What I wrote yesterday:
When Fox broadcasts the Super Bowl they advertise for their shows, like American Idol. But those years in which, say, ABC has the Super Bowl you will never see an ad for American Idol during the Super Bowl broadcast.
This is that sort of puzzle whose degree of puzzliness is non-monotonic in how good your economic intuition is.
If you don’t think of it in economic terms at all it doesn’t seem at all like a puzzle. Try it: ask your grandpa if he thinks that its odd that you never see networks advertising their shows on other networks. Of course they don’t do that.
When you apply a little economics to it that’s when it starts to look like a puzzle. There is a price for advertising. The value of the ad is either higher or lower than the price. If its higher you advertise. If its another network that price is the cost of advertising. If its your own network that price is still a cost: the opportunity cost is the price you would earn if instead you sold the ad to a third-party. If it was worth it to advertise American Idol when your own network has the Super Bowl then it should be worth it when some other network has it too.
But a little more economics removes the puzzle. Networks have market power. The way to use that market power for profit is to artificially restrict quantity and set price above marginal cost. (The marginal cost of running another 30 second ad is the cost in terms of viewership that would come from shortening, say, the halftime show by 30 seconds.)
When a network chooses whether to run an ad for its own show on its own Super Bowl broadcast it compares the value of the ad to that marginal cost. When a network chooses whether to run an ad on another network’s Super Bowl broadcast it compares the value to the price.
Indeed even if the total time for ads is given and not under control of the network (i.e. total quantity is fixed) the profit maximizing price for ads will typically only sell a fraction of that ad time. Then the marginal (opportunity) cost of the additional ads to pad that time is zero and even very low value ads like for American Idol will be shown when Fox has the Super Bowl and not when any other network does.
In fact that last observation and the fact that you never ever see any network advertise its shows on another network tells us that the value of advertising television shows is very low. Perhaps that in fact tells us that the networks themselves understand (but their paying advertisers don’t) that the value of advertising in general is very low.
Cheap Talk 
7 comments
Comments feed for this article
April 7, 2016 at 4:56 pm
afinetheorem
I would have imagined a Coase conjecture mechanism. I have X slots and want to “auction” them off before the game. The marginal cost of slots is zero. If I have any free slots at game time, advertisers know the price will fall, hence they wait on the margin. My own ads have value v, so the advertisers know I am credibly committed to not drop the price below v. This terminal value changes each advertiser’s actions throughout the dynamic purchase period a la Horner’s papers.
April 7, 2016 at 8:31 pm
JWH
Wouldn’t another theory be that ads just move demand around? Suppose there are only two networks, and the amount of time that each consumer watches television is fixed. Then the total profit for ABC+NBC from ABC showing an ad for an NBC show is zero, since it just moves consumers from ABC to NBC—so there are no gains from trade. By contrast, if ABC shows an add for household products from P&G, then there are possible gains from trade for ABC and P&G (although possibly a negative externality on other household products companies). Of course, with more television networks, this effect is smaller, but it does mean that the “cost” to ABC of showing an ad for NBC is greater than the “cost” of showing an ad for P&G, since the NBC add will cost ABC some of its own customers.
(And NBC, it would seem, should be pretty unwilling to pay the premium that ABC would charge, since NBC has a pretty good substitute for ABC ads: ads on NBC itself.)
April 8, 2016 at 4:24 am
David Gonzales
Perhaps the effectiveness of ads for own-network shows is higher. This is logical, as a viewer who is already familiar with a network and how to view it, will be easy to persuade to watch another show. Thus, with the value of own-network ads higher, the same price (even if internalized by the network) might be economically worth it for the same network and not for others.
Explained with an analogy to web-advertising, the same ad slot on a web page for a dentist might be worth more for a tooth-brush company than a lawn mower.
April 8, 2016 at 8:54 am
James Moore
What if there’s no such thing as an ad for a show, only ads for the current channel (that use shows as content, of course)? It wouldn’t even be possible to advertise on a different network.
April 8, 2016 at 10:50 am
Jeremy
JWH seems right to me: showing a competitor’s ad would create a negative externality that is at least partly incident on the seller.
This mechanism has the advantage that it does not rely on an assumption of market power. Other markets also appear not to involve competitors buying ads on each others’ platforms, e.g., no Wall Street Journal ads appear in the pages of the New York Times, and no United ads appear in the pages of AA’s in-flight magazine.
April 8, 2016 at 2:01 pm
hackerjay
“Perhaps that in fact tells us that the networks themselves understand (but their paying advertisers don’t) that the value of advertising in general is very low.”
Couldn’t it also tell us that the networks know that the value of their advertising is so high that the money gained from running a competitor’s ad would be erased by all the people that would flock to the other network, lowering their own ratings?
April 8, 2016 at 2:38 pm
EH
So you’re saying there’s a double marginalization problem associated with cross-network advertising, but no such problem when you run your own ads. This is definitely correct.
But there is also an indirect cost in the form of losing viewership in your own TV shows, namely those that run at the same times as the ones whose ads you’re running. Frequently rival firms cannot reach a mutually-beneficial agreement for an exchange that will serve to increase competition. This is why, for example, firms often do not license patents to their competitors. Such deals will often reduce joint profits by making the market more competitive, rendering mutually-beneficial trade impossible.