One of the more interesting parts of Senator Herbert Kohl’s recent Antitrust interview, in which he also discussed airline mergers, concerned antitrust’s treatment of media consolidation. Here’s what the Senator had to say:
It’s such a very important issue, media consolidation, because it has the potential to reduce if not eliminate the opportunities people have to read and think about differing opinions and independent opinions. If this were to happen, it would have a devastating impact on our society and our democracy. …
[W]e in the government must look to the public interest. We need to be very much on guard to see to it that media consolidation doesn’t happen to the extent that we have a society where the Fourth Estate has lost its spontaneity, its vigor, and its ability to encourage debate and to get people thinking. It’s so important to our democracy.
Multiplicity of independent ownership and vigorous competition is what is essential. If we have just a few companies that control vast portions of the media, I cannot imagine how that’s in the interest of anyone, except of course media owners who would profit greatly.
In sum, I believe it is very important that we in government — including here in Congress and in the antitrust enforcement agencies too — stand in the way of excessive media consolidation. And I understand that this may make some people in the private sector upset because they think maybe you’re going too far. But if you give me the choice between going too far and not going far enough, in the effort to keep the media as independent and competitive as we can, I’d rather go too far than not go far enough.
Senator Kohl’s view, then, is that antitrust should pose a significant barrier to media consolidation. I think he’s wrong.
From the standpoint of consumer welfare — antitrust’s exclusive concern — consolidations of competitors have two primary effects. They can, as Sen. Kohl would emphasize, lead to reduced product quality and diversity and higher prices. When you don’t have to compete as hard for customers because you have fewer competitors, you’re likely to slack a bit and/or charge higher prices to consumers, who have fewer alternative suppliers. Reduced competition permits you to charge prices that exceed your costs, for if competition were vigorous, you’d keep working to improve your product (and thereby win business from your competitors) to the point at which your costs equalled the price you received. Because social welfare is maximized when resources are priced very near their cost, reductions in competition can lead to allocative inefficiency — i.e., wealth losses occasioned by resources being diverted from their optimal uses.
With respect to media consolidation, the concern is that media outlets facing reduced competition will work less hard to provide in-depth news coverage and viewpoint variety. Because reduced competition may permit them to charge the same prices for their shoddier products, we’ll see lower-value leisure substituted for higher-value reporting depth and balance, which would be socially wasteful (allocatively inefficient).
Allocative inefficiency, though, is only part of the consolidation story. Competitor combinations can also result in cost savings, which ultimately benefit consumers. Economies of scale exist when the per-unit costs of production decrease as the total level of production increases. For example, by building enormous factories and utilizing assembly lines, automobile manufacturers can substantially reduce the per-unit costs of building a car. Below a certain scale of production, though, these cost-saving production processes would not be economical. For example, if one needed to build ten cars, it wouldn’t make sense to invest in a costly factory and hire an assembly line of workers who could each focus on one small part of the manufacturing process. A certain scale, then, is needed to justify investment in productive technologies that will, if employed at a certain level, minimize the per-unit costs of production. By consolidating, competitors can reach the scale that permits them to minimize their per-unit production costs. In other words, consolidation can create productive efficiencies.
So, with respect to media consolidation, which effect is likely to dominate: allocative inefficiency occasioned by enhanced market power (e.g., reduced product quality, viewpoint diversity, etc.) or productive efficiency occasioned by the attainment of economies of scale (e.g., reduced costs resulting from the elimination of redundancies, etc.)?
I suspect the latter. To see why, consider why media consolidation is unlikely to create significant allocative inefficiency and why the productive efficiencies it creates are likely to be substantial.
Allocative inefficiency requires an exercise of market power. The producer that controls the market cuts back on production either quantitatively (which will cause price to rise as consumers compete for fewer units) or qualitatively (which will cause the producer’s costs to fall). This reduction in production leads to prices in excess of costs, thereby enhancing the producer’s profits but causing a social welfare loss. But a producer cannot profitably reduce his production — either quantitatively or qualitatively — if consumers can easily turn to alternative suppliers. The upshot is that market power cannot be exercised if significant competitive alternatives either exist or could easily come onto the scene in response to a price enhancement or quality reduction. In other words, if barriers to entry are low, a producer cannot profitably increase price or reduce quality.
So how does this apply to media mergers? The happy fact nowadays is that barriers to entry in the market for news and analysis are virtually non-existent. As evidenced by the fact that you are reading this weblog by six nobodies (OK…one nobody and five prominent academics), practically anybody who feels his or her viewpoint is being marginalized can reach out and share it with the world — and consumers who feel that their perspectives are marginalized by mainstream media can easily find kindred spirits. Think the media are bunch of right-wing fascists? Go visit Daily Kos. Think they’re a bunch of pinko commies? Run to The Corner. Are you out-n-proud with both your homosexuality and your membership in the vast right-wing conspiracy? Then Gay Patriot…the Internet Home for the American Gay Conservative has got you covered. The fact is, there’s hardly a perspective out there from which you can’t find news and analysis, and if you can think of a point of view that’s currently unrepresented, come back soon. In the Internet age, nature abhores a perspective vacuum. Surely, then, Sen. Kohl is off-the-mark when he says that “media consolidation … has the potential to reduce if not eliminate the opportunities people have to read and think about differing opinions and independent opinions.”
How about the productive efficiencies occasioned by media consolidation? They’re probably pretty substantial. The most essential input for any media organization is information, a commodity that is easily transferable and can be used without being depleted. This means that a media organization with multiple outlets needs to produce its most essential input only once. To gather the basic facts about what occurred at the Senate committee hearing on matter x, both the single-newspaper media outfit and the thousand-outlet conglomerate need to send the same number of reporters: one. Indeed, it was a desire to avoid reporter redundancy that led to the creation of the Associated Press, a joint venture that allows newspapers to economize on the costs of information collection by sharing news stories with each other. It is almost certainly the case, then, that media consolidations create substantial productive efficiencies.
None of this implies that there should be no antitrust scrutiny of media mergers. I’m just predicting that most media mergers would pass muster under a fairly applied efficiency analysis. More importantly, I’m disputing Sen. Kohl’s hyperbolic claims that media consolidation “has the potential to reduce if not eliminate the opportunities people have to read and think about differing opinions” and that “[m]ultiplicity of independent ownership” is “essential.”