The John M. Olin Center

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36. Ivan Reidel, The FCC's Anti-Payola Enforcement: A Policy at War with Itself, 8/2010.

Abstract: Is it sensible for the Federal Communications Commission to ban songwriters from advertising songs on radio through payola, when Geico and McDonald’s can get more radio spins than Taylor Swift and your top five favorite singers combined without any of the hassles of anti-payola regulations? A robust line of scholarly work in economics, starting with the seminal work of Ronald Coase on the topic nearly three decades ago, has advocated for allowing the type of undisclosed pay-for-play transactions known as payola, generally considered to have benign effects on markets. In the last decade however, anti-payola enforcement has gained significant momentum mostly under the rationale that the practice effects upon audiences a type of deception that lowers audience welfare. Although recent work in economics appears to give weight to the deception concern, for the most part economic analysis and even legal scholars defending the practice have failed to address audience deception in their analyses. In this article I examine the merits of the “deception” rationale—the last and most entrenched line of defense supporting anti-payola enforcement—building on my work on multi-sided media markets. I argue that the flawed understanding of broadcasting, music and advertising markets has obscured the true workings of payola and led regulators to believe, incorrectly, that the practice lowers audience welfare. I show that in the absence of payola, song selection by broadcasters is not primarily focused on pursuing musical talent or maximizing audience utility—as implied by FCC officials—and hence that the banning of this beneficial practice simply forces radio stations to steer away from audience welfare by selecting songs that facilitate the sale of products to particular demographics but that are more weakly correlated with listening utility. I construct a simple payoff matrix to illustrate how profit maximizing stations, in the absence of payola transactions, are likely to further deviate from maximizing audience welfare, reduce program diversity and increase advertising levels suboptimally.