Media economics is the application and study of economic theories and concepts to the media industries. Media economics encompasses all forms of media, including traditional media such as print, broadcasting, music, and film, and new media forms such as the Internet. Media economics scholarship is broad and diverse and includes such topics as policy and ownership issues, market concentration, practices and performance of media firms, and political economy of the media. This article reviews the historical development of media economics, the key theories and paradigms in media economics research, and the contributions of media economics to the broader area of communication science.
Historical Development of Media Economics
The development of the field of media economics began with the study of economics itself. The earliest literature on economic thought began to evolve with the study of mercantilism in the sixteenth century in western Europe. Mercantilists equated wealth with the accumulation of precious metals like gold and silver. If nations lacked mines, they could acquire products through trade and commerce. This led to political intervention in the market via tariffs and subsidies, elevating commercial interests to national policy and tying economic activity to political interests. The French physiocrats, a group of eighteenth-century philosophers, rejected mercantilism in favor of agriculture, and represent one of the first groups to call for a policy of laissez-faire, or minimal government involvement in the market. This group was among the first to view the economy as a constant flow of inputs and outputs.
The philosopher Adam Smith is credited with providing the first syntheses of economic thought with a large collection of writings that became a seminal work entitled The wealth of nations. Smith identified land, labor, and capital as the three most important factors of production and the key contributors to a nation’s wealth. Smith referred to the growing discipline as “political economy,” which became the early name for the study of economics. In addition to Smith, David Ricardo, Thomas Malthus, and John Stuart Mill collectively formed what is known as the classical school of political economy. The work of these authors centered on the interplay of economic forces, the operation of markets, and the cost of production.
The classical school would later be challenged by new ideas: marginalist economics and Marxism. While the classical scholars believed that price was determined primarily by the cost of production, marginalists equated prices with demand. The marginalists contributed the basic analytic tools of demand and supply, consumer utility, and the use of mathematics as analytical tools – all forerunners to the development of the area of economics known as microeconomics. Marginalists also argued that, given a free market economy, the factors of production (chiefly land, labor, and capital) were important in understanding the economic system.
The Marxist school, built on the works of Karl Marx, identified labor as the source of production. Marx rejected the idea of a market system that allowed capitalists (the owners of factories and machinery) to exploit the working class and deny them a fair share of the goods produced. Marx predicted the eventual fall of capitalism, believing that the disenfranchised labor class would ultimately rebel, overthrow the capitalists, and seize the means of production.
By the beginning of the twentieth century, institutions of higher learning embraced the growing field and dropped the word “political” in favor of the single word “economics,” used to represent courses of study in both North America and Europe. But another more important shift was occurring, as economic research moved from a classical approach to that of neo-classical economics. Neo-classical economics differed by its use of both analytical tools and mathematics (primarily calculus) to examine market behavior and price determination. Yet another important contribution of neo-classical economics was its refinement of demand theory, since much of classical economics tended to focus only on the concepts of production and supply. Many principles developed in the neo-classical era became the basis for the broader study of microeconomics.
In the second half of the twentieth century, the study of economics was further enhanced by a number of important contributors. Alfred Marshall emerged as one of the most prolific economic scholars, influencing countless graduate students during his tenure at the University of Cambridge. Marshall is credited with refining many aspects of economic theory, and also made key advances in the study of industry supply, consumer surplus, elasticity of demand, and allocation of resources.
Edward H. Chamberlin, another key scholar, theorized a new form of market structure during this period called monopolistic competition. Monopolistic competition centered on the concept of product differentiation, with application to a number of different markets where multiple suppliers offer products that differ slightly from one another. Joan Robinson, one of the few female scholars in the neo-classical era, developed the theory of imperfect competition, which examined price discrimination among monopolists as well as the market for labor. Welfare economics, the examination of how economics can be used to promote better social policy, also came of age during the neo-classical period.
Significant changes in twentieth-century economic thought were further realized with the development of macroeconomics. Here the focus shifted to aggregate economics, which encompasses the entire range of monetary and market principles. Macroeconomics became a catalyst for numerous fiscal policy decisions in both western Europe and the United States during the 1950s and 1960s. John Maynard Keynes, a student of Alfred Marshall and the eventual founder of Keynesian economics, became the best-known scholar of macroeconomics.
Keynes’s thinking and research would provide the rationale for the use of government spending and taxation to stabilize the economy. Keynes believed the government should increase spending and decrease taxes when private spending was insufficient and threatened a recession; conversely, government would reduce spending and increase taxes when private spending was too great and threatened inflation. Keynes’s focus on the factors that determine total spending remains at the core of modern macroeconomic analysis.
Other scholars who helped influence macroeconomics as an area of study included Irving Fisher (money, price, and statistical analysis), Knut Wicksell (public choice), A. C. Pigou (welfare economics), and Milton Friedman (economic policy and consumption). The study of macroeconomics is now concerned with many topics, including economic growth, employment, aggregate production, consumption, inflation, and political economy. Still other areas of study that coincided with this time period included the development of international economics, improving methods of applied economics, and the adoption of more powerful analytical and statistical tools through another sub-field known as econometrics.
Economic theories and economic thought are constantly changing and evolving. By the 1970s, growing inflation and changes in productivity pushed economics in new directions such as monetarist theories, which re-emphasized growth in the money supply as a determinant of inflation. Rational expectations anticipate government intervention; the theory argues that the market’s ability to anticipate government policy actions limits their effectiveness.
The study of supply-side economics revisited a concern expressed in the classical school regarding economic growth as a fundamental prerequisite for improving society’s wellbeing. Supply-side economics emphasizes the need for incentives to increase consumer savings and investment if a nation’s economy is to prosper, and the danger of canceling out those incentives through high taxation.
Development of Media Economics
This review of major historical developments in economic thought illustrates the rich diversity of scholarship and theories in the field of economics. As the study of economics became more refined, scholars began to investigate many different markets and industries, applying economic concepts and principles to different fields, including media. The interest in this area would lead to the development of media economics.
The growth of the mass media paved the way for the study of media economics, with some of the earliest research emerging during the 1950s and flourishing through the twenty-first century. The media industries featured all of the elements necessary for studying the economic process. Content providers offering information and entertainment represented suppliers, with consumers and advertisers forming the demand side of the market. Regulatory and policy agencies (e.g., Federal Communications Commission [FCC], Federal Trade Commission, and other entities) affected macroeconomic market conditions, while the relationship among suppliers in various industries created microeconomic market conditions.
Many of the early media economics studies addressed microeconomic concepts, with newspapers, radio, and television the primary industries under examination. Much of this early research is descriptive in nature, reviewing topics like ownership, advertising revenues, the structure of the market, and competition with other media.
Concentration of ownership emerged early in the field as a critical topic, and continues today. Concentration of the media impacts both regulatory and social policy, and there is a considerable body of literature on media concentration available on all segments of the media industries. Concentration is synonymous with ownership, another area of concern for media economics research. Ownership studies also can be examined from a media management perspective, illustrating the interdependence between media management and media economics. Other studies have examined media competition, consumer expenditures and the principle of relative constancy, barriers to entry for new firms, advertiser and ownership demand, and consumer utility.
In 1988, the field of media economics became further established by the debut of the Journal of Media Economics. Over time, the Journal of Media Economics has emerged as the premier journal for the latest research in the field. In addition to articles in scholarly journals, a number of books and edited volumes have contributed to the development of media economics.
Theoretical Dimensions of Media Economics
Media economics research utilizes a variety of theoretical approaches. In terms of theoretical development, the field can be broadly classified into three major areas that account for much of the knowledge regarding media economics: microeconomic theories, macroeconomic theories, and political economy, which may also be identified as critical theory. Much of the historical literature base deals with microeconomic trends and issues, which is particularly suited for media economics research as it centers on specific industry and market conditions.
Macroeconomic studies by their very nature take a much broader focus, examining such topics as labor and capital markets, gross domestic product, and policy and regulatory concerns. In comparison, the literature base utilizing macroeconomic theories is much smaller than the literature drawing on microeconomic theories.
Political economy of the media is itself broad and diverse, emerging as a response to positivist approaches in mainstream economic theory. The mass media became a natural area of inquiry for political economy research, drawing scholars from fields such as political science, sociology, and economics as well as communications. This section of the essay focuses on micro and macroeconomic theories used in media economics research.
Microeconomic Theories: The Industrial Organization (IO) Model
The most widely used framework for the study of media economics is the industrial organization model, developed by a number of neo-classical economists. The model offers a systematic means of analyzing many of the abstract concepts encountered in the study of a specific market. The industrial organization, or IO, model is built around three main variables: market structure, market conduct, and market performance. As such, the model is also identified as the SCP model, used as a tool for analysis in the study of media markets and industries.
In its simplest form, the IO or SCP model posits that if the structure of the market is known, it allows explanation of the likely conduct and performance among firms. Each of the three areas (structure, conduct, and performance) can be further defined and analyzed by considering the specific variables associated with each part of the model. For example, in regards to market structure, the variables often used for analysis include an examination of the number of sellers and buyers in the market, the degree of product differentiation, the barriers to entry for new competitors, cost and pricing structures, and the degree of vertical and horizontal integration.
The market offers great utility for media economics scholarship. Some scholars have focused on just one part of the model, such as market structure, while others take a holistic approach and analyze all parts of the model. The model recognizes the interdependent relationships that exist between how the market is structured, and the resultant conduct and performance expectations. There has been criticism that media economics scholars rely too heavily on the IO model, and that the IO model does not capture all of the nuances associated with new technologies and the convergence of markets. However, the model still offers great utility to researchers and remains one of the key theoretical foundations in microeconomics research.
The Theory of the Firm
Efforts to refine an understanding of market structure led to the development of what is known as the theory of the firm. The theory of the firm is an expansion of the industrial organization model, with the goal of gaining a more thorough explication of the most common types of market structure: monopoly, oligopoly, monopolistic competition, and perfect competition. Most media markets tend to be dominated by oligopoly and monopolistic competitive structures. Perfect competition is rarely identified in the media industries (one exception being websites), and monopoly tends to be limited to areas like newspapers and cable television.
The appeal of this approach lies in its simple and parsimonious nature. However, the defining of a market structure has become increasingly complicated due to rapid consolidation across the media industries and technological convergence. For example, the market for radio can be considered as simply the market for broadcast radio, but it can also encompass a much wider definition that includes high definition (HD) and satellite radio, Internet radio, and even podcasting. Many scholars suggest that market structure cannot clearly be defined using these broad and simplistic labels.
Another area of theoretical development with significant implications for both public and social policy is media concentration. In the United States, antitrust laws are designed to promote competition and limit concentration, making this a controversial topic of study. Media concentration tends to be examined in one of two ways. Researchers gather existing data on firm or industry revenues to measure the degree of concentration by applying different methodological tools such as concentration ratios, or other indices. The other approach is to track concentration of ownership among the media industries. Regardless of the approach, research has clearly shown there is increasing consolidation across all areas of the media industries with many facets reaching the levels of “highly concentrated” status, indicating that a limited number of firms control the revenues or ownership in a market. Globalization of the media industries has contributed to media concentration, with a global oligopoly of media firms controlling the majority of what people around the world see, hear, or read. Media concentration research can be studied at all levels of analysis, from local markets to global markets.
The study of how the media compete with each other has also captured the interest of media economics scholars. Much of this literature draws upon niche theory, which originated in the field of biology and the study of ecosystems. Competition studies typically take one of two forms: competition within an existing industry, or competition across media industries. Various indices are used in this area of research to measure the breadth, overlap, and superiority of one media form over another.
The principle of relative constancy sought to understand the relationship of consumer spending to media consumption. This research first appeared in the 1970s, and stressed that on average households spend around 3 percent of their disposable income on media services and products over time. Some later studies on relative constancy were conducted over the next few years, but the topic has not been revisited for some time.
Macroeconomic Theories in Media Economics
There is a much more limited body of literature involving macroeconomic analysis in the field of media economics. Most of the macroeconomic research is related to policy and regulatory analysis, usually conducted at a national level of analysis. Policy studies usually attempt to analyze the impact of regulatory actions and decision-making on existing markets and industries.
Labor and employment trends in particular media industries are another area of study that is often approached from a macroeconomic perspective. Much of this research tends to be centered on the print (newspaper) or broadcast (television and radio) industries.
Another area of focus centers on advertising revenues and expenditures. Often these types of studies build on aggregate data from specific countries and regions of the world to determine their economic impact. For example, many studies in this area consistently show that the bulk of advertising dollars are located in what is known as the triad, the regions of the world representing North America, western Europe, and Japan and the Pacific Rim nations. Due to many trade pacts and the rise of the World Trade Organization (WTO), analysis and tracking of advertising data is of interest to researchers in media economics.
In its early stages, much of the media economics research was labeled as atheoretical. This criticism was justified as many of the early studies lacked any theoretical foundation, but since the 1970s the field has witnessed considerable theoretical growth and development, although there is still room for greater expansion and refinement of theory.
Methodologies Used in Media Economics Research
Media economics research embraces many different types of methods to answer research questions and investigate hypotheses. However, most of the existing literature tends to utilize one of four methods: trend studies, financial analysis, econometrics, and case studies.
Trend studies are used to compare and contrast data over a time series. In assessing media concentration, scholars typically study concentration indices over time to gauge the impact of policy decisions or other significant actions on media ownership. Most trend studies tend to use annual data as the unit of analysis. Trend studies are helpful due to their descriptive nature and ease of presentation, and aid in analyzing media company and industry performance. Trend studies can be applied to virtually any media industry.
Financial analysis is another common tool used in media economics research. Financial analysis can take many different forms and utilize different types of data. The most common data includes information derived from company financial statements, along with the use of financial ratios. In the USA, all publicly traded companies must file financial statements with the Securities and Exchange Commission (SEC). Individual companies distribute annual reports to their shareholders that contain financial statements. The Internet has become a very important source of financial data for researchers, making it much easier to collect and analyze financial data. Financial analysis is much more challenging in research on privately held companies, which are not required to disclose any financial information, as well as companies domiciled outside the US where accounting practices and currency exchange rates vary.
Econometric analysis, drawn directly from economics, involves the use of statistical and mathematical models to verify and develop economic research questions, hypotheses, and theory. Econometrics is more prevalent in the general economic literature, because most media economics researchers coming from communication or journalism backgrounds lack the mathematical expertise needed for econometric modeling.
Case studies represent another extremely useful method in media economics research. They are popular for researchers because they embrace different methodological approaches as well as types of data. For example, a case study of a particular company might combine in-depth interviews, financial information, and analysis of company reports over a series of years. Case studies in media economics research tend to be very targeted and focused examinations. They are not limited to just companies and industries; they can investigate topics such as management styles, marketing and branding strategies, and consumer behavior.
Methods used in media economics research are not limited to these approaches. Researchers can also employ policy analysis to investigate regulatory action on media companies, markets, and industries. Historical research is occasionally represented in the literature, and may be combined with approaches like trend studies.
Critics of media economics research contend that too much of the research remains descriptive in nature, and that the variety of methodological approaches is limited. There are also complaints that researchers tend to spend too much time studying only the major companies, and that too much attention has been expended on traditional media industries like television and newspapers, and not enough on new media forms and enterprises.
Future Directions for Media Economics Research, Theory, and Methodologies
There are a number of steps researchers and scholars need to address in their efforts to further develop and shape the field of media economics in terms of research, theory, and methodologies. Each of these areas has equal priority given the rapid pace of change and evolution occurring across the media industries.
Media Economics Research
One of the most pressing research issues in the field of media economics is reconceptualizing and defining what constitutes a market and expanding our understanding of the key variable of market structure. Media economics research must grapple with the evolving definition of how to define a media market, a critical issue given the convergence and consolidation taking place across the media industries. Markets are no longer defined cleanly. Media companies supply products in many different markets and sub-markets, in competition with other providers. Yet the tendency among policymakers and researchers is still to treat markets using traditional labels, such as television, newspapers, or motion pictures. This approach fails to recognize the realities of the media marketplace, and can lead to inaccurate assumptions over which firms dominate a particular market. In reality, each of these media is undergoing significant change in terms of how their products are distributed and their content. The trend for many media companies is toward becoming multimedia enterprises. Newspapers have websites that feature video and audio clips (“podcasting”) while television stations offer streaming media and links to partnership newspapers and print products
One answer to this dilemma is to consider the functions of a firm rather than focusing on just the final product. If for example, Disney is considered a company with multiple brands engaged in content creation and distribution, it perhaps offers a clearer interpretation of what the company is about and how it seeks to be a leader in many different markets like network television, program syndication, cable networks, radio, and feature films. Such an approach considers the totality of media operations, and provides researchers with a more accurate picture.
In addition to clarifying and refining key concepts, media economics research must also expand into new arenas. No doubt, studies on television, newspapers, and other traditional media will continue to be conducted, but there are new areas where research is needed. Among the areas where new understanding and investigation are required are online phenomena like blogging and podcasting, as well as exploring new emerging industries like satellite and HD radio, online video distribution, and the use of search engines to deliver media content.
It is also time to revisit the relation of consumer spending to the media. Knowledge of this area is limited to the principle of relative constancy introduced earlier. Research is needed to build upon this principle, to see if the early patterns identified with consumer spending have been maintained, or to determine to what extent they have changed.
Media Economics Theory Development
Media economics research has relied heavily upon microeconomic concepts and principles, most of which build on the industrial organization model. While this emphasis has helped to clarify the relationship of various concepts in microeconomic analysis, it has also limited the development of the field. Other economic theories, which have possible application to the media industries, have been ignored, especially those found in macroeconomics. Macroeconomic approaches can be used to strengthen our understanding of areas such as the factors and patterns of global consolidation of media markets. The impact of global consolidation on topics like employment, economic development, and inflation are just three possible topics of interest.
In addition to drawing upon the diversity of existing economic theory, media economics scholars should consider new theoretical inquiries that could draw upon multiple methods of investigation. The interplay of business structures, government regulation, new technology, and social policy implications across the media industries offers a unique opportunity for scholars to generate new theories and hypotheses. Researchers must be willing to move away from simply describing specific firms’ structure and performance, take some risks, and produce more analytical and investigative analysis.
In addition to the need to understand the concept of the market better is a need to redefine the theory of the firm. Media economists have functioned primarily within the three areas most prevalent in the mass media: monopoly, oligopoly, and monopolistic competition. But other types of structures are evolving across the industries. Duopoly, the structure identified with two primary firms, is becoming more common in media markets, such as with satellite radio (between competitors XM and Sirius) and multichannel video (between cable and satellite providers).
In many media industries what we really have is a two-tiered market structure, with a limited oligopoly of firms (from three to seven) controlling between 75 and 90 percent of the revenue/market share, and a number of smaller firms on the other tier competing for the remaining market share. Media industries representing this type of hybrid structure are the motion picture, recording, television network, radio, consumer book publishing, and magazine publishing sectors. Exploration of the variables that describe these new and evolving market structures is badly needed in the field of media economics.
Improving Methodological Tools
Improvements in developing theory and redefining and conceptualizing the media market and market structure must be realized in conjunction with enhancements in methods and methodological tools. No area deserves attention more than measures used to assess competition and concentration.
Measures to assess competition and concentration have relied primarily upon one of two available tools: descriptive concentration ratios and the Herfindahl-Hirschman Index (HHI), used by the US Department of Justice. Concentration ratios provide a parsimonious way to measure concentration, using either the top four firms or the top eight firms in a market. If the top four firms control at least 50 percent or more of the market revenue, or if the top eight firms control at least 75 percent or more of the revenue, the market is labeled “highly concentrated.” While the measure is useful, it fails to address the possible inequality of market shares. For example, using a four-firm ratio, one could encounter one firm dominating the market with 40 percent of the revenues, while the other three firms hold a combined 10 percent. Such a market would be considered highly concentrated, but there is a clear dominance by the top firm. The HHI index is more rigorous. It squares the market share for each firm, and then aggregates a total from all the firms. Researchers need data on every firm in the market in order to calculate the index. Researchers in the academic sector often lack access to data from all firms, especially privately held companies. Further, calculating the index can be unwieldy.
But more problematic for both these measures is that they are designed only to measure concentration within a particular market segment. There are no generally accepted measures available to assess concentration across markets yet, although some researchers have attempted to offer some solutions. Time Warner, News Corporation, Sony Corporation, Disney, Viacom and other media giants may have a limited market share within individual market segments, but no tools exist to measure their combined influence across markets. With so many multi-product firms engaged simultaneously in many different media markets, measures need to be developed to assess within-industry concentration and competition.
Media economics provides theories and tools to understand the activities and functions of media companies as economic institutions. An understanding of media economics strengthens our overall understanding of the role and function of the media in society. At a theoretical level, media economics complements existing communication theory by adding important dimensions regarding the structure, conduct, and performance of media firms and industries, the interplay of economics, policy and regulation, and audience behaviors and preferences. Media economics research will continue to evolve as it attempts to analyze and evaluate the complex and changing world in which the mass media industries operate.
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