Markets are where media function. They also provide the foundation of economic analyses, providing the context and mechanisms for explaining and predicting media and audience behaviors. Economists define markets broadly as any context in which goods and services are offered and purchased. Markets are thus defined by a set of goods or services, the set of firms and individuals that offer them for trade (supply), and the set of firms and individuals that seek to acquire them (demand, or in media terms, audiences). The context of markets includes their scope (reach) and a variety of structural features, including the particular attributes of media technologies and organizations, their products, and their distribution systems. Law and policy often play a role in defining markets, by influencing or even defining some of those structural features and costs.
Being able to define media markets, and to understand how particular markets function, is critical to understanding, explaining, and predicting media operations. Being able to discern and predict shifts in markets and consider their implications is similarly critical to media survival in an increasingly competitive environment.
Markets In Economics
Markets are at the heart of economic theory and analysis, where supply and demand functions interact to determine market outcomes. Supply functions are defined in terms of the willingness of producers to offer goods at various prices. Similarly, demand functions are defined by the willingness of consumers to purchase products at various prices. A critical first step in looking at markets is to clearly define them. There are various ways to define or characterize economic markets.
Markets can be defined in terms of the good, defining supply as those offering the good, demand as those interested in acquiring the good, and the market scope delimited by the ability to actually engage in the exchange. Where goods are highly differentiated, as in many media markets, the market is more appropriately defined by the range of close substitutes. Substitutes are defined as products that consumers see as potential alternatives, and might choose to consume in lieu of the primary good. For example, one could define a market by a specific good, say copies of today’s edition of a specific newspaper. Or one could define the market as all newspapers available locally, or in terms of media outlets offering current news, depending on how close a substitute is being considered.
Markets can be defined geographically, by the area in which the product is distributed, and made available for acquisition. This can delimit those considered as viable suppliers and consumers for a particular product. For some media, like broadcasting, this can be determined in large part by policy, through licensing and designation of technical standards. For others, like cable, it can be constrained by licensing and the area covered by the physical distribution networks. For other media, market scope is more flexible, and can be influenced as producers search for audience and the costs of reaching various potential market areas change over time.
Markets can also be somewhat defined in terms of various barriers to entry, on both the supply and demand sides. Conditions may exist where some potential suppliers or demanders are unable to participate in the market, restricting the scope of the particular market. Barriers can exist in the form of high costs of entry, in terms of the lack of access to required skills or complementary products (as with the digital divide), or through law and policy limitations (such as limiting the availability of required licenses, as in broadcasting, cable, and telephony). In most cases, markets are defined by some combination of product range and geography. In some cases these are heavily influenced by regulatory actions and various entry barriers.
Once defined, market operations can be addressed. Market operations, and the behaviors of those on the supply and demand sides, are considered largely through the interaction of supply and demand curves. Defining the market delimits whose supply or demand functions get aggregated. At that point, structural factors that may affect valuation (and thus supply and demand curves), or can directly influence the movement of supply or demand curves, need to be considered.
A number of factors can impact on valuation. Incomplete information about the product and its potential utility (a common issue with media and information goods) can create uncertainty and reduce perceived value. Law and policy can influence value by adding costs through mandates or taxation, or can reduce them through various forms of subsidy. The presence of substitutes or complements can influence valuation and impact on supply and demand shifts. Substitutes provide alternative outlets for satisfying demand, and can moderate the reaction of demand curves to price changes. Complements refer to other goods whose use and value are linked to the primary product. They include situations where use of one good requires use of others, or where use of one affects the perceived value of others. Changes in one market have ripple effects in supply and demand for complementary goods.
General market structure can influence market behaviors by providing differing potentials to influence supply or demand. Four basic types of market structures have been identified: perfect competition, oligopolistic, monopolistic, and monopolistic competition. These structures differ primarily in the degree to which each provides a degree of market power (the ability to influence prices) to suppliers or consumers. A perfectly competitive market is defined as one where an undifferentiated good is offered by a large number of suppliers to a large number of potential consumers, with no barriers to entry. In the absence of market power, market equilibrium determines prices, theoretically at a socially optimum level. Markets are rarely perfect, though, so it is more typical to think in terms of competitive markets, defined as situations where neither potential suppliers nor potential consumers have any meaningful ability to influence supply and/or demand curves (and thus prices) in the long run.
The other three structures vary in terms of the degree and source of market power. Market power permits some control over prices in order to extract any consumer surplus in the market. This is generally seen as socially harmful, and has widely resulted in a range of antitrust regulations that attempt to limit the application of monopoly power. In a monopolistic market, there is a single supplier (or purchaser) of the good. Being a single source allows the monopolist a high potential for market power through its ability to control supply or demand. Oligopolistic structures exist when a few sources dominate supply or demand. Their contribution to market supply or demand is large enough that their decisions influence (although do not completely determine) market levels, giving them a degree of market power. Oligopolistic structures also facilitate collusion, as the major players know one another and their actions. Collusion can increase the potential for market power. Monopolistic competition occurs when sources of supply or demand can sufficiently differentiate their product to the point where they can carve out a submarket that exhibits monopolistic or oligopolistic structures. This gives them market power within the sub-market, although it is moderated by the larger market.
Market power is also influenced by the presence of substitutes and complements. The presence of substitutes moderates the ability to benefit from controlling prices, as price shifts lead to greater demand shifts and reduce the ability to capture surplus value. This is the main source of the moderating power of the wider market in monopolistic competition. This can focus on shifting values (consuming a book may impact on the likelihood of seeing a movie based on that book), or when the ability to acquire and use some product is based on having certain other pre-existing skills or products (watching TV requires access to a television set and electrical power).
Still, being able to adequately describe markets and the range of factors that can affect supply, demand, and their interaction over time can provide a foundation for explaining and predicting market behaviors, and the impacts of changes in market factors.
Markets Of The Media
Media produce products, and interact in markets with those who desire those products. From a media perspective, the main products of interest are the media goods – the newspapers, books, movies, and broadcast programming. Media markets were, in that sense, widely identified by those products and the geographic area in which a set of products was made available. The attendant distribution system thus contributed to defining geographic boundaries by constraining the ability to get the offered goods to potential consumers. The scope of many markets emerged as tradeoffs between maximizing potential reach and the costs of producing and distributing media goods and services. Economies of scale play an important role in determining efficient or viable reach, and thus market size. For other media, market definitions were effectively imposed by limits of technological design and standards, or through law and policy. Potential audiences, and thus demand, were identified largely in terms of that geographical area.
Characteristics Of Media Goods And Services
This helped to identify media markets as being largely synonymous with media. In fact, and in practice, identifying markets of the media and using them to examine media behaviors are much more complicated. Some of the problem emerges from the particular characteristics of media goods and services. First, media goods and services almost always have complements. Some require acquisition of specific skills or equipment before they can be consumed. For example, print media require a degree of literacy, and DVDs require both a player and a display device, both of which also require access to, and consumption of, electrical power. Further, consumption of media products takes time, a limited and costly resource. The presence of complements can limit markets, but more critically from the perspective of examining market operations, it means that supply and demand curves are influenced by conditions in the markets for those complementary goods and services.
Media goods and services also tend to be highly differentiated and innovative. While helping to continue demand over time, this also means that there tend to be a number of potential substitutes, and a fairly high level of uncertainty about value of specific goods. Media goods also tend to exhibit a degree of perishability, where the value of the product declines over time, or with multiple uses. Finally, media products tend to exhibit certain characteristics associated with public goods, particularly nonexcludability and nonrivalrous consumption. Nonexcludability refers to the situation where it is difficult to exclude those who do not pay from consuming the product, and nonrivalrous consumption refers to products where use by one consumer does not greatly affect the ability of others to use it.
In addition, the use of information products can have impacts outside of the particular market. When these impacts are not considered in the individual supply and demand functions, they create externalities that can impact on considerations of broader social efficiency. When products exhibit some or all of these characteristics, it can make it difficult for the markets to operate efficiently, and to achieve “optimal” solutions. Aspects of market structure, such as the presence of monopoly power or barriers to entry, can also contribute to sub-optimal solutions. Concerns about media concentration and conglomeration are based on arguments that they tend to increase the potential for exercising monopoly power, resulting in less than socially optimal markets.
Market Failures In Media Markets
As media goods and markets tend to exhibit many of these characteristics, media markets are often perceived as exhibiting “market failure.” Market failure in this sense does not indicate that markets do not work; rather, it is an economic concept that suggests that the market may fail to achieve what are considered socially optimum outcomes. This does contribute to concerns about the broader social impact of market operations and whether media markets provide the proper supply and mix of information goods and services. Perceived market failure also provides a rationale for using law and policy to “correct” apparent market failures, even though law and policy often contribute to the factors causing the “failure”.
To illustrate, copyright and intellectual property policy are a reaction to one set of market failures (the public good characteristics). The solution, though, is the creation of monopoly rights and the granting of monopoly power to the owner of those rights, which happens to create a different kind of market failure, of possibly greater consequence (Lessig 2004).
Additionally, media confound things by operating in multiple markets. Media often can be said to operate in multiple product markets, and media products can often be marketed to different sets of potential consumers. Broadcasters and newspapers, for example, use their basic media good (the paper or signal) as an intermediate good in two very distinctive markets. In the audience market, the firm uses the information content of their good to attract the attention of audiences, who compensate the firm through some combination of their time and attention, and fees paid to access the content. The media firm then takes the audience’s time and attention, and offers it to those who seek to communicate with the audience. Different groups may seek access to that audience, and to the extent that the various groups exhibit different demand characteristics, they may constitute separate markets. For example, broadcasters and newspapers often differentiate between local and national sales markets for advertisements, while others seek access through provision of press releases and other content. In addition, broadcasters and newspapers also operate in the market for content, producing some, acquiring others through various markets. Finally, media incorporate distribution networks, which in some cases can also be used to distribute other goods and services, providing another potential market.
The audience good and its markets display many of the same basic characteristics of the markets for media goods and services. There is uncertainty in terms of actual audiences reached, substitutions galore in audience segmentations, and the variety of media options available for those who seek to reach audiences. Motivations for demand may be commercial, or the seeking of social or political influence. In either case, there are clear externalities. While having much of the same potential for market failure, efforts to regulate audience markets in western states have been moderated by concerns about possibly infringing on freedom of information.
Media markets are complex, often comprising multiple affiliated markets, and are marked by a broad range of competing influences driven by the presence of substitutes, complements and externalities, market structures, and regulatory policies. This has restricted the ability to fully articulate markets of the media, and thus to be able to understand and predict market behaviors and results. This is likely one reason for the apparent inability of some communication law and policy to achieve their stated goals. If policymakers do not understand the full market, efforts to correct perceived market failures can contribute to further market distortions, aggravating rather than solving conditions. Complexity and uncertainty have also made it more difficult to predict the impacts of changing market conditions, such as can be brought on by new technologies, convergence, increased competition, and so on.
Emerging Market Issues
The growing convergence of media markets and the growth of cross-media marketing also contribute to the growing complexity of media markets, expanding the range of substitutes and blurring market boundaries. Contributing to this is shift in audience focus from media to content, further blurring (or converging) media markets from the demand perspective. The growing complexity, flexibility, and uncertainty of media markets led Lacey (2004) to suggest the embrace of at least a degree of uncertainty through the concept of “fuzzy markets.”
Technological innovation, particularly in the fields of digital technology and telecommunications, is starting to transform markets of the media. It is contributing to convergence, reducing old market boundaries and barriers. It is leading to the rise of new media forms and content, and new distribution systems. It is expanding market boundaries, and reducing distribution costs, creating global markets. In the Internet, there is the potential for the emergence of a global market that is radically different from traditional media structures, and offers a number of advantages over them. At the very least, this emerging market for media and information goods and services will provide strong competition. The inherent cost structures are such that they have the potential to transform how value is associated with products, and possibly radically transform supply and demand functions, leading to new ways of thinking about market functions.
A final emerging issue comes from current trends in copyright and intellectual property law. Current policy focus tends to be on extending rights, and protecting against unauthorized uses through enhanced legal protections and penalties and the use of technological protection measures. Such activities add costs to media products, and can impact on their perceived value, shifting supply and demand functions and distorting markets. In general, the impact is negative, suggesting reduced use of media, which will also impact on audience markets. The cost of technological protection measures can significantly impact on distribution costs, even to the point of affecting economic viability. Current copyright and intellectual property policy is focused on content creators and owners; it needs also to consider the broader impact on markets and society.
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- Baker, C. E. (2002). Media, markets, and democracy. New York: Cambridge University Press.
- Benkler, Y. (2006). The wealth of networks: How social production transforms markets and freedom. New Haven, CT: Yale University Press.
- Hoskins, S., McFadyen, S. M., & Finn, A. (2004). Media economics: Applying economics to new and traditional media. Thousand Oaks, CA: Sage.
- Lacey, S. (2004). Fuzzy market structure and differentiation. In R. G. Picard (ed.), Strategic responses to media market changes. Jonkoping: Jonkoping International Business School, pp. 83 – 95.
- Lessig, L. (2004). Free culture: The nature and future of creativity. New York: Penguin.
- Napoli, P. M. (2003). Audience economics: Media institutions and the audience marketplace. New York: Columbia University Press.