Product Diversity and Ethnic Fragmentation: Is Heterogeneity Good or Bad for Media Capture?

Transcription

1 Product Diverity and Ethnic Fragmentation: I Heterogeneity Good or Bad for Media Capture? Caterina Gennaioli Preliminary Draft June 2008 Abtract Under ome circumtance a power eeking politician trie to exert control over the media in order to gain political upport. He ha two way to reach thi goal; one i to formally acquire media ownerhip, the other i to pay the media in exchange for favourable information or ilence. In thi paper, a in Beley and Prat (2005), media are captured whenever the government bribe them for hiding new which potentially damage hi reputation and threaten hi reelection. My aim i to tudy how heterogeneity in conumer preference for media outlet can hape the tructure of the media market, in turn a ecting the extent to which media can be captured by politician. I ditinguih between "hard" ethno-linguitic di erence and "oft" hedonic di erence among conumer. My model how that the rt type of heterogeneity tend to foter media capture while the econd type of heterogeneity tend to reduce it. The intuition behind thi reult i that when conumer are eparated by trong linguitic or cultural barrier, they cannot obtain information from each other new outlet. A a reult, by bribing only a ubet of few newpaper, politician are able to gain political upport. By contrat, when conumer heterogeneity i hedonic, a large number of media outlet i upplied in equilibrium. However, ince under thi econd type of heterogeneity conumer can freely acquire information from any outlet, a PhD tudent, Bocconi Univerity. I am grateful to Eliana La Ferrara, Nicola Gennaioli, Michele Polo and Guido Tabellini for very helpful comment. 1

2 politician will need to bribe a very large number of outlet to gain political upport, rendering the enterprie more di cult. Thi reult implie that tandard indexe of market tructure uch a the number of outlet upplied and their concentration may ay little about the extent of media freedom ince di erent ource of media pluralim may have oppoite implication for the ability of politician to in uence citizen information. Overall thi analyi can hed light on the poibility for the media ector to foter the quality of politic epecially in developing countrie, where cultural and ethnic polarization play a key role. Keyword: Media, Corruption, Ethnolinguitic Fragmentation JEL: D72, D73, L82 1 Introduction Nowaday the media repreent a very important intrument through which citizen can monitor politician behavior and the functioning of other intitution, uch a the judicial or the nancial ytem. Viewing the one between voter and their repreentative a a principal agent relation, the availability of unbiaed information give to the agent the incentive to well behave. On the contrary if the agent are able to manipulate the new about their own conduct, the aymmetry of information increae the cope for moral hazard practice. Therefore the media providing hard new play a crucial role in fotering the quality of the politic. There i a large debate on which feature of the media market can guarantee freedom and independence of the information; the one mot emphaized by antitrut agencie and economic literature have been ownerhip tructure and pluralim. My tudy link to thi debate pointing out that tandard indexe of market tructure uch a the number of outlet upplied and their concentration may ay little about the extent of media freedom ince di erent ource of media pluralim may have oppoite implication for the ability of politician to in uence citizen information. In my analyi, a in Beley and Prat (2005), media are captured when the politician bribe them in exchange for favorable information or ilence. My goal i to analyze how heterogeneity in conumer preference for media outlet can hape the tructure of the media market, in turn a ecting the extent to which media can be captured by politician. I ditinguih between "hard" ethno-linguitic di erence and "oft" hedonic di erence among conumer. The rt type of heterogeneity i due to trong cultural and linguitic barrier which eparate 2

3 conumer in a way that each outlet ha to pecialize chooing to target a peci c ethno linguitic group. Thi lead to a egmented market uch that reader buy only from a retricted ample of the outlet. The econd type of heterogeneity i hedonic and regard the main iue covered by a newpaper; within the ame language group, ome conumer may prefer to read about port, other about politic or fahion and o on. Thi feature of conumer preference generate an horizontal di erentiated market; the more heterogeneou and ditant are individual preference along thi dimenion, the higher the number of outlet willing to enter that market. In a egmented market characterized by many linguitic group, a high hedonic heterogeneity among conumer would tranlate in having more outlet targeting each group. The argument developed here relie on two critical aumption: (i) conumer can read only newpaper targeting their own ethnic group and (ii) apart from their hedonic and ethnic tate, they all prefer "hard" new, that i they all give the ame value to unbiaed information. From thee condition it follow the conumer behavior to get acce to information; in a model of horizontal di erentiation a la Salop, I aume that every conumer continue to read hi preferred newpaper even if uninformative, being till intereted in the main iue it cover, but he trie to get trutworthy new buying alo from other outlet. Thu if ethno linguitic egmentation i perfect, in order to become informed, citizen can freely move among hedonically di erentiated media but not among ethno linguitic divere paper o that if all the outlet targeting hi own group are bia, he remain completely uninformed. The main reult of my analyi i that ethno linguitic fragmentation tend to foter media capture, while hedonic heterogeneity tend to reduce it. The intuition behind thi reult i that when conumer are eparated by linguitic or cultural barrier, they cannot obtain information from each other new outlet. Thu by bribing only a ubet of few newpaper, politician are able to gain political upport. By contrat, when conumer heterogeneity i hedonic, a large number of media outlet i upplied in equilibrium. However, ince under thi econd type of heterogeneity conumer can freely acquire information from any outlet, a politician will need to bribe a very large number of outlet to gain political upport, rendering the enterprie more di cult. I will tart my analyi auming perfect egmentation uch that conumer cannot overcome linguitic barrier at all, reading other group paper. I later generalize the model allowing a fraction of reader to move acro group and buy alo newpaper in another language. I will how that imperfectly eparated market mitigate the reult but will not modify the main implication of the model. In my tudy I tre two ource of pluralim for the media market demontrating their oppoite 3

4 e ect on media freedom but I want to highlight an alternative interpretation one can give to my model; in particular every element that, on one hand, lead more outlet to enter but on the other hand generate a hard egmentation of the market, i potentially harmful for the independence of the pre, while any ource of a ofter pluralim deter media capture. So you might think at geographical ditance intead of ethno linguitic heterogeneity and at outlet di erentiated along an ideological dimenion intead of along the iue covered. Thi paper relate to the growing body of literature on media which on one hand focue on the e ect of media on ocial and political outcome, on the other analyze the determinant of media bia. In the rt trand one can mention Beley and Burge ( 2002 ) and Stromberg ( 2004) which focu on the role of media in taking the politician accountable. The former tudy ue a panel data from India, howing that the government increae public food ditribution and relief fund in tate where newpaper circulation i higher; intead Stromberg nd that in 1930 the US countrie with more radio litener have been the one that received more New Deal Fund. Regarding the e ect of ma media on voter political deciion and attitude, Della Vigna and Kaplan ( 2006 ) analyze the impact of entry of Fox new in cable market on voting behavior; uing a data et on voting for US town they nd that Republican gained from 0,4 to 0,7 percentage point in town which broadcat Fox New; Gerber et al. ( 2006 ) conduct a randomized control trial jut prior to the November 2005 gubernatorial election in Virginia in which the control group wa repreented by individual that received a free ubcription to the Wahington Pot, while individual in the treatment group received a free ubcription to the Wahington Time. They nd that individual aigned to the Wahington Pot were eight percentage point more likely to vote for the Democrat in the 2005 election, while individual aigned to the New York Time, were only four percentage point more likely to vote for the Democrat. Other tudie treed the ocial outcome of ma media; Gentzkow and Shapiro (2006) analyzed the e ect on children chool performance, Olken (2006) on adult participation in ocial activitie and trut, La Ferrara et al (2008) found in Brazil that women expoed to oap opera decreaed their fertility rate. Finally, Jenen and Oter (2007) etimate the impact of cable TV on female autonomy, chool enrollment and fertility. Thi work i cloely related to the literature on media bia that can be divided in two tream ; the rt focuing on a demand driven bia, the econd on a upply driven media bia. Gentzkow and Shapiro (2007) meaured media bia looking at imilaritie between the language ued by media outlet and congremen and nd that the bia of newpaper depend mainly on conumer ideological poition and le on the identity of owner. Alo Mullainathan and 4

5 Shleifer (2005) identify the origin of bia in the demand ide, arguing that it i driven by conumer prior belief. Other treing a upply driven bia are Larcinee et al. (2007) who invetigate the correlation between the endorement policy of newpaper, and the di erential coverage of bad/good economic new a a function of the preident political a liation. They nd uggetive evidence that outlet with pro-democratic endorement give more coverage to high unemployment when the incumbent preident i a Republican than when the preident i Democratic, compared to newpaper with pro-republican endorement pattern, furthermore thi reult i not driven by the partianhip of reader. Alo Beley and Pratt (2005) belong to the econd tream; they build a model of media ownerhip and political capture, where media capture arie endogenouly. Their main nding are that media pluralim and independent ownerhip reduce capture and that media capture negatively a ect ome political outcome uch a political turnover. My paper can be conidered lying in between thee two line of reearch; on one hand I conider a upply driven bia, ince it originate from the politician action, on the other hand the likelihood of media capture turn out to depend on two feature of conumer preference, i.e. on the demand ide. The novelty of my paper i that I derive the equilibrium outcome of the media market making aumption on conumer preference and population characteritic, while Beley and Prat take a exogenou the market pro t of the media. Moreover my analyi hed light on the poitive role of heterogeneou conumer preference. A I aid, ince hedonic heterogeneity can be referred not only to preference over iue (port, nature, culture) but alo to conumer ideological poition, my model would predict a higher media freedom if the population ha highly heterogeneou political preference. Then it i intereting to ak ourelve what i the origin of hedonic heterogeneity. I believe that education play an important role helping to create a critical thinking and to develop concioune of peronal need and tate. I believe that income too i an important ource of oft diverity in preference; wealthier peron can take more care of their paion, cultivate their interet and increae their need. A a conequence the demand for travel, deign or cooking magazine and newpaper will certainly increae with income. The following analyi o er important empirical prediction on the relationhip between total number of outlet and media capture. Conitent with the concluion of Beley and Prat, it i widely accepted the view according to which having more media outlet can guarantee media freedom. My analyi implie that thi i not alway the cae; in particular, di erent ource of pluralim might have oppoite e ect for the freedom of the pre. To undertand why, imagine two imilar countrie unle for a di erent degree 5

6 of ethno linguitic fragmentation; the common view would predict for both countrie the ame level of media freedom while my theory would predict a higher media freedom in the le fragmented country. The paper will continue a follow; in the rt ection I will decribe the political etup through a imple model of moral hazard. In the econd ection I will tudy the media ector and I will determine the equilibrium media capture. Third ection provide an extenion of the model introducing the poibility of imperfect egmentation of the market. In the fourth ection I will conclude dicuing the main reult and decribing my future reearch on thi topic. 2 The Model My analyi i divided in two part; in the political etup, through a imple model of moral hazard, I decribe the politician incentive to mibehave and to capture the media. In the econd part I will analyze more cloely the media ector uing a tandard horizontal di erentiation model a la Salop; rt, I determine how heterogeneou conumer preference for media outlet hape the market tructure, then I derive the reervation utility of the outlet, or tating it di erently the amount they have to be o ered to accept to hide the new. Thi help me to pin down the condition under which we can expect to oberve media capture. I tart with a framework where market are perfectly egmented, next I will generalize the reult relaxing thi aumption. 2.1 Political Setup: A Moral Hazard Problem In thi economy there i a population normalized to one which i divided into N eparated ethno linguitic group. Each of them ha di erent culture, religion and above all a di erent language. The population of each group i uniformly ditributed around a unitary perimeter circle city with denity 2 (0; 1). Each city i targeted by a certain number of media outlet which are the only ource of information available to conumer. All the outlet hare the ame information o that no outlet ha a privileged acce to new. Moreover, for implicity, information cannot be bia uch that no newpaper can mirepreent or falify it. The hypothei of perfect egmentation implie that conumer in a group are not able to overcome the linguitic barrier therefore they read only newpaper in their own language. Moreover ince conumer are rational and like truthful new, 6

7 they are willing to move around the city in order to get informed, regardle of the ditance they have to travel. I introduce a model of electoral accountability in which citizen can dicipline the politician through a backward-looking voting behavior. The incumbent politician ha an amount of the governement budget which he can ue a private rent and a targeted trafer to the population. Neglecting other component of the public pending, the government budget contraint can be written a: = T + r with T = X i t i,where t i i the exogenouly given trafer to group i. The voter monitor the politician by reading newpaper and decide whether to keep him in o ce. There i a proportional electoral ytem, therefore the politician i reelected if he get the vote of at leat half of the population. Everyone i rik neutral Timing The timing of the event i a follow: 1. In the rt period (t 0 ) the incumbent can decide to teal or not to teal an amount S of money. If he teal, the judiciary catche him and put him in prion with probability (1 p) ; 2. In the econd period (t 1 ) the incumbent decide whether to hide the new bribing the media; 3. In the third period (t 2 ) voter buy newpaper and learn what they read; a I already pointed out, there i no biaed or partian information, o either they get a report on the politician behavior or they do not get anything. 4. In the fourth period (t 3 ) election are held in which the voter chooe between the incumbent and an identical opponent. Notice that citizien will punih ex pot the o cial, voting for the opponent, only in cae they learn he did mibehave during hi mandate The Political Equilibrium The politician ha to decide whether to a ect voter deciion by capturing the media. In thi way he could hide hi bad conduct and teal without being punihed by the voter. Let C; NC indicate corrupted and not corrupted media, while S; NS tay for to teal and not to teal. Solving thi imple game by backward induction one can immediately ee that in t 0 the incumbent, anticipating population voting behavior, decide to teal or not. Thi deciion i cloely 7

8 related to the one about capturing or not media outlet which directly determine the voter repone to the incumbent conduct. The politician expected payo in the rt period are: i) E(NCjS) = p S ii) E(NCjNS) = R + r iii) E(CjS) = p(s + R + r) f(c) iv) E(CjNS) = R + r f(c) where R are the rent for taying in o ce, r are the private rent he extract from and f(c) i the cot of bribing the media. It i important to remark that in taking hi deciion the incumbent ha to conider at leat half of the population. The group are perfectly eparated but within group everyone ha acce to the ame information. Indeed, a I will better explain in the next ection, if there i at leat one informative outlet in a group every member of that group will learn the truth. Therefore if the politician decide to capture the media in order to be reelected, he ha to keep uninformed group repreenting at leat half the population and moreover he will ditribute to them the tranfer which in my etup are completely exogenou. Thu the incumbent give t to a ubet N N uch that: X i 1 1=2. Subtituting in the government budget contraint r = T where T are the total i2n tranfer. In order to determine the optimal politician deciion in t 0, we rt have to compare i) with iii) and ii) with iv). Propoition 1 If S < R+r p, the politician will decide to teal and capture the media whenever: f(c) < ps (1 p)(r + r) (1) Propoition 2 If S > R+r p, the politician will decide to teal and capture the media whenever: f(c) < p(r + r) (2) Notice that both the threhold are increaing in p;if the probability to be imprioned i low, the politician i more likely to chooe to bribe and to run the rik of tealing. The incumbent deciion will depend on the relative gain of tealing (S) to the one of holding o ce (R + r); in particular if 8

9 it i low, then any increae in (R + r) will make the politician le likely to bribe the media. On the other hand if it i high, an increae in the value of o ce will puh him to capture the media. In the next ection I will determine the cot function f(c), analyzing the feature of the media indutry that a ect it. The following analyi help u to nd out when the incumbent i uccefull in bribing the media and a a conequence when media capture will take place in equilibrium 3 The Media Sector In thi ection I determine the amount demanded by each media outlet to the politician in exchange for hiding information which correpond to the opportunity cot for a certain outlet of not being informative. Remember that media in a group hare the ame information, conumer value information per e and the market i perfectly egmented. It follow that the politician i e ective in hiding information for group j only if every outlet in j i ilenced. Indeed in the bargaining game with the incumbent every outlet take a granted that all other newpaper have been uccefully bribed. Therefore each outlet will ak the o cial, what it could earn if it were the only one to be informative, that i the monopoly pro t in information. A a reult, once the politician ha decided which group to keep uninformed, the total cot of bribing ( i.e. f(c) ) will be the monopoly pro t in information time the number of active outlet targeting thoe group. Following the tandard analyi of patial di erentiation "on the circle" due to Salop ( 79) but including egmented market due to ethno linguitic fragmentation, I pin down the number of active outlet in a certain group and the monopoly pro t in information. In thi etup conumer are located around the circle city at di erent place. Thi can be interpreted a conumer having heterogenou (hedonic) preference which lie on a continuum. Thi model tudie entry and location when there are no barrier to entry other than xed cot. The n good are produced in the media ector (one can think at newpaper but alo at tv channel). Each outlet produce only one good. There i free entry and each potential commodity require a xed et-up cot f and a contant marginal cot c. Let me retate how the information di uion work; the outlet di erentiate themelve with repect to the main iue they cover (port, economic, fahion, goip) but they all provide truthfull information about the politician conduct. Newprint hare the ame information, i.e. they have 9

10 the ame technology and the ame ource to get the new, o at the beginning of the period they all know the actual behaviour of the politician. Conumer get an utility of B from information. The outlet perfectly compete among themelve for the proviion of information. Since the cot of producing it i normalized to zero, rm charge a price equal to zero for the new and make conumer paying only for the di erentiated component of the good. Given the previou characteritic of conumer preference, the technology of the media outlet and of the population, it i poible to compute the equilibrium outcome in the media ector in term of price and number of entrant. There i a large number of identical potential rm. A I aid, conumer ditribute themelve among the N group. Thi ituation can be decribed a having N circular citie with unitary perimeter each. The rm alo are located around each circle and no location i a priori better than another. Conumer wih to buy one unit of the good and have a unit tranportation cot : In the preference interpretation they incur in a utility lo from not conuming their preferred commodity. They are willing to buy a long a the generalized cot doe not exceed the utility they obtain from the good u + B: Each rm can locate in only one location. The rm pro t i: = (p i c)d i f if it enter and = 0 otherwie. Thi i a two tage game; in the rt tage, potential entrant imultaneouly chooe whether or not to enter. Let n be the number of entering rm. They are located equiditant from one another. Maximal di erentiation i exogenouly impoed. In the econd tage they compete in price. Given the aumption of free entry, the equilibrium pro t of entering rm i zero. To olve the problem we hould; 1) determine the Nah equilibrium in price for any number of rm and calculate the pro t function and 2) determine the Nah equilibrium in the entry game. Let me olve the problem for a rm located in the repreentative city j. Equilibrium in price Aume that n rm entered the market. They are located ymmetrically o it i reaonable to look at an equilibrium in which all charge the ame price p. Firm i have only two competitor, the two urrounding it. Suppoe it chooe price p i. A conumer located at the ditance x i 2 (0; 1 n ) from rm i i willing to purchae from rm i rather than from i cloet neighbor if: p i + x p + ( 1 n x) (3) 10

11 p i p + Calling x n and remembering that the denity of conumer in circle j i 2 j we can determine the demand function olving: Z D i (p i ; p) = 2 0 x f(x)dx = p + n p i j (4) Firm i face demand: D i (p i ; p) = 2x = p + n p i p + n Max (p i c) p i j ; thu, rm i will olve: p i j f (5) Di erentiating with repect to p i and then etting p i = p give: p = c + n Equilibrium in the number of entrant From the zero pro t condition for the exiting rm we can obtain the number of rm in equilibrium: (p c) 1 n j f = n 2 j f = 0 (6) The equilibrium price and number of rm for each group in equilibrium are: and p j = c + f j (7) n j = r j f (8) Firm entry deciion turn out to depend on the cope for both economie of cale ( j ) and di erentiation ( ); a the xed cot increae relative to market ize ( j ), the number of equilibrium f entrant decreae while, at the ame time a lower ubtitutability rate between the outlet, ceteri paribu, lead to an increae in the number of entrant ince the rm have more opportunity to di erentiate and o face le competition. It i important to notice that in equilibrium mut be: n j > 1 (9) 11

12 Or uing (8): j > f (10) If thi expreion i not ati ed it mean that no outlet will enter to target a certain group; in other word thi implie that a group could remain "naturally" uninformed. The element that render thi ituation more likely are: i) high ubtitutability rate between outlet, that i a lower hedonic heterogeneity of conumer, ii) high x et up cot and iii) mall market ize. A before, thi i due to the preence of economie of cale; ince there are x et up cot an increae in market ize increae the market hare available for each rm entering the group. Therefore holding contant the total population, the higher the fragmentation of the market ( higher number of group ), the maller the number of active rm within each group. In highly fragmented population thi implie a higher probability of oberving completely uninformed group, epecially the maller one. Notice alo that in equilibrium it mut hold the following condition: p + i.e. the conumer furthet from a tore, having to travel a ditance of urplu conuming the good. 2n < u + B (11) 1 ; receive a poitive net 2n 3.1 The Equilibrium Media Capture I A in Beley and Pratt [7] I focu the attention on pure trategy perfect Bayeian equilibrium in which voter ue undominated trategy, that i they alway vote for their preferred candidate 1. To get the intuition behind thi olution uppoe that only one outlet i informative. One can think at a political candal covered only by a newpaper or a detailed reportage on the incumbent miconduct. In thi cae conumer will continue to read their preferred newpaper but, valuing information per e, they will buy alo the informative newprint even if they are not intereted in the main iue it cover, that i they are located very ditant from it. In thi etup the uninformative outlet continue to compete in price with the other. Thu the di erentiated component of the newpaper ha the ame cot a before ( i.e. p ). The main di erence i that now the monopolit will 1 All proof are in the Appendix. 12

13 et a higher price charging conumer for the bene t they extract from information. Therefore the monopolit price will be: p m = p + B, where p i the price charged by the uninformative newpaper. The implicit hypothei here i that the monopolit doe not price dicriminate among conumer and thi in turn come from the aumption on conumer preference; conumer perceive the tranportation cot only with repect to the main iue covered by newpaper while they have homogeneou preference over information. They value hard information o much that they are willing to buy the only informative newpaper regardle of the travel ditance from it. A I will tate below, the only binding contraint i that they cannot pay more than their utility bene t. Therefore the monopolit cannot do more than xing a price higher than before by an amount exactly equal to the utility gained by conumer in reading truthful piece of fact. Let me explain thi cenario by an example; imagine a city with many newpaper, each of them having a di erent ideological poition. Suppoe that the incumbent politician tole money from public fund and every newpaper got aware of thi mibehavior. Since the citizen value information irrepectively of their ideological poition, all the paper will report it. The monopoly cenario I decribed above, refer to the ituation in which for ome reaon, only one outlet provide a detailed reportage on the candal. Then every conumer continue to buy the uual newpaper but will not mi the only ource of information available whatever her ditance from it. The active ( i.e. informative ) outlet will increae the price of the newpaper, taking into account how much the conumer bene t from information. Indeed, a I already explained, conumer valuate ditance only along the "iue" dimenion, the di erentiated component of the journal. More explicitly, if a reader uually buy La Repubblica (center-left oriented Italian daily) but at a certain point in time Libero (a right oriented daily) publihe an excluive reportage on the Prime Miniter ( whatever party he belong to), he will buy it even if ideologically very ditant from that journal. The important aumption obviouly i that the information provided i hard and not biaed, o the only choice available to the outlet i to report or not a fact and not how to preent it. It follow that, ince all the conumer in group j buy from the only informative outlet, it pro t will be: m j = (p m c) j f (12) 13

14 Subtituting for p m = p + B we obtain: m j = q f j + B j f (13) Moreover I aume that the following condition hold in equilibrium: p + p m + 2 < u + B (14) Thi retriction mean that a conumer located furthet from the informative outlet will be willing to utain the entire cot to acce the information. Given the previou obervation, if the incumbent want to hide the information for ome group he ha to make ure that all the outlet in each group are ilenced. For thi reaon, an outlet ak the incumbent what it would be it pro t, given that all the other outlet in it group are ilenced ( i.e. the monopoly pro t in information ). Only o ering that amount the politician would be ure to ucceed in keeping uninformed the entire group. It follow that if the politician want to ilence group j, given the number of the equilibrium entrant and the pro t m j, the total amount of bribe he hould pay to ecure captured media i: T C j = n j m j = r hq f j f j + B j i f (15) where T C indicate total bribe. Notice that on one hand, a higher ubtitutability rate between the outlet ( low ) and high xed cot make cheaper for the politician to ilence the media, on the other, market ize ha a poitive e ect on bribe; the denity of the group population turn out to be a crucial variable to explain media capture. Indeed the preence of high et up cot, which i the cae of media ector, and a a conequence the preence of economie of cale, increae the impact of market ize on rm entry deciion. That i the reaon why I focu on the ethno linguitic fragmentation of the population; thi feature make the reference market for the media perfectly (or quai-perfectly) egmented, decreaing the ize of the potential audience for each rm and in turn the opportunity for newpaper entry. Since I aume ingle ditrict election, the incumbent need the vote of at leat half of the population to be reelected. To determine whether media capture will be oberved in equilibrium we have to compute the total cot f(c) the incumbent ha to pay to uccefully bribe the media. 14

15 Recalling that he ha to ilence at leat N group uch that: X i 1 1=2 we have jut to um i2n T C j over N. It follow: f(c) = X X T C i = n i m i (16) i2n i2n Uing thee reult I can rewrite the propoition in the previou ection and tudy more deeply the political equilibrium. Propoition 3 If S < R+r p media whenever:, then the politician will decide to teal and will uccefully capture the X i2n n i m i < ps (1 p)(r + r) (17) and ubtituting with (15) I obtain: X i2n r hq f j f j + B j i f 6 ps (1 p)(r + r) (18) Propoition 4 If S > R+r p, media capture will be oberved in equilibrium whenever : X i2n r hq f j f j + B j i f 6 p(r + r) (19) Proof. See the Appendix A. Dicuion A I already pointed out, whether the value of (R+r) poitively or negatively a ect equilibrium media capture, it depend on the gain of tealing relative to the one of holding o ce. In both inequalitie intead, the "market" variable enter with the ame ign; in particular, the tranportation cot, the population denity j and the value conumer aign to information B, make bribing more cotly for the politician. On the other hand the more e cient i the judiciary ytem (p low), the le media capture and tealing will be likely. The expected value of reelection and it e ect depend on whether the 15

16 judiciary i e cient or not, uch that if the politician face an higher probability to be imprioned, he will be le prone to run the rik of tealing and a a conequence to in uence the new. Let me tre in particular the role of tranportation cot and market ize a determinant of media capture; i) The parameter can be interpreted a the hedonic heterogenity of conumer. It negative e ect on media capture i channeled through number of rm and price; given a certain market ize a higher lead to a higher equilibrium price, thu, increaing the potential pro t margin for each rm, more rm will enter in equilibrium. Since the politician ha to bribe all the outlet active in a certain group, a higher hedonic heterogeneity reduce the probability of media capture. ii) The denity j in group j can be interpreted a a meaure of market ize. Media indutry i characterized by increaing return to cale due to the preence of high xed cot, therefore a higher market ize will determine a higher number of active rm in equilibrium. Since in thi ection I aume perfect market egmentation an increae in ethno linguitic fragmentation (higher N) lead to a decreae in the market ize for each group. Thi in turn negatively a ect the number of entrant rm in each group. Therefore the politician need to pend le to keep a certain group uninformed. The ize of the group a ect media independence alo through another channel: market ize ha to exceed the threhold (10). So if a group i very mall might be the cae that no rm nd it pro table to enter, leaving the group without newpaper. Thi phenomenon i certainly taken into account by the politician when he ha to decide which group to keep uninformed in order to gain reelection; it i reaonable to expect him to eek the vote of thee mall group ince he doe not need to face the cot of media capture. Summing up: 1) Given a certain market ize, higher hedonic heterogeneity of conumer preference raie the number of active outlet. Thi ource of pluralim turn out to be good for pre freedom ince doe not prevent voter to get the information from di erent newpaper. Thi i the uual poitive e ect of pluralim on media independence, emphaized in the literature and in the competition policy debate. 2) For a given population ize, the higher the fragmentation, that i the number of group, the lower will be the group market ize and conequently the number of active rm targeting it. Thu the politician will more eaily ucceed in keeping the group uninformed. I want to highlight that, although the number of rm in each group turn to be reduced, high ethno linguitic heterogeneity doe not need to decreae the total number of newpaper acro group oberved 16

17 in equilibrium. Thi lead, a I will point out in the concluding remark, to important policy and empirical implication; having more outlet overall and implementing policie aimed at increaing the pluralim, it i not necearily deiderable. I claim that if the market i egmented uch policie might fail to enhance media freedom. Notice that the reaon why the incumbent ha to ilence only N group i due to the extreme aumption of perfect egmentation. Indeed I am auming that information cannot be tramitted acro group due to the trong linguitic barrier, therefore even if half of the population i informed about the politician miconduct, ther i no way ome rumour reache the ret of the population if the media targeting it are ilenced. 4 Imperfect Segmentation In thi ection I relax the hypothei of perfect egmentation, puruing a generalization of the previou etup. All the former aumption till hold with the exception that now a portion of conumer are able to overcome the cultural and linguitic barrier eventually buying not only from outlet targeting their group but alo from outlet upplying a di erent group. In thi cenario, even if the politician ucceed to ilence all the media in a group, there will be a mobile fraction of it member which get informed (unle all the other group media are ilenced too). Since conumer are perfectly rational, I will aume that if mobile reader of group j have to chooe between an informative outlet targeting group i and a ilenced one targeting group, they will buy from the informative outlet. Thank to the continuity aumption of individual ditribution the fraction can be interpreted a the probability with which each conumer in a group become informed buying a newpaper in another language. The hypothei of imperfect egmentation will directly a ect the cot function that now I indicate a f(c) 0, and the incumbent expected gain of reelection. In thi cae the potential market ize for each entrant change, modifying the equilibrium in price and in the number of active rm in the media ector. A before I will tart from the political etup. Under thi new cenario the expected politician payo of ection two become: i) E(NCjS) = p S ii) E(NCjNS) = R + r 17

18 iii) E(CjS) = p(1 )(S + R + r) f(c) 0 iv) E(CjNS) = R + r f(c) 0 It i very intuitive to undertand why the expected gain of ilence the media in cae of tealing, ha changed with repect to the previou peci cation; in a group with captured outlet, the politician obtain le vote than before due to the preence of mobile voter who can get informed reading free newpaper from other group and, a a conequence, the probability of reelection i lower. The previou propoition can be retated a the following: Propoition 5 If S < R+r p, the politician will decide to teal and capture the media whenever: f(c) 0 < p(1 )(S + R + r) (R + r) (20) Propoition 6 If S > R+r p, the politician will have the incentive to bad behave and ilence the media whenever: f(c) 0 < p(1 )(R + r) ps (21) Notice that thi time the threhold depend negatively on the parameter. The intuition behind i very traightforward; exible reader, being able to overcome cultural and linguitic barrier, mitigate the negative e ect of egmentation and render the enterprie of controlling the media, more di cult for the politician. A before, tudying the media indutry, I will determine the cot function f(c) The Media Sector Since the main etup remain the ame, I will jut compute the equilibrium in price, in the number of entrant and I will pin down the new monopoly pro t ( i.e. the reervation utility ) the incumbent ha to pay to each outlet in a group in order to in uence the new. In thi ection I will aume, for implicity, that the denity j i equal 8j, that i all the group are identical in term of population. Since thi framework entail a ymmetric equilibrium thi aumption inure that the equilibrium number of rm will be the ame in each group, i.e. n i = n ; 8i. Now each outlet in group j will compete with the rm of the ame group for reader in city j, and with rm targeting other group for the mobile reader. 18

19 4.1.1 An Example with three group To give you the intuition let me preent an example in the cae of only three group, then I will extend the formula to the cae of N group. Imagine that the rt group i characterized by Englih outlet, the econd by Arab outlet and the third group by Hypanic newpaper. A rm in the Englih group will face the following demand: Di 1 (p i ; p) = p + n 1 p i 1 + p + n 1 +n 2 p i 3 + p + n 1 +n 3 p i 2 (22) The rt term repreent the uual demand of Englih peaking conumer, the econd term repreent the demand of Hypanic mobile reader, for which rm i face the competition of Arab outlet, while the lat term indicate the demand of Arab mobile reader for which rm i compete with Hypanic outlet. Notice that the higher the parameter, the le egmentated will be the market and the more the cenario can be traced back to the cae with all the rm located around the ame circle. Indeed in the extreme cae of = 1, we would have all the newpaper in di erent language competing among themelve and formally thi would tralate into the tandard Salop model. Thank to the previou aumption I can write (22) a: D 1 i (p i ; p) = p p i (1 + 2) + (1 + ) (23) n Let me retate (23) in the cae of N group: D 1 i (p i ; p) = p p i [1 + (N 1)] + (1 + ) (24) n Let me pin down the equilibrium in the media market of group j. Equilibrium in price Firm i will olve: p Max (p i c) p i pi [1 + (N 1)] + n (1 + ) f (25) Di erentiating with repect to p i and then etting p i = p give: p 0 = c + 19 (1 + ) n[1 + (N 1)] :

20 Equilibrium in the number of entrant From the zero pro t condition I can derive the number of rm in equilibrium: j = (p c) n (1 + ) f = n 2 (1 + ) 2 [1 + (N 1)] f = 0 (26) The equilibrium price and number of rm for each group are: p j = c + f [1 + (N 1)] (27) and r n j = (1 + ) f[1 + (N 1)] (28) Comment i) With imperfect egmentation the price charged by the rm i lower the higher the hare of mobile reader for each group. Thi i due to the fact that competition faced by rm i increae in the term (N 1); ii) The number of entrant change with repect to the cae of perfect egmentation ince the potential rm can react to imperfect egmentation not only through price etting but alo through their entry deciion. The equilibrium number of entrant i now driven alo by the portion of mobile conumer ; on one hand a higher increae the potential market ize faced by each rm, leading to a higher n j ; on the other hand it increae the competition with newpaper in other language, thu deterring entry:the condition for having at leat one entrant in equilibrium become: It i eay to verify that (29) i ati ed whenever: r (1 + ) f[1 + (N 1)] > 1 (29) j > (f[1 + (N 1)]) (30) 1 + Thi i the threhold for the population denity, under which a group remain "naturally" uninformed. The variable which a ect (30) are the ame a in the ecodn ection; a lower hedonic heterogeneity of conumer (low ), high x et up cot and a maller market ize (low j ) dampen entry. On the contrary, the parameter ha two e ect which go in oppoite direction; 20

21 on one hand it lead to a higher potential market ize, on the other it make the competition ti er for a potential entrant. Yet the former e ect dominate, o a higher will make (30) eaier to be ati ed. 4.2 The Equilibrium Media Capture II The logic behind the determination of the equilibrium i the ame a before, however the imperfect egmentation hypothei make the computation more complicated. A before I focu the attention on a pure trategy perfect Bayeian Equilibrium in which outlet i ak the incumbent what it would be it pro t if it were the only one in group j to provide information. Now the outlet know that it potential demand i made by two component; the reader of it own group for which it i the unique informative upplier and the mobile reader of all the other group for which outlet i face the competition of rm targeting not ilenced group. Propoition 7 It can be hown that the price rm i can charge i 2 : p i = c (N 1) 1 + (N N )n + (N N ) 1 + n (31) where N are the number of ilenced group, while n i the number of entrant in equilibrium. Notice that a I will how below, N depend on the fraction of mobile conumer. Therefore if an outlet in group j ha the monopoly in information he will get the following pro t: m0 j () = 1 + (N 1) 1 + (N N )n + (N N ) n (N N )n + (N N ) (N 1)(1 + n) (32) A I derive 3 j () > 0. Thi implie that a higher fraction of mobile reader make capture more di cult for the incumbent, increaing the price of the bribe he ha to pay. In particular an increae in ha two e ect wich go in oppoite direction; on a ide a larger number of mobile reader increae the potential market ize for the rm i; on the other hand the f 2 The proof i in Appendix B. 3 The proof i in Appendix B. 21

22 le egmented the market are, the higher the competition an outlet face. Since the rt e ect dominate the j () > 0 Summing up, if the politician want to ilence group j, given the number of the equilibrium entrant and the pro t m0 j (), the total amount of bribe he hould pay to ecure captured media i: T C 0 j = n j r m0 j = (1 + ) f[1 + (N 1)] m0 j With imperfect egmentation the ubtitutability rate between outlet and the market ize till play a crucial role in a ecting media capture; low tranportation cot decreae the bribe the incumbent ha to pay, while a higher market ize ( ), that i a lower number of ethnic group, ha till a poitive e ect on bribe. Notice from (33) that our parameter of interet () clearly ha a poitive e ect on bribe; the higher the fraction of mobile conumer, the higher the compenation an outlet ak to the politician for the lot revenue from being informative. Now I can compute the total cot f(c) 0 () the incumbent ha to utain to uccefully bribe the media. Remember that with perfect egmentation in order to be ure of reelection, the incumbent had to keep uninformed at leat N group uch that: X i2n i 1 1=2: With imperfect egmentation the incumbent know that in every group there i a portion of conumer that can get the information from active outlet in another language. So in any group where media have been ilenced the hare of vote the politician gain i: (1 the incumbent will have to hide information for N group, uch that: ). Summing up, X i2n (1 ) i 1 1=2 ; i:e: X i2n i 1 1 2(1 ) : One can immediately oberve that with mobile conumer the politician ha to keep uninformed more than half of total population. Thi i becaue he looe anyway ome vote from thoe who move and get aware of it micinduct buying from other group paper. 22

23 It follow that total cot of bribing will be: f(c) 0 = X i2n T C 0 i = X n i i2n m0 j () (33) I conclude thi ection rewriting the propoition (5) and (6), and analyzing the political equilibrium. Propoition 8 If S < R+r p, the politician will decide to teal and media capture will occur if: f(c) 0 < p(1 )(S + R + r) (R + r) (34) and ubtituting with (34), I nd: X i2n r (1 + ) f[1 + (N 1)] m0 j () 6 p(1 )(S + R + r) (R + r) (35) Propoition 9 If S < R+r p, the politician will teal and media will be captured whenever: X i2n r (1 + ) Proof. See the Appendix A. f[1 + (N 1)] m0 j () < p(1 )(R + r) ps (36) Comment A I already pointed out, it i eay to identify the determinant of media capture. In the cae of imperfect egmentation the parameter of interet i the fraction of mobile conumer,. Ethno linguitic fragmentation through market ize ( j ) and hedonic heterogeneity () till play a crucial role in a ecting the preence of bribing in equilibrium but their e ect i augmented by the voter "rate of mobility". Let me repeat the channel through which thi variable operate; rt, it increae the potential market ize leading to a higher number of active rm. Thi raie the number of rm per group the incumbent ha to bribe. Second, it a ect the way conumer can acce to information; bribing all the outlet in a group doe not guarantee all the vote to the politician. A hare of thoe voter i able to read informative outlet in other language. A a conequence, the incumbent need to hide information for a larger portion of the population to be ure of reelection. 23

24 4.3 Comparative Static I want to um up the main reult of the model making comparion between di erent cenario. Firt of all I look at the more general model, the one with a hare of mobile reader in the population. Indeed letting to be zero bring you back to the cae of perfect egmentation. Let conider expreion (36) that provide the condition under which media are captured in equilibrium. For a given level of ethno linguitic fragmentation ( j ), the higher conumer hedonic heterogeneity () the le likely will be media capture ; ince outlet di erentiate themelve on the main iue but not on the information they provide, the politician ha to ilence all the media targeting a group to gain it upport. Given that a higher boot the number of outlet targeting a group, it will increae the cot borne by the incumbent for capturing. On the oppoite, for a given level of horizontal di erentiation within group, the higher i the number of group ( i.e. higher ethno linguitic fragmentation ) the lower the market ize for each potential entrant. Thi e ect decreae the number of outlet in a group, in turn the cot of media capture hrink and it i more likely to have ilenced media in equilibrium. Notice that the impact of linguitic fragmentation i driven by the information acquiition proce of conumer; if nobody in a group i able to read newpaper in di erent language, the politician jut need to ilence all the outlet to gain the vote of it member. Thi i due to the trong linguitic and cultural barrier which lead to perfectly eparated market. In fact the negative e ect of linguitic di erentiation i mitigated by the preence of a hare of mobile voter in every group. Imagine the extreme ituation in which all the voter are mobile (i.e. = 1); the right hand ide of (36) would be negative that i, the politician expected gain from bribing the outlet and tealing would be negative. A a conequence he would never decide to capture the media caue he would have to bribe the rm active in the whole market. 5 Concluding Remark Thi paper ha developed a framework in which to analyze the phenomenon of media capture. I focued on two element that in my opinion are crucial in determining media capture; hedonic heterogeneity and ethno linguitic fragmentation of the population. The rt i a feature of conumer utility implying di erent individual preference on the main iue covered by newpaper which lead to a horizontal di erentiated market and in turn rie the number of media outlet upplied in equilibrium. Under thi type of heterogeneity conumer can freely acquire information from any outlet; therefore a politician will need to bribe a very 24

25 large number of outlet to gain political upport. On thi repect it i intereting to undertand the determinant of hedonic heterogeneity and I think that education and income might be two plauible candidate. Thi would imply that in underdeveloped environment, characterized by low income and education, the preence of free media would be le likely. The econd element I focu on, i ethno linguitic fragmentation which generate a egmented market; when conumer are eparated by trong linguitic or cultural barrier, they cannot obtain information from each other new outlet and a a reult, by in uencing only a ubet of few newpaper, politician are able to obtain a u cient number of vote for reelection. In my model linguitic fragmentation a ect the number of equilibrium entrant in each group, hrinking it market ize; when a rm decide whether to enter and which group to target, the preence of high xed et up cot create a cale e ect whoe magnitude depend on the ize of the potential market. A a conequence, higher egmentation reduce the cope for economie of cale in turn deterring entry; in fact there will be ome group too mall to attract any outlet and which, a I have hown, remain naturally uninformed. I believe that thi analyi with endogenou media entry can provide intereting empirical prediction on the relationhip between an economy total number of rm and media capture; I argue that it might be mileading to compare the abolute pluralim in media market among countrie in order to etablih the quality of the pre ince high ethno linguitic heterogeneity doe not need to reduce the number of outlet overall nonethele, a I derived, it can undermine independence of the pre. Thi reult ha clear implication for regulatory policie of media market; in particular, tandard indexe of market tructure uch a the number of outlet upplied and their concentration may ay little about the extent of media freedom ince di erent ource of media pluralim may have oppoite implication for the ability of politician to in uence citizen information. For example in an highly fragmented environment, it might be helpful to implement policie aimed at increaing the number of local newpaper, targeting a peci c geographical area or a peci c ethnic/language group. I would like to empirically explore ome of the implication of my model on a cro ection of countrie. Some empirical literature ha treed the correlation between public targeted tranfer and diffuion of information; a I mentioned, Beley and Burge how a partial evidence of thi correlation in India, taking into account extraordinary tranfer in cae of ood and drought. The quetion they addre i whether informed voter are more e ective in holding the politician accountable. 25