vanderwurffyvancuilemburg[1]

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Impact of Moderate and RuinousCompetition on Diversity: The Dutch

Television Market

Richard van der Wurff and Jan van CuilenburgThe Amsterdam School of Communications Research ASCoR

University of Amsterdam

This article analyzes how competition in television broadcasting influences diversity

of program supply. We argue that competition in oligopolistic broadcasting markets

can take different forms, depending on the strategies adopted by broadcasters. We

distinguish between moderate and ruinous competition, and discuss under what con-ditions these types of competition will emerge. Wehypothesize that moderatecompe-

titionimprovesdiversity,whereas ruinous competitionproducesexcessivesameness.

We test these hypotheses for the Dutch television market.

Since the 1980s European governments increasingly rely on competition to govern

media industries. Proponents of this economic turn in policy making argue that

competition maximizes social welfare by forcing media companies to respond to

demand as efficiently and effectively as possible. Opponents maintain that compe-

tition results in trivialization, reduced quality, and replication of content; either be-cause of market failures or because commercialism and social-cultural aims do not

go hand-in-hand.

Taking this debate on competition and media performance as our point of de-

parture, this article examines how competition in broadcasting influences diversity

of program supply. We define diversity in the following section. Later, we argue

that competitive behavior, below a certain threshold of intensity will stimulate di-

versity, while above that threshold, it will reduce diversity. Later, we specify and

THE JOURNAL OF MEDIA ECONOMICS, 14(4), 213229Copyright 2001, Lawrence Erlbaum Associates, Inc.

Requests for reprints should be sent to Richard van der Wurff The Amsterdam School of Communi-


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test our model for the Dutch television market. Finally, we draw conclusions and

discuss policy implications.

REFLECTIVE AND OPEN DIVERSITY

Diversity refers to the extent to which media content varies on one or more content

dimensions. To establish whether media content is (sufficiently) diverse or not, we

can use two different norms. First, we can assess whether media express different

ideas or topics in the same proportion as media users prefer them. This provides a

measure ofreflective diversity. Second, we can assess whether media express all

reasonable ideas or topics in equal proportions, regardless of their public support.This offers a measure ofopen diversity (Van Cuilenburg & McQuail, 1982).

Theformernormofreflectivediversityderives itssignificancefromtheprinciple

thatmediashouldpayproportionalattentiontotheneedsofallmediausers.Itresem-

bles the economic argument that supply should match demand. The latter norm of

open diversity builds upon the criticalrational principle that media content should

be thought provoking and objective. It resembles political and cultural arguments

that all ideas should have uniform access to societys communication system.

Open andreflective diversityareincompatibleandat thesame time complemen-

tary notions. They areboth importantobjectivesincommunications policy, yettheycan only coincide in the exceptional case that preferences for different ideas and

opinions are uniformly distributed. We therefore argue that a media system per-

forms optimally when it strikes a balance between open and reflective diversity.

MEDIA COMPETITION, INNOVATION, AND DIVERSITY

Our main question is whether competition in broadcasting can produce a balance

between reflective and open diversity. To answer this question, we build on Indus-trial Organization (IO) theory. We study the market where broadcasters sell televi-

sion programs to viewers, and define the price of a television program as the aggre-

gated amount of money, attention, or both that viewers pay in exchange.

Oligopolistic Rivalry and Competitive Strategies

Broadcastingmarkertsareoligopolies (Picard,1989).Starting with Hotelling(1929), a

number of scholars (Chae & Flores, 1998; Noam, 1991; Owen & Wildman, 1992;Waterman, 1989) have discussed whether competition in oligopoly markets tends to

214 VAN DER WURFF AND VAN CUILENBURG


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viewersarenotable toexpress theintensityoftheirpreferences, andthatpreferencesare

discontinuous, we indeed find that competing suppliers offer excessive sameness

rather than diversity. When we assume the opposite, however, we find that competingsuppliers do offer differentiated content.

This outcome is not surprising for IO theorists. Different IO models clearly show

that market conduct andperformance of oligopolists can vary significantly, depending

on the assumptions, or conjectures, of the firms (Scherer & Ross, 1990). We there-

fore assume that rational broadcasters in oligopoly markets have a range of strategic

options to choose from. For our research, this implies thatwe need to take competitive

conduct as a relatively autonomous variable into account, next to market structure, if

we want to explain how competition influences diversity (Wirth & Bloch, 1995).

Following Porter (1985), we further assume that competing broadcasters canadopt threedifferentcompetitive strategies,namelya cost leadership strategy,a dif-

ferentiation strategy, or a price competitive strategy.1 Broadcasters adopting a cost

leadership strategy aim for a structural cost advantage (Porter, 1985). They offer

content toviewers (and audiences toadvertisers)at lowcost,without compromising

the quality of content. Maintaining cost advantages requires a continuous focus on

cost reduction, and investments in technological and nontechnological process in-

novations. Because broadcasting entails high first copy costs and low reproduction

costs, a primary way to acquire a structural cost advantage is by serving maximum

audiences and realizing economies of scale and scope.Broadcastersthat adopta differentiationstrategyratheraimtodevelopacompet-

itiveadvantagebyofferingqualitatively differentcontent (Porter, 1985).They need

tomakeastructural, financial, andorganizationalcommitment topursueproductin-

novations. Both the cost leadership and differentiation strategies intend to create a

sustainable competitive advantage that earns broadcasters above-average profits.

Whenbroadcastersfailtoaccomplishthisgoal,theywillfindthemselvesengagedin

price competition. Then they need to minimize costs in the short term. They may

re-broadcast content that has already aired in the same or other markets. Alterna-

tively, they will broadcast content that has already been proven successful in othermarkets and that can be replicated at low cost. We may refer to this strategy as the

price competitive strategy.

Oligopolistic Rivalry and Market Performance

Porter considers it essential that companies that want to develop a sustainablecom-

petitive advantage make a clear choice between either the cost leadership or the dif-

COMPETITION AND DIVERSITY 215

1Porteradds that strategies canbe appliedtowards thewhole marketor towardsmarketsegments.We

disregard this distinction It does not add much at this stage of our argument Besides the dataset with


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ferentiation strategy. In addition, it is essential that they do not replicate each

others strategies. We argue that broadcasting markets can only provide a balance

between reflective and open diversity under similar conditions. The argument un-derlying our model is as follows.

When one or very few companies adopt a cost leadership strategy, these compa-

nies will offer mainstream content of acceptable quality that attracts large audi-

ences. In our terminology, this means that they will offer a reflectively diverse

spectrum of programs that fits the demand of the largest possible audience. How-

ever, when too many companies adopt a cost leadership strategy, these cost leaders

will start to compete on price. They will start undercutting each others prices until

prices equal marginal costs.2

Given that marginal costs are very low and that fixed first copy costs are rela-tively high in broadcasting, price competition will easily push prices below aver-

age costs. When this happens, a negative cycle starts. Revenues will not be

sufficient to recoup first copy costs. Investments in content development or pro-

cess innovation will become unfeasible. Broadcasters will start replacing cost

leadership strategies with short-term price competitive strategies to minimize first

copy costs. They will offer low quality content at low prices. Audiences will turn

to other media markets and revenues will decline further. The end result will be

that the remaining broadcasters all offer the same content. Formally, this is the

perfect competition scenario, with prices that equal marginal cost and productsthat are homogenous. We, however, prefer the term ruinous competition (Van

Cuilenburg, 1999).

Companies can avoid a ruinous price war by adopting a differentiation strategy

(see Tirole, 1988). Broadcasters that act accordingly offer distinct content that

contributes to open diversity. Yet, prices in such a market will increase, too both

because differentiation increases costs and because differentiation gives broad-

casters market power to increase prices. When too many companies adopt a differ-

entiation strategy, prices will increase too much and a negative cycle will occur.

Consumers will reduce demand and switch to substitutes. Revenues will declineand companies will once more be forced to revert to price competitive strategies.

In contrast, a beneficial cycle emerges when broadcasters do not imitate each

others strategies. Under these conditions, price increases due to product differen-

tiation will strengthen the competitive position of cost leaders that can expand

their offerings. Likewise, growing price competition will trigger offsetting prod-

uct differentiation responses. Hence a dynamic balance between cost leadership

and differentiation strategies emerges. In such a situation ofmoderate competi-

tion, process innovations that are initially developed by cost leaders gradually dif-

fuse to companies with differentiation strategies, while cost leaders gradually take



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up product innovations from differentiating broadcasters. Prices therefore are not

excessively high and supply varies between open and reflective diversity.

Ultimately, companies strategic choices will determine whether competitionwill be moderate or ruinous. Nevertheless, IO theory and Porters (1980) theory on

industry-wide competitive forces suggest several structural factors that make a

moderate competitive outcome less likely (see De Jong, 1993; Porter, 1980; Soete

& Ter Weel, 1999):

1. Suppliers, buyers, or both are concentrated.

2. Switching costs for viewers (or advertisers) are low.

3. Innovations cannot be appropriated (i.e. patented or kept secret).

4. There are many competitors of about equal size.5. Firms have different backgrounds.

6. New entrants enter the market.

7. Market growth is slow or negative.

These seven factors increase competition and/or make competitive relations less

stableandless predictable.They indicate marketstructural conditions that favor the

emergence of ruinous rather than moderate competition.

A Media Competition, Innovation, and Diversity Model

Competitive conduct on oligopoly markets can take different forms. We distin-

guish between moderate and ruinous competition. Under moderate competition,

companies pursue either cost leadership or differentiation strategies. They either

invest primarily in process innovations and offer mainstream content of adequate

quality at lower prices, contributing to reflective diversity, or they invest primarily

in product innovation and offer distinctive content that contributes towards open

diversity at higher prices. Because of this strategic heterogeneity, a shift towards

differentiationstrategies cantrigger cost leadership responses,andvice versa.Con-sequently, a dynamic balance between open and reflective diversity emerges.

On the other hand, ruinous competition emerges when most companies pursue

price competitive strategies. This situation corresponds with the classic model of

perfect competition. Innovation will be absent, prices will approach marginal

costs, and content will be homogeneous. Such a situation of ruinous competition

can emerge, inter alia, when many competitors of similar size compete or when

significant new competitors enter a market.

A CASE STUDY OF THE DUTCH TV MARKET



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Dutch market in this period. Until 1989, the Netherlands had an exclusively public

broadcasting system with two, andsince 1988 three,public channels.Broadcasting

time on these channels was allocated to seven major independent, not-for-profitbroadcasting organizations (and a number of minor organizations) in a manner that

supposedly provided a combination of open and reflective diversity (see Van

Cuilenburg & McQuail, 1982).

The first commercial broadcaster entered this market in October 1989. Since

then, the number of broadcasters has steadily increased.3 Number two entered the

market in 1993, three more commercial channels followed in 1995, and the last

commercial channel entered the market in early 1999. At present there are three

public and six commercial general interest channels.4 In addition, there are more

than 10 new special interest channels, such as CNN, MTV, and Discovery Chan-nel. These channels serve a population of slightly less than 16 million people.

HYPOTHESES

Our model suggests that the gradual increase incompetitionin theDutch broadcast-

ing market improves diversity until the threshold between moderate and ruinous

competition is passed. To test this model, we derive nine hypotheses.

First we predict that the gradual increase in competition results neither in asteady increase nor a steady decline of diversity. Rather we predict that there are

two different modes of competition that each delivers distinct results. Conse-

quently, we hypothesise in negative terms that

H1. Competition intensity and reflective diversity are not linearly related.

H2. Competition intensity and open diversity are not linearly related.

H3. Competition intensity and excessive sameness are not linearly related.

In positive terms, we predict the following relative levels of diversity:

H4. Reflective diversity is highest with moderate competition and lowest

with ruinous competition.

H5. Opendiversity is highest withmoderatecompetition and lowestwith ru-

inous competition.


3Market entry of commercial broadcasters is strongly facilitated by the high degree of penetration

(>90%) of cable in The Netherlands.4

Three commercial channels (RTL4, RTL5, and Veronica) are owned by the Holland Media Groep,part of CLT-Ufa. Two channels (NET5 and SBS6) are owned by SBS and De Telegraaf (a major Dutch

newspaper publisher). One channel (TV10, later Fox) is owned by Fox (Rutten & Buijs, 1999). During


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H6. Excessive sameness is lowest with moderate competition and highest

with ruinous competition.

Inaddition,weexpect to find a dynamicbalance between openand reflective diver-

sity under moderate competition,anda negative cycle under ruinous competition:

H7. With moderate competition, changes in open diversity have different

signs than changes in reflective diversity. (That is, if open diversity increases,

reflective diversity will decline, and vice-versa.)

H8. With ruinous competition, changes in open andreflective diversityhave

equal signs. (Basically, both open and reflective diversity will decline.)

Finally, we take into account that new entry is one of the structural factors that in-

tensify competition. We moreover assume that the competition intensifying effect

of new entry is higher under moderate competition than under ruinous competition

(where competition is intense anyway):

H9. With moderate competition, excessive sameness increases and open

and reflective diversity decrease more rapidly in quarters immediately be-

fore, during, or after new entry than in other quarters.

DATA AND VARIABLES

To test these hypotheses we use quarterly data on broadcasting supply and viewing

patterns in the Netherlands, broken down per channel and program type, for the pe-

riod 1988 until the second quarter of 1999. We include all (nine) public and com-

mercial general interest channels that target the Netherlands.5 We exclude all other

channels that can also be received.6

We examine diversity of television program types. We use ten different pro-

gram type categories, that are generally used by European broadcasters and ratingagencies. These are (a) news, (b) current affairs, (c) serious information, (d)

light information, (e) artistic information, (f) entertainment, (g) performances

(music, comedy), (h) sports, (i) movies, and (j) TV-series.


5The data we use are collected on a regular basis by Intomart for broadcasters and advertising agen-

cies. However, Intomart did not collect data for all commercial channels from the moment they entered

the Dutch market. We therefore lack data for RTL4 from its entry in 1989 until and including the third

quarterof 1992. We also lack data for TV10/Fox, from its entry in May 1995 until and including the last

quarter of 1995.6The ninemajor general interest channels included in our study together had a market share of86% in

the second quarter of 1999 The regional channels and one Flemish public channel not included in our


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Wedraw sixvariablesfrom ourdataset (see Table1), threerelated tocompetition

andthreetodiversity.ThefirstvariablemeasuresoverallCompetitionIntensity(CI)

between channels. It is basically a Herfindahl-Hirschman Index (HHI) that isre-codedsothatahighervalueimpliesmoreintensecompetition.FollowingScherer

andRoss(1990)wefurtherdecomposethisvariableintotwocomponents:theNum -

ber of Channels (NC) and the Variance Equivalent of Market Shares (VEMS). The

formervariable (NC) represents a structural condition that can trigger ruinous com-

petition. The latter variable (VEMS) we interpret as an indicator for competitive

conduct. We assume that a low variance equivalent of market shares indicates that

corporate strategies are similar, and thus that competitive behavior is intense.

The remaining three variables measure diversity according to the definitions

provided earlier. Reflective Diversity (RD) measures how well supply matches av-erage demand (in terms of relative viewing time per program type). Open Diver-

sity (OD) gives an estimate of how uniformly broadcasting time is spread over the

different program types. Excessive Sameness (ES) expresses what percentage of

broadcasting time is devoted to the two most popular program types (i.e. light in-

formation and TV-series).

PERIODIZATION

To be able to test our model, we further need to distinguish between a period inwhich structural conditions favor moderate competition and another period in

which structural conditions favor ruinous competition. We derive the threshold be-

tween these two periods from IO theory.

Scherer and Ross (1990) argue thatas a verycrude general rule, if evenly matched

firms supply homogeneous products in a well-defined market, they are likely to begin

ignoring their influence on price when their number exceeds ten or twelve (p. 277).

When oligopolists start to ignore their influence on price, they start to behave as in a

perfectly competitive market. Inour model this means the start of ruinouscompetition.

Given our discussion of structural conditions that favor ruinouscompetition, wemoreover assume that competitors in broadcasting markets will already start to be-

have as in a perfectly competitive market at lower numbers than 10 to 12. After all,

concentrationof content suppliers and advertising agencies is high, advertisers and

viewers can easily switch from one broadcaster to another, (product) innovations

caneasily be copied, different broadcasters have different (public andcommercial)

backgrounds, and supply is growing rapidly whereas demand is stagnating.7 All

these factors, we argued in section 3, trigger more intense competition.


7Themajor Dutch general interest channels, in combination withthree major thematic channels (Car-

toon Network KinderNet and MTV) broadcasted in 1998 on average 157 hr per day; almost six times


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TABLE 1

Variables Used in Study

Variables Indicator for Formula

Range (Minimum

Maximum)

CI Competition intensity in general = 1 HHI

= 1 S mi2= 1 (1/NC + VEMS)

0 CI (n 1)/n W

NC Competitiveness of market structure = n 0 < NC < WVEMS Intensity of competitive conduct = S si2

= HHI 1/n

0 VEMS (n 1)/n W

OD Extent to which program types are

broadcasted uniformly

= 1 S yi /2 0 OD 1 W

RD Extent to which program types are

broadcasted proportionally to

demand

= 1 S zi /2 0 RD 1 W

ES Bias toward popular programs = vt1 + vt2 0 ES 1 W

Note. CI = competition intensity; HHI = HerfindahlHirschman Index; NC = number of channels; VEM

diversity; RD = reflective diversity; ES = excessive sameness.

221


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We argue that the threshold between a market structure that favors moderate

competition and a market structure that favors ruinous competition in the Dutch

market lies at six channels. Accordingly, we divide our data set into two periods. InPeriod A conditions favor moderate competition. This period runs from the first

quarter of 1988 until the third quarter of 1995. In Period B, conditions favor ruin-

ous competition. This period starts with the entry of three commercial channels in

the fourth quarter of 1995, and runs until the second quarter of 1999.

RESULTS

Figure 1 presents a graphical overview of the developments in competition and di-versity in the television market in the Netherlandssince 1988.It shows thatCompe-

tition Intensity and Excessive Sameness increase gradually during the 11-year pe-

riod of analysis, while Open Diversity decreases and Reflective Diversity first

increases and then declines again.

Competition and Diversity

Figure 1 suggests and analysis confirms that Competition Intensity, Open Diver-sity, and Excessive Sameness are strongly correlated (rCI-OD = .855; rCI-ES = .910;


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Competition Intensity Reflective Diversity Open Diversity Excessive Sameness

RTL4 RTL5VOO

SBS6

TV10

NET5


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rOD-ES = .894).8 The more intense competition, the lessopenly diverse and the more

excessive the same program supply. These results are not as expected. They do not

support hypotheses H2 and H3. Reflective Diversity and Competition Intensity, onthe other hand, show a low and insignificant correlation (rCI-RD = .193; p = .2). Con-

firming our expectations, there is only a very weak linear relationship between

these two variables.

When we decompose Competition Intensity into its two components, we find

that Reflective Diversity is strongly and negatively related to the Variance Equiva-

lent of Market Shares (rVEMS-RD = .662). Excessive Sameness and Open Diversity

on the other hand are strongly related to the Number of Channels (rNC-ES = .889 and

rNC-OD = .916 respectively). These results suggest that reflective diversity de-

pends in particular on the competitive behavior of broadcasters, whereas open di-versity and excessive sameness depend more on the structural dimension of

competition.

Moderate Versus Ruinous Competition

Next we study the relative levels of diversity in the two periods. The results concur

with our hypotheses H4H6. Reflective Diversity is highest when conditions favor

moderate competition (i.e. in period A), although the differences between the twoperiods are small (RDA = .87 and RDB = .85). Open Diversity in contrast is clearly

highest when conditions favor moderate competition (ODA = .69; ODB = .62). Ex-

cessive Sameness likewise is clearly highestwhen conditionsfavor ruinouscompe-

tition (ESA = .46; ESB = .54). The latter two findings support the model.

Part of the explanation why Reflective Diversity does not vary much between

period A and B, is that Reflective Diversity is especially low in the first part of pe-

riod A, when only public broadcasters compete (RDA1 = .85). Reflective Diversity

subsequently becomes highest in the second part of period A, from 1993 forward,

when public and commercial broadcasters compete (RDA2 = .89). These changesin Reflective Diversity suggest that public broadcasters without commercial com-

petition do not pay as much attention to the demands of the general public as they

do when they do compete with commercial broadcasters.

Turning to the period-specific relationships between competition and diversity,

we note that Reflective Diversity and Competition Intensity are positively related

when conditions favor moderate competition (rCI-RD, A = .681). When conditions

favor ruinous competition, Reflective Diversity and Competition Intensity are not

significantly not negatively related (rCI-RD, B = -.371; p = .161). When we compare

these figures with the correlation for the whole period (rCI-RD, A+B = .193; p = .2),



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TABLE 2

Correlations

Total Period

Period A: Modera

Competition

Variables RD OD ES RD OD

CI

Pearson correlation .193 .855** .910** .681** .636**

Significance levels (two tailed) .200 .000 .000 .000 .000

NC

Pearson correlation .092 .916** .889** .539** .713**

Significance levels (two tailed) .542 .000 .000 .002 .000 VEMS

Pearson correlation .662** .226 .048 .714** .038

Significance levels (two tailed) .000 .132 .751 .000 .841

RD

Pearson correlation .193 .024 .148

Significance levels (two tailed) .199 .876 .426

OD

Pearson correlation .894**

Significance levels (two tailed) .000

Note. N= 46 in total period; n = 31 in Period A; n = 15 in Period B. CI = competition intensity; equivalent of market shares; RD = reflective diversity; OD = open diversity.

*p = .05. **p = .01.

224


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we can draw the conclusion that reflective diversity and competition are differ-

ently related under different modes of competition.

A disaggregation of Competition Intensity into its components offers additionalsupport for this conclusion. When competitive behavior becomes more intense (as

signaled by a decline in the variable Variance Equivalent of Market Shares) under

conditions that favor moderate competition (i.e. in period A), supply becomes

more reflectively diverse (rVEMS-RD, A = .714) and more excessively the same

(rVEMS-ES, A = .442; p < .05). When competitive behavior becomes more intense

under conditions that favor ruinous competition, in contrast no significant effects

on diversity are observed. These results suggest that under conditions that favor

moderate competition diversity is strongly related to competitive conduct. The less

intense competitive conduct is, the more broadcasters strategy will vary and themore open diversity will be, and vice versa. However, once the threshold of ru-

inous competition is passed, changes in competitive behavior do not have a signifi-

cant effect on market performance any more. The structural conditions have

become dominant, and conduct can but only result into excessive sameness.

Changes in Diversity and New Entry

We noted that Excessive Sameness and Open Diversity are very strongly and verynegatively related. This is quite logical, given that these variablesmeasure opposite

phenomena. Of more significance is the finding that Reflective and Open Diversity

arestrongly andpositive related when conditions favor ruinouscompetition (rOD-RD,

B = .814). This result confirms hypothesis H8. When conditions favor moderate

competition, Reflective and Open Diversity are not related. This is not as we pre-

dicted in hypothesis H7. Still, we do believe that we can interpret the differences in

these two periods as additional support for our model.

A more detailed and comparative analysis of the direction of changes in diver-

sity in the two periods delivers exactly the same results.9 In period B, when condi-

tions favor ruinous competition, changes in Reflective and Open Diversity are

primarily negative. Open and Reflective diversity also change 14 out of 15 times in

the same direction. On the other hand, in period A, when conditions favor moder-

ate competition, positive and negative changes in Reflective and Open Diversity

are more in balance, and Reflective and Open Diversity change 13 out of 27 times

in opposite directions.

Finally, we consider the impact of new entry on diversity. When comparing an-

nual changes in diversity, we observe that the most rapid changes took place under

conditions of moderate competition and in annual periods in which new players



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entered the market (see Table 3). This finding supports our prediction in hypothe-

sis H9, that new entry intensifies competition and negatively affects diversity un-

der conditions favoring moderate competition.

CONCLUSIONS AND DISCUSSION

A proper empirical testof our model would requireanalysis of different media mar-

kets in more countries. Yet, given the exploratory character of our study and the

many practical problems involved in acquiring the necessary data, we restricted

ourselves to a case study and a two-dimensional assessment of correlations for a

relatively long period in Dutch broadcasting. We believe that this study illustrates

the usefulness and supports the overall argument of our model.To begin, our results clearly confirm the first hypothesis (H1), that competition

and reflective diversity are not linearly related. And although more research is

needed before robust thresholds between moderate and ruinous competitioncan be

defined, our analysis of the phases with conditions that favor either moderate or ru-

inous competition, supports or confirms most of our other hypotheses as well. The

results show that reflective diversity is (somewhat) higher when conditions favor

moderate competition than when they favor ruinous competition (H4), that open

diversity is highest when conditions favor moderate competition (H5), and that ex-

cessive sameness is highest when conditions favor ruinous competition (H6).Moreover, our data indeed show that, at least to a certain extent, a balance exists

between open and reflective diversity under conditions that favor moderate com-


TABLE 3

Average Changes in Diversity in Four-Quarter Periods, With or Without New Entry

Period 89-III/90-II 90-III/91-II 91-III/92-II 92-III/93-II 93-III/94-II

Changes in RD 0.0036 0.0167 0.0284 0.0316 0.0250

Changes in OD 0.0114 0.0081 0.0215 0.0289 0.0152

Changes in ES 0.0226 0.0271 0.0213 0.0161 0.0438

94-III/95-II 95-III/96-II 96-III/97-II 97-III/98-II 98-III/99-II

Changes in RD 0.0064 0.0196 0.0028 0.0090 0.0144

Changes in OD 0.0124 0.0312 0.0116 0.0069 0.0200

Changes in ES 0.0061 0.0266 0.0237 0.0155 0.0178

Note. Periods with new entry are indicated in italics. Periods with largest changes in diversity are

indicated in bold. Figures are calculated by estimating the change in diversity for one quarter in

comparison with the same quarter 1 year before (to rule out seasonal biases), and then by averaging thechanges for four-quarter periods. Because most new entry occurred in Quarter IV, we compare annual

periods that start in Quarter III and end in Quarter II the ensuing year RD = reflective diversity; OD =


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petition (H7), whereas under conditions that favor ruinous competition open and

reflective diversity clearly decline together (H8). Finally, the data indicates that

new entry under conditions that favor moderate competition has a relatively strongnegative impact on diversity (H9). These findings all support our model. Only the

hypotheses that Open Diversity and Excessive Sameness are not linearly related

with Competition Intensity (H2 and H3) had to be rejected. In sum, we conclude

that indeed two different modes of competition exist, namely moderate and ruin-

ous competition, that each affect diversity differently.

For the future, more thorough test of our argument with data on more than just

one national broadcasting market, we propose to derive from our analysis a

multivariate model. This model encompasses two independent variables (X1:

Variance Equivalent of Market Shares; X2: Number of Channels; both variablesresulting from decomposition of our original variable Competition Intensity), one

dichotomous interaction variable (Z: Mode of Competition), and three dependent

variables (Y1: Reflective Diversity; Y2: Open Diversity; Y3: Excessive Sameness).

We predict the following relations between these variables:

Y1 = a 1 b 11(1 Z)X1 b 21ZX2 (1)Y2 = a 2 + b 12(1 Z)X1 b 22ZX2 (2)Y3 = a 3 b 13(1 Z)X1 + b 23ZX2 (3)

That is, under conditions that favor moderate competition (Z = 0), less intense com-

petitive conduct (i.e. higher variance in market shares, X1) produces more open di-

versity (Y2) whereas more intense competitive conduct producesmore reflective di-

versity (Y1) and more excessive sameness (Y3). The number of channels (X2) will

have no significant effect on diversity. In contrast, under conditions that favor ruin-

ouscompetition(Z=1),thenumberofchannels(X2)ispositivelyrelatedwithexces-

sive sameness (Y3), and negatively with open and reflective diversity (Y2 and Y1).

Competitive conduct (X1) will have no significant influence on competition. These

predictions concurwith the results ofourcasestudy.Theyfurther specify howcom-

petition, in its structural and conduct dimensions, influences diversity differently

under different conditions. They moreover encompass our basic assumption that

Open and Reflective Diversity are inversely related under moderate competition

while they areproportionally related under ruinous competition.Further sophistica-

tion can be added by slightly varying Z, to simulate that structural conditions and

conducthaveminoreffectsundermoderateandruinouscompetitionrespectively.

A different but equally important issue that likewise deserves more attention in

future research is the role of special interest channels, which we excluded from our



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channels as broadcasters that adopt a focus strategy. Like the general broadcasters

we discussed, these niche players can adopt a cost leadership, a differentiation or a

price competitive strategy. We assume that broadcasters with a focus cost leader-ship strategy strengthen reflective diversity by catering for particular demands of

large or small audiences, whereas broadcasters that adopt a focus differentiation

strategy contribute to open diversity by offering particularly distinct content.

Broadcasters with a focus price competitive strategy, in contrast, almost by defini-

tion offer one-sided and cheap content (i.e. excessive sameness). Inclusionof these

niche players in the analysis might show that supply is more diverse under moder-

ate competition than we have found so far.

Third, more research is needed on viewer preferences. We used measurements

of viewing time as approximations of consumer demand in our study. This is lessthan ideal, given that viewing time is not independent from broadcasting supply.

Yet, independent estimates of viewer preferences are not readily available.

POLICY IMPLICATIONS

Anticipating further support for our model on media competition, innovation, and

diversity, we believe that the conclusions have at least three implications for media

and competition policy. First, we conclude that media competition policy shouldexplicitly aim for moderate competition rather than competition as such, because

moderate competition is thebest guaranteefor optimal diversity, reasonable prices,

and adequate innovation.

Second, we conclude that moderate competition in broadcasting markets can be

stimulated by shaping the appropriate structural conditions. Given the problems

inherent in market conductregulation, this is a comforting outcome. Moreover, we

note that such structural media competition policies are both in the interest of di-

versity and of broadcasters. They therefore should command sufficient political

support, and can partly rely on self-regulation.Third, we believe that market entry regulation should be part of structural me-

dia competition policy. We do not want to go as far as arguing that policy makers

should restrict the number of channels in the Dutch market to six channels (or to

any other number). Yet, we do believe that market entry regulation is an appropri-

ate instrument to create favorable conditions for moderate competitionas long

as not only the number of players but also their backgrounds and strategic aims,

and other structural conditions are considered.

In sum, we recommend that media competition policy makers and regulators

seriously consider the implications of their decisions for moderate and ruinouscompetition. These implications need to be assessed on a case-by-case basis. If we



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ACKNOWLEDGMENTS

We gratefully acknowledge the support of Lex van Meurs of Intomart, who pro-vided us with data on theDutch television market. We thank Intomarts clients, and

in particular Marjan Hammersma of the NOS, for giving us permission to use these

data. We thank three anonymous reviewers for their useful comments. Of course,

none of these organizations or persons can be held responsible for any errors, omis-

sions, or conclusions that we have presented.

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