The Impact of an Advertising Quota on Public Television

Abstract

In this paper we propose a model of competition between a private television channel, financed by advertising, and a public channel, financed by advertising and a transfer of public funds. We study the impact that an advertising quota imposed on the public channel has on the channels and on the viewers' welfare. We show that, in the short term, when program investments are exogenous, the quota hurts the private channel, but benefits viewers. In the longer term, when program investments are endogenous, the introduction of an advertising quota can benefit the private channel if it is high enough, and reduce the viewers' surplus if set too low.