Broadcast competition and advertising with free entry: Subscription vs. free-to-air

This paper develops a model of broadcast competition in the presence of free entry. In particular, it considers two alternative schemes in which broadcast stations are financed: The pay media regime under which broadcast stations are financed through subscription and advertising revenues, and the free-to-air regime under which broadcast stations are financed through advertising revenues only. It addresses the nature of market failure in the industry with respect to the provision of variety of programming and the level of advertising. Policy implications and the optimal regulation are also explored.