Slide 1 Slotting Allowances and Payola: Do
They Deserve Different Regulatory
Mary W. Sullivan
The George Washington University
DOJ/FTC Hearings on Single-Firm Conduct
November 15, 2006
Slide 2 Similar Practices
- 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.
- 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.