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Slide 1

Slotting Allowances and Payola: Do
They Deserve Different Regulatory
Treatment?

Mary W. Sullivan
The George Washington University
msull@gwu.edu

DOJ/FTC Hearings on Single-Firm Conduct

November 15, 2006


Slide 2

Similar Practices

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


Slide 3

Different Regulatory Treatment

  • 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

Can theories of exclusion explain slotting allowances and payola?

  • 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

Is evidence consistent with theories of exclusion?

  • 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

Are slotting allowances exclusionary? Evidence from the courts

  • 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

Why does payola receive different regulatory treatment than slotting allowances?

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


Slide 9

Will regulating payola cause radio stations to select music that is in public interest?

  • 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

Conclusion

  • 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

References

  • 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.