the past and are no longer relevant for the present. In contrast to other costs, which are only irrelevant in a certain decision-making situation, “sunk costs” can be neglected once they have arisen. Due to the fact that they are related to the past, sunk costs basically do not represent any (necessarily future-related, influenceable) costs, but merely historical expenses. In the theory of natural monopolies as in the collective good theory discussed below, a distinction is made between the The provision and production of the goods differ. As a rule, the only problem will prove to be the provision, since private providers can usually take over the actual production of the goods. The reasons for equating units of measure with users will have to be dealt with in the context of the comparison of the theory of natural monopolies with the collective good theory. See chap., p. 167. These degression advantages in the costs of a television broadcast are not only theoretical, but can also be proven empirically. Cf. Rott (2003), p. 27. 5.1 Media - an (in) natural monopoly? 119 the average costs are asymptotic to the consistently low marginal costs GK that arise for sending or copying per additional unit of quantity. The provider therefore has economies of scale that do not decrease with further inquiries or with a growing output volume. Fig. 5-1: Market constellation in a natural monopoly The curves make two central phenomena of media production clear: First, it is possible for the provider - at least in theory - to increase its income by supplying every potential customer. Second, the wholesale nature of the costs leads to the risk of not being able to cover the xen costs in the subsequent sales phase. If there is a lack of audience response, a critical mass of viewers is not reached and media production as a whole is decent. In order to deal with this risk in an economically viable manner, measures such as risk diversification (e.g. risk pooling of products that are then cross-linked) or risk sharing may be implemented at company level Necessary by investors. If a provider has already started production and sales, i.e. fixed costs of KF have already been incurred, it is just as economically unprofitable from a short-term static perspective as it is economically nonsensical for a second competitor to enter the market and Attracts parts of the existing demand. 120 II. Chapter 5 - The financing of media goods as a reason for market failure If the potential supplier does not have a fundamentally different, cheaper technology, he would have to pay fixed costs of the same or a similar amount before entering the market. It is doubtful whether these costs are offset by the same amount of revenue after the market occurs. In the case of a symmetrical market division, both providers can only distribute their respective block of fixed costs to half of the customers, i.e. realize far lower degression advantages. If the providers set (average) cost-covering prices both in a duo and a monopoly, the competitive situation would lead to a doubling of these prices. Since the marginal costs GK are always below the average costs DK, which therefore fall monotonously, no quantity combination is conceivable in which the quantity produced by a monopolist can be eciently divided between two or more competitors. This makes it clear why this phenomenon is called “indivisibility” in economics: The type of production - mostly the factors or the process used - does not allow the market to be economically controlled in any way desired segment. There is no production volume that cannot be divided up between different suppliers in an economically or economically efficient manner. A “natural” monopoly of the provider is the result of this indivisibility. All cost structures in which a monopolist has a cost advantage over several providers in the production of a certain output volume are generally called “sub-additive” in the theory. In practice, subadditivities do not have to be limited to individual or identical goods, but can also result from advantages in terms of size or combination when offering different products. For example, inter-media synergies arise from the joint production of a single content for different forms of media distribution. A subadditive cost structure in the media sector can also be caused by marketing costs if the offer of a media good (such as a game) is accompanied by a number of additional products (e.g. books, games or merchandising articles). is accompanied. There are also likely to be syn ergy e ects in the joint financing, sale or purchase of rights to media goods. All forms of sub-additivities - in addition to the single-product indivisibilities described and the composite and synergy e ects for several products or for coupled products - can lead to concentration tendencies right through to a natural one - The subadditive cost function is de ned by the fact that the sum of the costs Kn of each supplier n who has a share? N in the total production exceeds the costs of the sole supplier K of this production volume, K (x) < n="" n="" kn(?n="" x)="" mit="" n="" n="" =="" 1;=""> 0.I See Fritsch / Wein / Ewers (1993/2005), p. 184.I 5.1 Media - an (un) natural monopoly? 121 lead a monopoly and thus theoretically be the cause of a market failure. Pure fixed costs of gravity advantages are therefore a sufficient but not a necessary condition for a natural monopoly. In a natural monopoly, the tendency to concentrate competition, ie. H. caused by the company's internal cost structure, not by external growth through company acquisitions or mergers. When interpreting the market model, it should not be ignored that the providers considered compete with one another only on price, because differences in the type and quality of the respective good were abstracted as a result of the approach. Strictly speaking, only for goods that are homogeneous in this way is the conclusion valid that with increasing subadditivities, the number of competitors in the market will decrease and ultimately a sole offer will develop. Since the methodical approach excludes a possibly existing quality competition from the model, it cannot be concluded on this basis - as H - that with the decreasing number of competitors, a decreasing product diversity in the market and the lack of it of programs for minorities. ? In order to assess the quality competition between programs, an extended model is required that at least depicts the quality of the products as a possible competitive parameter for the providers. The later sketched model of H, which spatially maps the quality competition between providers in an intuitive way, offers such a model extension. b. Natural monopoly as a market constellation of supply and demand A central aspect of the economic and political assessment of natural monopolies is often overlooked: Contrary to what the term “natural monopoly” suggests, it is not the purely supply-side phenomenon of the supplier's unique position meant. ? Rather, “natural monopoly” characterizes a market constellation in which competition between different providers as a result of the interplay of supply and demand is impossible. In the natural monopoly, the relevant demand cannot be eciently divided among different competitors. The supplier's monopoly therefore does not necessarily exist for every arbitrary- F / W / E emphasize that economies of scope alone do not create a natural monopoly, as competitors can achieve the same cost advantages through a similar production structure. See Fritsch / Wein / Ewers (1993/2005), p. 189. See Fritsch / Wein / Ewers (1993/2005), p. 187.? See Heinrich (1999), p. 122. ? This is probably the reason why L does not succeed in concretizing the postulated potential market failure despite an extensive analysis of the fixed cost degression. See Ludwig (1998). 122 II. Chapter 5 - The financing of media goods as a reason for market failure Ge production volume, a justification of the natural monopoly only with a view to the supply side - the cost situation of the monopoly - is too short. If the natural monopoly is seen exclusively as a supply problem caused by subaddivities, the significance of demand for the existing monopoly situation remains in the dark. In this sense, a growth in the relevant demand can lead to a development from the natural monopoly if the marginal and average costs are no longer cut by the demand curve in the falling but in the rising range. If demand grows beyond the point at which the demanded quantities can be split up at the same cost, the market is viable enough for two, not just one, suppliers. In contrast to other markets - for example telecommunications - an evolution from the natural monopoly is ruled out for media goods such as television broadcasts, since virtually every conceivable demand can be satisfied by a single provider and cost advantages are not exhausted. Instead of overcoming the natural monopoly, the fixed costs incurred would only be doubled with additional market access. If only individual TV programs are viewed, the impossibility of growing out of the natural monopoly results directly from the subadditivities of the production of the media good, possibly accompanied by indivisibility in the distribution process. c. Ine ciencies and welfare losses in the natural monopoly The negative social effects of a natural monopoly can be illustrated using the market constellation of supply and demand. In Fig. 5-1 - besides the already discussed cost situation of the provider - the demand N for the media good is taken into account on the basis of the individual willingness to pay that the customer has. The demand curve intersects the course of the marginal costs for the price pM and the quantity xM, which on a normal competitive market would be the equilibrium between the large number of suppliers and buyers. If the sole supplier in the natural monopoly lowers its price to this level, the result would be a decit of DK - GK per item over the entire quantity xM (area highlighted in gray). An unregulated monopoly will not have this de cite, as he can draw off the existing willingness to pay of the customers in various ways through the structure of prices and quantities. The sole position For example, there will be an evolution in the coming years from the current monopoly of German Telekom for local network telephony. See Schröder (1999). See Owen / Beebe / Manning (1974), p. 16. 5.1 Media - an (in) natural monopoly? 123 of the provider does not have to manifest itself in setting a single monopoly price. Different types of price differentiation are available for this, as is a uniform price that is equally valid for all consumers. For the established provider, the advantage of being able to set prices arises from the cost structure, which - according to assumptions - applies to him as well as to other providers. Due to the high xen costs, which have sunk after the market entry, i.e. are no longer relevant for a decision, the long-established provider can threaten to lower the price to the level of the - very low - marginal costs when new competitors enter. At this price, every new supplier inevitably incurs a de cite that penalizes possible market entry.If the price threat from the old supplier can successfully prevent any competition, including potential competition, then he has market power and will act as a de facto monopoly. Without a sanction from potential competitors, the monopolist is now in a favorable position for him to be able to enforce the maximum profit or prices unhindered. In the simplest case, the monopolist foregoes di erentiated prices and will set a uniform price on the market in accordance with the C price rule - marginal revenue GE equals marginal costs GK - in order to maximize his profit. The effective supply of the monopolist will consequently not consist of a supply curve, but only of one supply point. Correspondingly, for example, a television station financed directly by viewers, if it has an access-protected natural monopoly, can increase the price achievable on the market and the marginal revenue by reducing the market volume. The C quantity xC thus leads to an offer price of pC. With average costs of KC = DKC, the result is a monopoly profit per piece of pC - DKC over the amount xC. This combination of prices and quantities is unfavorable in terms of welfare economics. The supply is artificially reduced by the monopoly in order to enforce the monopoly price, which is undi ered here. There is a price and a quantitative inciency compared to the competitive situation. With a price pC, additional customers could be served at those low marginal costs GK that their additional consumption causes economically and economically. Setting the C price consequently excludes all buyers whose willingness to pay lies between the market price and the marginal costs. If the provider - in this case the television broadcaster - were obliged by the state to serve these customers by means of a uniform price, a reduction in this marginal cost price would again be inevitable. This created a paradox: the supposedly welfare-optimal price means that the product is not offered at all. A price that ensures availability, on the other hand, excludes customers whose willingness to pay is above the economic marginal costs of consumption. In the 1940s, this paradox led to an intense debate between well-known economists such as H H, A ?? P. L, R F and R C led. We shall come back to this in connection with setting the prices for a collective good that is probably optimal for the journey. The extent to which consumers are disadvantaged by the market power of the provider can be quantified using the market scheme described. The The consumer's “pension” - the difference, also known as the M -D area, between the maximum willingness to pay and the market price across all customers. On the basis of the increase or decrease in consumer surplus, the effects of market changes can be read off as better or worse performance of the demand. In the market under consideration, a price in the amount of the marginal costs would be optimal for the consumers, since they would receive the entire area above the marginal costs up to the demand curve as consumer surplus. This consumer surplus is, however, purely active, since the offer of the good causes a decline at marginal cost prices, i.e. is not provided by the provider. The supplier can only provide the goods if he can obtain a price that covers the costs (average costs). This price pD is associated with a quantity xD at which, on the other hand, far fewer consumers are excluded, whose willingness to pay is above the marginal costs of consumption. Compared to the C price solution, the consumer surplus at this price improves by the area pCBApD. Compared to the monopoly price, not only those additionally served, but all customers would experience a better position. The problem with the position of the natural monopoly is not only the strong competitive position and the resulting monopoly rent, but also the inevitable incidences resulting from the indisputability of the market. Coase (1946/1990) provides a summary of this debate. For the welfare-optimal price setting for a collective good, see Chap. e., P. 179. This instrument for assessing different market situations was first referred to by A? - M as consumer surplus, but goes back to J D's approach from 1844, which M picks up on. Clearly in front of M - D uses the “benefit that remains with the customer” to assess the welfare effects of public projects and state monopoly supervision, but still in diagrams showing the quantity, not as in the M tradition Price, show on the abscissa. Using these representations, D already derives statements about the regulation of natural monopolies. M s achievement was to expand the approach and to reveal the associated methodological problems. Cf. Dupuit (1844/1952), p. 106, Dupuit (1849/1962), p. 22, Marshall (1890/1920), p. 103 f. Sohmen (1976 / 1992), p. 404. 5.1 Media - an (in) natural monopoly? 125 actual or potential competitors. These incidences are by no means specific to natural monopolies, but generally arise as a consequence of a decrease in the intensity of competition. Even setting an undi erentiated monopoly price via the ratio of the supply volume is obviously inezient, since it unnecessarily excludes buyers from consumption. This shortage of supply occurs in every monopoly if the sole supplier demands a unit price from the buyers. In the natural monopoly, however, the reduction in quantity or the number of customers excluded is comparatively high due to the development of marginal costs. In addition to price and quantitative ineziency, the lack of competitive pressure will also lead to changed behavior on the part of the sole supplier in other dimensions of the offer. It is to be expected that the type and quality of the offer will be less in line with the consumers' preferences (qualitative ine ciency). The incentives to keep production costs low or to realize potential cost savings are also reduced. The offer is therefore too expensive compared to the market competition. In this form of cost inecience does L? empirically the most important source of welfare losses due to monopolies, which is why he describes it as “X-In eciency” as opposed to price and quantitative incidence. Wohlfahrt's eco nomic mix should therefore cause a monopoly provider on the television market to incur price, quantitative, qualitative and cost inconsistencies. It is to be expected that the last two incidences will become even more pronounced over time, since further dynamic incidences occur in addition to the static ones. The analysis of these statistic, especially the dynamic incidence, however, requires an expanded approach compared to the previously comparative-static analysis, as provided by the presented model of a natural monopoly. If consumer sovereignty - as explained in the introduction - is understood as a functioning principle-agent relationship between the consumer and the provider, ineziencies mean a far-reaching disruption of this relationship. The provider as agent then no longer pursues the interests of the principles without restriction, but deviates from them in terms of the quantity offered, the quality, the price and the costs incurred. In the model described, at least the problem of quantitative efficiency, i.e. the exclusion of potential consumers, can be easily solved. Since these customers have a willingness to pay above the marginal costs of their consumption, there are considerable incentives for the monopolist to serve them too. These consumers are only excluded from the previous C price setting in order to have a critical view of this via the cf. Leibenstein (1966), p. 392, Leibenstein (1973), p. 765, and Stigler (1976). 126 II. Chapter 5 - The financing of media goods as a reason for market failure Artificial rationing of the quantity to enforce the uniform, undifferentiated price. In the case of differentiated prices, this rationing is only necessary to a lesser extent; in the case of complete price differentiation, it is no longer necessary, which is why quantitative indices no longer appear. Instead of a unit price for all customers, each customer pays an individual price if the price is fully di erentiated. The monopolist's e ective supply no longer corresponds to a point, but to a curve again, although it coincides with the demand curve. Since the respective price then corresponds to the willingness of consumers to pay, those customers whose willingness to pay exceeds the marginal costs are no longer excluded. In the case of completely differentiated prices, all customers are served up to the amount xM, i. H. By avoiding quantitative inconsistencies, an economic optimum is apparently achieved. On closer inspection, this solution turns out to be of little benefit to consumers, although every potential customer is served. This is already indicated by the monopolist's incentives to operate price di erentiation himself in order to achieve a higher profit through price discrimination. Instead of acting as a trustee for the principals and differentiating prices exclusively to cover fixed costs, the sole supplier uses its market power to achieve its own goal of a monopoly pension. This pension is a maximum in the case of complete price discrimination, since here the price to be paid by each customer corresponds to his individual willingness to pay and the entire consumer pension disappears in favor of the producer pension. ? Although the provision of the good is ensured by the completely differentiated prices, consumers are now indi erent between consumption and non-consumption. If welfare is assessed on the basis of consumer surplus, the supply of the good does not mean that consumers are better off. The achieved solution to the problem of quantitative ineziences cannot be P -optimal, since each individual customer could be served at the marginal costs of his consumption instead of in the amount of his payment. This will have to be dealt with in more detail in connection with the financing of media as collective goods. In contrast to perfect price differentiation, other pricing rules promote welfare more from the consumer's point of view. This is especially true for prices according to In avoiding quantitative inconsistencies, S? the essential advantage of non-profit-oriented, public-law providers, since their social objective would ensure supply to previously excluded customers. In view of the incentives of a private-sector monopoly to serve other customers who are excluded from a C price through price di erentiation, this argument should be invalid. See Seufert (2005), p. 372.? Going back to P, the division of consumers according to their willingness to pay is called the first type of price discrimination. Cf. Pigou (1920/1952), p. 278 f.5.1 Media - an (un) natural monopoly? 127 the R? Rule, the welfare optimal price under the restriction of the cost-covering provision of the good. ? R? Prices ensure an optimal offer in the natural monopoly. With the help of R? Prices, various pricing rules can be analyzed in terms of welfare economics, which is why they will also be relevant in connection with the collective good properties of media, which are another reason for a market failure in the narrow sense related to the theory of natural monopolies. d. Disputability of the natural monopoly from the point of view of suppliers and buyers 1) Market barriers for competitors and the risk of ruinous competition If the sole supplier sets a uniform monopoly price and even differentiated prices, the resulting monopoly rent makes market entry attractive for potential competitors. The reason for this price-setting scope was previously based on the cost situation in the natural monopoly. In theory at least, the monopoly can signal at any point in time that if its monopoly position is threatened, due to the sunk in costs, it can react by lowering prices to the level of marginal costs. For him, only the low marginal cost price is relevant as the lower limit price; every price above this contributes as a unit profit to cover its fixed costs, which are no longer relevant for decision-making. The more potential competitors have to expect that the long-established provider will quickly lower the price to the marginal cost level, the less attractive it will be for them to enter the market. If the price in competition actually drops to the level of the marginal costs, every new provider has a de-cit, since the xen costs are still relevant for him before market entry. The high monopoly prices and rents of the established sole supplier are therefore unattainable for new competitors, which is why they theoretically do not have a disciplinary effect on the monopoly. Whether the market is also practically protected from entry, i.e. the sole supplier does not actually have to reckon with market entry by competitors, cannot be answered adequately on the basis of the short-term cost situation. On the one hand, one must ask how credible the monopolist's price threat is to new competitors. Due to the cost situation in the natural monopoly, every provider who can retain more customers has an advantage. Succeeds ? See Ramsey (1927). An application of the R? Price rule to natural monopolies can be found in Rodi (1996), p. 93. See chap. e., P. 179. 128 II. Chapter 5 - The financing of media goods as a reason for market failure The new competitor can, under certain circumstances, oust the established monopoly and himself to the Become a sole supplier. On the other hand, an analysis of the market entry barriers that exist in the medium to long term is required, which, however, does not result from subadditivity but from the irreversibility of costs. In contrast to xen costs, the level of which does not vary with the output volume or the number of customers, the reversibility of costs describes the extent to which these can be “reduced” by exiting the market. For new competitors, irreversibilities represent barriers to market exit that they have to take into account when entering the market. Significant irreversibilities seem to exist in the case that resources are specific to the respective use and their current value IAt =? in an alternative use such as exiting the market. According to W, a speci c resource is characterized by the fact that its value consists largely of a specific quasi-rent for the respective use, the loss of which in the next best use IOt =? is to be expected. Thus the specificity of an investment is related to the concept of sunk costs. In terms of the history of ideas, W adopts an approach from K / C -? / A, which in turn take up M s concept of the quasi-pension. W s use of the quasi-pension to assess the risk of an investment is criticized by P as being too vague and incorrect in terms of decision-making theory. According to this, an investment, in this case a market entry, can be considered even if a later necessary exit from the market means the loss of a high quasi-pension (IAt =? >> IOt =?). In decision-making theory, according to P, it is not the impending loss of the quasi-pension that is decisive, but the development of the opportunity, i.e. the investment value after market exit IOt = ?. If this value is strictly speaking, the costs of entering the market have sunk in the business sense, i.e. actually historical expenses without any decision-making relevance. In the theory of contestable markets, see B / P? / W sunk costs as irreversible costs that cannot be "eliminated" even if production is completely stopped. Before entering the market, these costs, which will sink in the future, are not only relevant to the decision, as they later develop a binding effect on the current use. Since the expected falling costs are offset against the active revenues upon market exit before market entry, they serve as an indicator for the factual expected loyalty.The amount of these irreversible costs varies depending on the possible opportunities for leaving the market. In this sense, the use of the concept of sunk costs in economic competition theory goes beyond the concept of sunk costs in business cost accounting. See Baumol / Panzar / Willig (1988), p. 280. See Williamson (1985/1987), p. 55 f. See Williamson (1989/1996), p. 59. See Klein / Crawford / Alchian ( 1978), p. 298. Cf. Pies (1993), p. 234 f., Pies (2001), p. 106 f. 5.1 Media - an (un) natural monopoly? 129 compared to the status quo ISt =? improved, the investment in W may be specific due to its high quasi-pension, but it is in any case advantageous (IOt =?>