Slide 1

Slide 2

• Definition
• Promotional effect
• Need to allocate scarce resource
• Claims of exclusion

Slide 3

• Slotting allowances are not regulated by the FTC
  • They “need to be judged on a case-by-case basis, with attention both to likely competitive harms and to likely procompetitive benefits.” (FTC 2001)
• FCC regulates payola
  • Prohibits payments unless an announcement of the endorsement is made every time a song is played.
  • Major recording companies recently settled investigations brought by New York AG Spitzer; terms more restrictive than FCC regulations.

Slide 4

• Popular “theory” of exclusion:
  • Payment of fees increases the cost of introducing a new product. This may exclude manufacturers, particularly small ones.
  • Cannot explain exclusion: auctioning scarce resource to highest bidder results in efficient allocation.
• Economic theories of exclusion:
  • Contractual provision for retailer to exclude competitor in return for fees (Farrell 2001, Shaffer 2005).
  • Fees alone will not result in exclusion.

Slide 5

• Slotting allowances: Sometimes
  • Occasionally slotting allowances are accompanied by contract to reduce shelf space available to competing manufacturers.
  • Such contracts are rare (FTC 2003)
• Payola: No
  • No evidence of exclusionary contracts with payola. More likely that recording studios are simply trying to buy more of scarce resource—having song played on radio.

Slide 6

• In two legal challenges to slotting allowances, the courts found that the fees are valid means of competing.

Slide 7

• El Aguila Food Prods. v. Gruma Corp:
  • “[S]ome of the plaintiffs’ losses are due to a ‘self-inflicted’ wound—they chose not to compete for shelf space.”
• R.J. Reynolds Tobacco Co. v. Philip Morris Inc:
  • “Defendant’s Retail Leaders program has induced rivals to compete more vigorously.”

Slide 8

• Belief that since airwaves are owned by public, radio stations should select music on basis of “public interest” rather than commercial interest.

Slide 9

• Under regulation, radio stations earn profits solely from advertisers. Will select music that appeals to people who buy advertisers’ products.
• Without regulation, radio stations earn revenue from advertising and payola. Will modify playlists to appeal more to people who buy records.

Slide 10

• Highly unlikely that payola will exclude promising music.
• Regulation will not accomplish the goal of serving “public interest.” With or without regulation, radio stations will design playlists to serve commercial interest.
• Prohibiting explicit payment for radio airspace will not make competition for airspace disappear.

Slide 11

• El Aguila Food Prods. v. Gruma Corp., 301 F. Supp. 2d 612, 621 (S.D. Tex. 2003)
• Coase, Ronald (1979). Payola in Radio and Television Broadcasting. Journal of Law and Economics. v.22(2).
• Farrell, Joseph (2001). Some Thoughts on Slotting Allowances and Exclusive Dealing. U.S. Department of Justice, presentation before the American Bar Association (March 28).
• Federal Communications Commission. 2006. The FCC’s Payola Rules, 19 (June).
• Federal Trade Commission. 2001. Report on the Federal Trade Commission Workshop on and other Grocery Practices in the Retail Grocery Industry (February).
• Federal Trade Commission. 2003. Slotting Allowances in the Retail Grocery Industry (November).
• Office of New York Attorney General Eliot Spitzer. 2005. Sony Settles Payola Investigation, 25 (July).
• R.J. Reynolds Tobacco Co. v. Philip Morris Inc., 199 F. Supp 2d 362 (M.D.N.C. 2002)
• Shaffer, Greg (2005). Slotting Allowances and Optimal Product Variety. Advances in Economic Analysis & Policy v.5 #1, article 3.