Price discrimination in political advertising: Evidence from the 2012 presidential election

• DOI: http://doi.org/10.1111/1756-2171.12335
• Published date: 01 September 2020
• Date: 01 September 2020

RAND Journal of Economics

Vol.51, No. 3, Fall 2020

pp. 615–649

Price discrimination in political advertising:

Evidence from the 2012 presidential election

Sarah Moshary∗

In 2010, the US Supreme Court loosened contribution limits to Political Action Committees

(PACs), sparking fears that big donors could exert outsize influence on elections by funding PAC

advertising. However, PACsare potentially handicapped when buying advertising time; data from

2012 reveal that PACs pay 32% above regulated campaign rates. I estimate a model of demand

for advertising by PACs, exploiting the misalignment of state and media market borders to ad-

dress price endogeneity. I find that prices reflect willingness-to-pay for viewer demographics

rather than media bias. The estimates further suggest that network-owned stations discriminate

more successfully than do local affiliates.

1. Introduction

To limit the influence of wealth in politics, many democracies regulate how politicians

raise money and how they spend it—in particular, how they spend it on advertising (Karanicolas,

2012). As an example, the UK bans paid political advertising outright, whereas Belgium, France,

and Ireland allow paid ads only in the print media. These advertising bans leave candidates with

few spending opportunities, and consequently, these countries place little emphasis on campaign

finance regulation. In contrast, the United States has historically adopted the converse strategy:

imposing few limits on advertising, and instead restricting individual and corporate political giv-

ing. An explicit goal is to give voice to diverse political ideologies by restricting how much any

one individual can spend. In its 2010 Citizens United ruling, the US Supreme Court dramati-

cally altered the American regulatory approach by easing contribution limits for Political Action

Committees (PACs), groups that are separate from official campaigns but share the same aims.1

PAC funding skyrocketed to $1.3 billion in the subsequent 2012 election, spurring fears in the

popular press that a few small donors were buying victories.2But the importance of Citizens

∗The University of Chicago Booth School of Business; sarah.moshary@chicagobooth.edu.

Moshary would like to thank Glenn Ellison, Nancy Rose, Paulo Somaini, Sanjog Misra, and Aviv Nevo for invaluable

help and advice throughout this project. She gratefully acknowledges support from the George P. and Obie B. Shultz

Dissertation Fund.

1I use PACs as an umbrella term for outside spending groups, including traditional PACs, super PACs, and 501(c)

organizations. Restrictions on donations to certain kinds of PACsremain, but there are no restrictions for Super PACs,

which account for 50% of spending in 2012.

2Spending estimates come from OpenSecrets.org. An example headline is The New York Times’ Editorial on

August 4, 2014, “The Custom-Made ‘Super PAC.”’

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United hinges on how effectively PACs spend these new funds, which depends on the TV sta-

tions that sell airtime to PACs.

Rather than post prices, stations negotiate contracts separately with individual advertisers,

giving scope for them to tailor prices to each Political Action Committee. A station that slashes

prices for a particular PAC essentially donates hundreds of millions of dollars, and might there-

fore shift election outcomes. In light of this concern, the Federal Communications Commission

mandates that TV stations report on transactions with political groups, providing detailed infor-

mation beyond what researchers typically observe about advertising rates. This article uses FCC

data from the 2012 Presidential Election to document price discrimination in TV advertising

markets. I then develop an approach to estimate the supply and demand for political advertis-

ing, and demonstrate its usefulness in understanding the factors that drive price dispersion and

ultimately mediate access to the electorate.

A first finding is that PACs pay 32% markups above campaign prices. Campaign rates are

regulated by Congress, which requires that TV stations charge candidates the lowest rate that

any advertiser (political or otherwise) receives for comparable airtime. These lowest unit rate

rules (LUR) come into effect 60 days before a general election, but they do not apply to PACs.3

Because PACs pay higher prices than campaigns, they are less effective than the spending figures

might suggest; each PAC dollar is worth only 68 cents of campaign funding.4

Although all PACs pay high rates for airtime, the average price paid per spot is higher for Re-

publican PACs ($1,263) compared to their Democratic counterparts ($982). Although this simple

comparison confounds price and composition (because the two groups typically advertise to dif-

ferent audiences), the price gap remains even in a comparison of indistinguishable ad purchases.

When both advertise on the same station and at the same time of day, Republican PAC prices are

approximately 12% higher than Democratic PAC prices. This finding confirms suspicions in the

literature about station price discrimination (e.g., Blumenthal and Goodenough, 2006), but such

behavior is particularly concerning in the political arena where inequalities in price could lead to

asymmetries in political speech and ultimately hamper electoral competition. In this article, I es-

timate a model where stations and PACs engage in bilateral Nash bargaining (as in Crawford and

Yurukoglu, 2012), and use this model to decompose price dispersion into two components: taste

and bargaining ability, where the latter refers to a PAC’s ability to capture the surplus generated

from advertising.

In the model, stations engage in separate negotiations with Democratic and Republican

PACs, which differ in their willingness-to-pay for viewer demographics. Each station’s objec-

tive is to maximize profits, rather than to give cheaper rates to the party that its owner supports

privately. To motivate this assumption, I examine whether station owners’ political preferences,

measured using donations data from the Federal Election Commission, align with prices. Dona-

tions do not correlate with preferential pricing, indicating that media bias is unlikely to motivate

price disparities. The model instead focuses on cost, willingness-to-pay, and bargaining ability

as potential forces in price formation.

Consistent with classic price discrimination, I find that program-level willingness-to-pay is

positively correlated with observed prices. The key ingredient for this comparison is an estimate

of Democratic and Republican PAC demand for viewer demographics. PACs might prefer dif-

ferent demographics depending on whether they employ a get-out-the-vote strategy (target their

base), a persuasion strategy (target swing voters), or a vote suppression strategy (target their op-

ponent’s base).5Although it is tempting to infer valuation based on ad placement—that a PAC

values the group to whom it advertises most—this confounds PAC preferences with other market

forces. As an example, African Americans watch more television than Whites, so they wouldsee

3Lowest unit rate rules (The FederalElection Campaign Act of 1971.bl) also come into effect within 45 daysof a

primary election. Stations are required to give equal access to all campaigns at all times, precluding price discrimination

even outside of the LUR window.

4For example: Peters,Confessore, and Cohen (2012) and Bykowicz (2012).

5See Nichter (2008) for a complete categorization of strategies.

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more advertising even if PACs aired ads at random. To identify PAC preferences, I exploit the

sensitivity of political demand to state borders, which provides exogenous variation in price. This

strategy employs variation across media markets in the number of residents whoreside in uncon-

tested states. Political advertisers should be insensitive to the presence of uncontested viewers

because their votes cannot influence the election outcome. In contrast, commercial advertisers

ought to value these viewers, and their demand should drive up the price per contested viewer. I

can therefore infer PAC price sensitivity from the difference in purchasing between mismatched

and well-aligned markets. To infer willingness-to-pay by demographic group, I examine how

this price sensitivity varies with the distribution of demographics in the contested (politically

relevant) state. Results indicate that Republicans and Democrats target audiences beyond swing

voters, providing scope for stations to discriminate between the parties.

A second consideration in price formation is the opportunity cost of airtime, which con-

stitutes a station’s disagreement payoff in the event of bargaining break down. Because omitted

costs could drive a correlation between price and willingness-to-pay, I control for cost using data

on the lowest unit rates paid by official campaigns. These rates can be thought of as the outcome

of negotiations between the station and a third-party commercial advertiser, whose identity is

unknown. The rates therefore contain information both about opportunity cost and the marginal

commercial advertiser’s WTP, for which I proxy with DMA, total viewership, and daypart fixed

effects. The intuition behind this approach is similar to Hausman, Leonard, and Zona (1994),

where the price of a product in other markets instruments for its price in the focal market.

Estimates of the bargaining model indicate that television stations wield a modest amount

of bargaining power in their dealings with PACs,allowing them to price discriminate in instances

where PAC valuations diverge.The results also point to two sources of heterogeneity: first, across

parties, as Democratic PACs appear to capture a larger share of surplus than do Republican PACs;

and second, across ownership types, as network-owned stations appear to capture a larger share

of surplus than do local affiliates. The differences across parties and television stations is eco-

nomically meaningful: lesser bargaining ability accounts for approximately 31% of Republican

PAC expenditures, and enhanced ability accounts for 43.5% of network-owned station revenues.

These estimates suggest that loosening the cap on cross-market broadcast TV ownership, cur-

rently set by the FCC at 39% of the US population (see FCC Broadcast Ownership Rules6),

could meaningfully increase the price of political advertising. Because my results indicate that

Republican advertisers disproportionately value local-affiliate viewership, they also suggest that

loosening caps could increase price dispersion.

This article contributes to an empirical literature studying the drivers and returns to price

discrimination, including Shepard (1991), Goldberg (1996), and Scott Morton, Zettelmeyer, and

Silva-Risso (2003), and also more recent articles that estimate bargaining models to understand

price dispersion, such as Grennan (2013). Typically, bargaining models require estimates of

downstream demand to inform upstream bargaining payoffs (e.g., between cable companies and

content provers, as in Crawford and Yurukoglu, 2012, or hospitals and insurance companies, as

in Ho and Lee, 2017). In contrast, this article adopts a revealed preference approach to recover

bargaining payoffs for stations and PACs. I first estimate political advertiser demand for airtime,

and then estimate the parameters of the bargaining model. A feature of this approach is that it

permits testing of the bargaining model, allowing researchers to assess modeling assumptions.

This approach is somewhat unusual in the study of advertising because it uses data on prices

rather than quantities. A central focus of this literature is on estimating the return to advertising,

as in Gerber et al. (2011), Gordon and Hartmann (2013), and Spenkuch and Toniatto (2018), who

link advertising to vote shares. The first, in particular, highlights the potential for advertising to

affect election outcomes, and thus the importance of understanding the market for political ads.

In contrast to these works, this article does not employ vote shares at all, and instead recovers

advertiser beliefs about ad efficacy from the response of purchasing to a price shifter. To provide

6Availableat www.fcc.gov/consumers/guides/fccs-review-broadcast-ownership-rules.

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