The Determinants of Economic Rents in Television Broadcasting

• Published date: 01 December 1986
• Date: 01 December 1986
• DOI: 10.1177/0003603X8603100407
• Author: Gary M. Fournier
• Subject Matter: Economics

The Antitrust Bulletin/Winter 1986

The determinants

of

economic rents

in television broadcasting

BY GARY M. FOURNIER*

I.

Introduction

1045

In evaluating the performance of television stations operating

under regulation of the Federal Communications Commission

(FCC), two observations are frequently made: (1) average televi-

sion station profits are persistently high relative to firms in other

industries, and (2) within the industry itself profit rates differ

substantially among stations.IWhen sustained over time, returns

above the cost

of

capital suggest the presence

of

entry barriers

because otherwise they would be eliminated through the attrac-

tion

of

new firms. Moreover, persistent profit differences reveal

Associate Professor

of

Economics, Florida State University.

lOne

study cites a return

of

73010

on the book value

of

tangible

broadcast property in 1969, "more than three times that prevailing

elsewhere in the economy. . . . Returns

of

this magnitude have per-

sisted since the fifties." Roger Noll, Merton Peck, and John McGowan,

Economic Aspects

of

Television Regulation (Washington, D.C.: Brook-

ings, 1973), p. 16. On the other hand, data collected by the FCC

indicate

that

VHF stations averaged a return

of

39.7% on tangible

property in 1977, while

UHF

stations averaged only a 17.3% return.

Moreover, the fact

that

many television licenses remain available at a

zero price indicates that the profitability

of

at least the marginal firms in

the industry is approximately normal.

©1987 by Federal Legal Publications, Inc.

1046 : The antitrust bulletin

that the impact

of

the barriers to entry differs among television

stations.

The regulatory choice of an allocations plan for television and

the nonmarket rationing

of

licenses has inherent potential for

transferring wealth to firms in a strategic position to avail

themselves

of

the benefits. Wealth effects of regulation are

of

course common throughout the economy, but often are difficult

to explain systematically. In allocating television channels, how-

ever, the

FCC

enacted a plan which permits some tangible

hypotheses concerning how the economic benefits were distrib-

uted among the initial recipients of television licenses. These

hypotheses help to explain both the high average profit and

unequal profit among stations as a predictable consequence

of

FCC policy.

Our empirical analysis examines the factors affecting station

profitability

that

are largely determined by spectrum allocation

policies, including channel frequencies (UHF/VHF), network

affiliation, and geographic location, since these factors are be-

lieved to affect the station's costs or its ability to attract au-

diences. While other empirical studies have contributed evidence

on these factors,' this study can be distinguished from others in

several important respects. First, we suggest a refinement in the

method used to form geographic market areas. Under our

method, we can more accurately measure the variables thought to

influence station profitability, and can show these measures have

consequences for the empirical findings. Second, we test for the

first time whether, holding other factors constant, the degree of

seller concentration in the local market has any systematic effect

on station profitability. Our evidence seems to suggest that,

despite its other effects, regulation

of

entry into broadcasting has

2See, e.g., Stanley Besen, "The Value of Television Time,"

Southern Economic Journal 42 (January 1976): 435-41; Stanley Besen

and Paul Hanley, "Market Size, VHF Allocations, and the Viability of

Television Stations," Journal

of

Industrial Economics 24 (September

1975): 167-76; and Franklin Fisher,

John

McGowan, and Drvid Evans,

"The Audience-Revenue Relationship for Local Television Stations,"

Bell Journal

of

Economics

11

(Autumn 1980): 694-708.