Ω ¼ u
A
, u
B
ðÞ: 9x 2X s:t:U
A
x
A
ðÞ¼u
A
and U
B
x
B
ðÞ¼u
B
fg
:
Then a “bargaining problem” is given by the pair (Ω, d).
Nash (1950) established there is a unique solution to this bargaining problem that sat-
isfies certain axioms of rational behavior.
53
This was later generalized to account for
asymmetries between the two players, yielding a solution called the Asymmetric Nash
Bargaining Solution (ANBS).
Let τ 2(0, 1) be the “bargaining power” for Player A (with 1 τ being Player B’s
bargaining power) representing the strength of each player in negotiations. The ANBS
of the bargaining game ( Ω, d) is the unique pair of utilities that solves
max
u
A
,u
B
2Θ
u
A
d
A
ðÞ
τ
u
B
d
B
ðÞ
1τ
:
The solution to this problem is called the “split-the-difference rule.” It says that the
ANBS, (u
A
N
, u
B
N
), is given by
u
N
A
¼d
A
+ τ s d
A
d
B
ðÞ
u
N
B
¼d
B
+1τðÞs d
A
d
B
ðÞ;
where s is the “combined agreement surplus,” the (utility) size of the pie to be split.
The solution indicates that each party’s utility from the bargain depends on three fac-
tors: (1) their threat point, d
i
; (2) the “incremental surplus,” s d
A
d
B
, i.e., the surplus
the parties could earn from an agreement above and beyond what they could earn in the
absence of the agreement (i.e., the “size of the pie” to be split); and (3) their bargaining
power, τ.
In addition to satisfying reasonable axioms about agent’s behavior,
Rubinstein (1982)
later established that this ANBS solution was also the unique solution to a model of
“alternating offers” that closely resembles how bargaining happens in practice. In this
case, each party’s bargaining power (τ or 1 τ) could be related to how patient each
was in negotiations.
54
Horn and Wolinsky (1988) extended the bilateral monopoly bargaining solution to
that of bilateral oligopoly. This is important in television markets because the outcomes
of bargains are interdependent: negotiations yielding a low affiliate fee paid by one dis-
tributor to one channel impact the profits made by other distributors (and channels).
The equilibrium concept they introduced was a “Nash Equilibrium in Nash
Bargains,” or “Nash-in-Nash.” Each negotiating pair reaches an agreement conditional
on all other agreements (i.e., pair-wise Nash Bargaining) and, in equilibrium, no pair
53
These are (1) Invariance to Equivalent Utility Representation, (2) Pareto Efficiency, (3) Symmetry, and
(4) Independence of Irrelevant Alternatives (IIA).
54
Where patience was measured by the rate at which each party discounted future profits, with lower
discount rates corresponding to higher bargaining power.
307
The Economics of Television and Online Video Markets
wants to change their agreement given all other pairs’ agreements (i.e., each pair-wise
agreement is part of a Nash Equilibrium).
55
The structure of the solution for each bar-
gaining pair nonetheless follows that for bilateral monopolists described above.
7.4.2.2 Bargaining Empirics
Crawford and Yurukoglu (2012) (hereafter CY), building on this theoretical literature
and the empirical work of
Ho (2009), construct an empirical model of demand, pricing,
bundle choice, and bargaining to estimate bargaining parameters between channel con-
glomerates and large pay-television distributors in the US pay-television industry.
CY assume that the input costs (affiliate fees) paid by distributors to channels are the
outcome of bilateral negotiations between upstream channels, or channel conglomerates,
and downstream distributors that meet and negotiate bilaterally in a separate and simul-
taneous manner. Following industry practice, they assume distributors (Multiple System
Operators or MSOs) negotiate on behalf of all their component systems and channel con-
glomerates bargain on behalf of their component channels. They bargain à la Nash to
determine whether to form an agreement, and if so, at what input cost. The ultimate
payoffs are determined by downstream competition at the agreed-upon input costs. Fol-
lowing industry practice, CY assume that the agreements between conglomerates and
distributors are simple linear fees of the form $X per subscriber per month.
CY estimate that most bargaining parameters are between 0.25 and 0.75, discouraging
models that assume take-it-or-leave-it offers on the part of either channels or distributors.
They further estimate that distributors generally have higher bargaining parameters than
channel conglomerates for small channel conglomerates (e.g., Rainbow Media or the
content division of Comcast), but that the situation is reversed for large channel con-
glomerates (e.g., ABC Disney and Time Warner).
56
Among distributors, small cable
operators and satellite providers have slightly less estimated bargaining power than large
cable operators. They also find that bargaining is an important factor in determining what
outcomes would be in a world where distributors were forced to offer channels à la carte,
a topic I discuss further at the end of this section.
7.4.3 Barriers to Entry
As noted in Chapter 1 of this volume, media markets are generally characterized by high
fixed costs, preference heterogeneity, and advertiser support. One feature that
55
Like Rubinstein (1982), Collard-Wexler et al. (2012) similarly specify an alternating-offers representation
of the interdependent bargains inherent in bilateral oligopoly bargaining.
56
In the period CY study and for the 50 or so largest cable channels in their analysis, Rainbow Media owned
AMC and WE: Women’s Entertainment, Comcast owned E! Entertainment Television, the Golf
Channel, and Versus, ABC Disney owned ABC Family Channel, Disney Channel, ESPN, ESPN2, Soap
Net, and Toon Disney, and Time Warner owned the Cartoon Network, CNN, Court TV, TBS
Superstation, and TNT.
308
Handbook of Media Economics
distinguishes television from other media markets are the magnitudes of the fixed costs
and that they are often sunk. This introduces important barriers to entry in both the
upstream (channel) market as well as the downstream (distribution) market.
7.4.3.1 Market Power in Wholesale (Programming) Markets
As evidence of these fixed costs, consider again
Tables 7.1 and 7.2 that report the pro-
gramming expenditure for leading broadcast and cable television channels. The average
annual programming expenditure for even a minor broadcast network is upward of $100
million, with $200 million required for a low-end top-25 cable network. Launching a
channel requires a multi-year programming commitment, as well as administrative, tech-
nical, and marketing infrastructures that can easily push the fixed costs over $1 billion.
Furthermore, most of these costs are sunk: programming investments that prove unpop-
ular cannot be recovered, as cannot many administrative and marketing costs. Further-
more, arranging carriage agreements with leading distributors, a necessary condition for
the success of a television channel, are also expensive and uncertain. All these factors lead
to significant entry barriers and encourage a concentrated upstream market structure.
Table 7.5 presents the ownership pattern of leading broadcast and cable programming
networks in 2013, while
Figure 7.17 displays the share of this upstream industry revenue
that accrues to “Big Media,” “Vertically Integrated Multiple System Operators (MSOs),”
and “Other” owners. The table and figure show that seven firms dominate the produc-
tion of video programming in the US.
57
There are both pro- and anti-competitive effects that could arise from this increased
concentration. Increased firm size may yield economies of scale, greater facility develop-
ing and launching new program networks, and lower costs for investing in and deploying
new programming and services. It may also, however, increase market power in the pro-
gramming market, disadvantaging smaller channels and/or distributors. This has been a
frequent issue discussed in the context of large media mergers like that between Comcast
and AT&T, which created the largest downstream distributor serving nearly 25% of the
US market (
FCC, 2002). Some industry participants argue strongly that increasing con-
solidation is putting smaller distributors at a cost disadvantage in negotiations with chan-
nel conglomerates (
FCC, 2013b).
58
The conventional wisdom is that increased concentration in the distribution market
improves the bargaining outcomes of those distributors, reducing affiliate fees to televi-
sion channels in the programming market. The theoretical mechanisms, however, are
57
Similar patterns of concentration have existed since at least 1998 (SNL Kagan, 2014a).
58
Cox, the fifth largest distributor in the US, argues that the top four distributors exceed all others in terms of
their bargaining power with programmers and this represents one of the most significant competitive
threats that they face. The American Cable Association, an industry association representing small cable
operators, also emphasizes the importance of scale by calling attention to the higher prices paid for video
programming by small cable operators that lack scale economies.
309
The Economics of Television and Online Video Markets
Table 7.5 Concentration in the upstream (channel) market, 2013
Big media companies Total revenue ($ million) Ownership share Vertically integrated MSOs
Total revenue
($ million)
Ownership
share
The Walt Disney Co. Comcast Corporation
ABC 3161 100% NBC 3095 100%
ESPN 8343 80% Telemundo 396 100%
Disney Channel 1459 100% USA 2066 100%
ESPN2 1098 80% Syfy 788 100%
ABC Family Channel 761 100% CNBC 656 100%
History 890 50% Bravo 650 100%
Lifetime Television 884 50% E! 531 100%
A&E 879 50% Comcast RSNs 1427 (c)
Total Top Disney 17,476 14,261 Total Top Comcast 9609 9024
Total All Disney 19,339 15,697 Total All Comcast 12,498 11,255
21st Century Fox Time Warner Inc.
Fox 2660 100% The CW 429 50%
Fox News 1917 100% TNT 2784 100%
FX Network 1137 100% TBS 1817 100%
Fox Sports RSNs 3616 (a) CNN 1094 100%
Total Top Fox 9331 8877 Cartoon Network 832 100%
Total All Fox 11,758 10,801 Time Warner RSNs 545 (d)
Viacom Inc./CBS
HBO/Cinemax 4603 100%
CBS 4241 100% Total Top Time Warner 12,103 11,903
The CW 429 50% Total All Time Warner 13,496 12,787
Nickelodeon 2117 100%
Cablevision
MTV 1366 100% AMC 877 100%
Comedy Central 780 100% Cablevision RSNs 634 100%
Spike TV 651 100% Total Top Cablevisio n 1511 1511
BET 580 100% Total All Cablevision 2193 2193
VH1 569 100% Total vertically integrated 28,187 26,236
Showtime/TMC/Flix 1621 100% Other/Independent
EPIX/EPIX Drive-In 454 33% Companies
Total Top Viacom/CBS 12,809 12,290 Univision
Total All Viacom/CBS 14,949 14,370 Univision 692 100%
Liberty Global Inc.
UniMa
´
s 175 95%
Starz/Encore 1385 100% Scripps
Discovery Channel 1070 100% HGTV 876 100%
TLC 593 66% Food Network 867 69%
Liberty RSNs 376 (b) National Football League
Total Top Liberty 3423 2762 NFL Network 1165 100%
Total All Liberty 4872 4116 Total All Other/Inds 7654
Total big media 50,918 44,983 Total revenue all channels 86,760
Notes: Reported are the revenue and share owned of the largest US broadcast, cable, Regional Sports, and premium programming networks among major multichannel
owners of such networks in 2013. The left panel of the table reports this information for what are often called “big media” companies: Disney, Fox, Viacom/CBS, and
Liberty. The top half of the right panel reports this information for content affiliated with large cable operators: Comcast, Time Warner, and Cablevision. The bottom half of
the panel reports it for all other (i.e., “independent”) owners. Revenue data is from
SNL Kagan (2014a). Ownership data was collected by hand from company stock filings
and industry sources for the research conducted in
Crawford et al. (2015). Within each company, the highest-revenue networks are reported, as well as totals for these
networks and for all their networks. Totals in the Ownership Share column are the same revenue totals weighted by ownership share. Individual RSNs are not reported;
see
Crawford et al. (2015) for the RSN owned by each listed company and their ownership share. Figure 7.17 displays graphically the revenue share of each company among
the total revenue earned by such networks.
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