Localism and Welfare∗

We analyze competition between a mass media producer and providers of local content. The business model is that of a two-sided market: advertising finances programming. Broadcasters compete by choosing ad levels and program quality. The local market decision (advertising level) is tailored to each market, while the quality decision is one-size fits all. This means there are externalities between local producers even though they do not directly interact. The large producer can spread quality costs over all the local markets, and chooses higher quality than the local producers. Each local producer’s quality and audience share is an increasing function of the local market size. In each market, the mass producer advertises more and has a larger market share, so the disparity is largest in the smallest markets. For a given number of markets served by local producers, the equilibrium quality may be too low, suggesting that inducements to improve quality may be beneficial. However, there is not a clear-cut case that the global producer makes it too difficult for local producers to compete; indeed, the converse may be the case because the global producer is too soft in competing in local markets. The argument for intervention may therefore have to be made on the grounds of positive externalities created by provision of local broadcasting.