To follow up on our other more general payola video, let's now talk about payola
and conflict of interest.
Just to review our definition, payola is paying to have your song played on
the radio, but of course the medium doesn't have to be the radio.
You can think of this definition more generally.
Let's first consider the conflict of interest issues between the radio station
and the disc jockey.
Under one scenario, probably the most positive case, the station knows that
the disc jockey is taking money to play particular songs. That means that in the
longer run, in equilibrium, the direct wage falls for the disc jockey from the
station. If someone else is paying you to do part of the work,
the radio station can pay you less.
We can think of that arrangement as the DJ partly working for the music companies
and partly being paid for them, and at the margin the operative incentive may be
to find new songs which you can play and be paid for by music companies.
You can think of this as the radio station deciding to save some money
by paying less, give up some control, but figure the kind of song that
music companies would pay for are also the kind of songs that maybe
station listeners want to hear, so there's maybe not too much loss
of value or quality from the station's point of view.
Just to consider the alternative, the polar example:
Imagine the radio station doesn't know the disc jockey is being paid to play
particular songs. In this arrangement, then the disc jockey overall is paid more
because he or she has the normal wage from the radio station plus the payola income.
You can think of this as a transfer of wealth from the radio station and also
from the advertisers of the radio station (we explained that point at more length in
our other video on payola), and the transfer of wealth is to the disk jockey
and also to the music companies who now have greater control
over which songs are played.
Arguably this arrangement is unethical because the disc jockey is working for
the station and not telling the truth, so we may not approve, but if we're just
trying to ask, "Well, is this inefficient?" then it's hard to say.
It's efficient if under actual informed consent between the disc jockey and
the radio station. It would've been allowed for the music companies to
pay the disc jockey in any case. It is, however, inefficient if,
had there been full information, the radio station would've decided
no, control over the disc jockey is more important to us,
we're not going to allow this payola.
There's an entirely different conflict of interest problem here, and this one is
between the station and the listener. The question is, does the station disclose
to its listeners that its disc jockeys or maybe its managers or shareholders
are taking payments from these music companies?
We can view the overall equilibrium this way:
there are some media which will not sell stories or access to people who pay for it.
Let's say you went to the American Economic Review, and you offered the
journal $100,000 if they would promise to publish your article.
Well, they would say no. The credibility of the journal is simply worth too much,
and people look to the journal for its credibility, and furthermore for a lot
of readers, the quality of the product (the quality of the articles, that is)
is pretty hard to monitor, so the journal there serves a very important
function, and if it came out that people were paying to get in even with
low quality articles, that would decrease the value of that monitoring function.
However, other media will sell access, and this in some cases can be efficient.
Let's imagine our case of a radio station. You could argue, well people don't look
so much to radio stations to monitor quality, they look to radio stations
to play songs, but people more or less know what songs they like,
and they can tell if they like it on a listen or two,
and a radio station that would take payola and play music that people didn't
want to hear, well people could just stop listening.
Arguably we have a situation now where there's really a lot of payola.
Even though payola is nominally against the law, radio stations are paid a lot
by these third party distributors to promote music,
but listeners maybe they're just not all that upset about it because they don't
look to radio stations to certify quality the way economists and universities
look to the American Economic Review to certify quality.
To the extent that's true, it means that for the radio station,
the conflict of interest issue actually isn't all that severe, even though
it will be severe in many other cases like the professional economics journal.
There's still, however, maybe some case for regulation here,
regulation of some kind, either private or public.
Imagine there is an externality across different outlets in a given medium.
For instance, people probably don't know what are the ethical codes and standards
of various different radio stations or maybe various different public policy
magazines, but they have a general sense of how radio is run and how newspapers
are run and so on, which they form by a life of experience with different media.
So it could be the case, for instance, that individual radio stations will,
in a sense, free ride and adopt lower standards than would be optimal because
they have this view that their listeners are drawing upon the general behavior
of radio stations in general when forming their expectations.
If this is the case, it can be possible that by having some kind of
professional code regulating conflicts of interest that say most or all
radio stations and most or all listeners would be better off by internalizing
this externality across the outlets in a given medium.
Another way of putting this is simply that if a single newspaper lies
or is engaged in a lot of scandal, this can damage the reputations
of many other newspapers, too.
There's plenty more you can read on this and related topics,
and again I stress the point, it doesn't just have to be about radio.
One set of Google terms is to start with "radio payola conflict of interest."
In general you can read up on principal- agent theory, including some of the videos
on that topic in our microeconomics section.
There's a very good book edited by Michael Davis and Andrew Stark called
"Conflicts of Interest in the Professions."
I also have an essay on that book on the question of payola.
And again I would recommend our other more general video on the
economics of payola which covers the ideas of Ronald Coase.