Abstract: Is it sensible for the Federal Communications Commission to ban songwriters from
advertising songs on radio through payola, when Geico and McDonald’s can get
more radio spins than Taylor Swift and your top five favorite singers combined
without any of the hassles of anti-payola regulations? A robust line of scholarly work
in economics, starting with the seminal work of Ronald Coase on the topic nearly
three decades ago, has advocated for allowing the type of undisclosed pay-for-play
transactions known as payola, generally considered to have benign effects on
markets. In the last decade however, anti-payola enforcement has gained significant
momentum mostly under the rationale that the practice effects upon audiences a type
of deception that lowers audience welfare. Although recent work in economics
appears to give weight to the deception concern, for the most part economic analysis
and even legal scholars defending the practice have failed to address audience
deception in their analyses. In this article I examine the merits of the “deception” rationale—the last and most entrenched line of defense supporting anti-payola
enforcement—building on my work on multi-sided media markets. I argue that the
flawed understanding of broadcasting, music and advertising markets has obscured
the true workings of payola and led regulators to believe, incorrectly, that the
practice lowers audience welfare. I show that in the absence of payola, song selection
by broadcasters is not primarily focused on pursuing musical talent or maximizing
audience utility—as implied by FCC officials—and hence that the banning of this
beneficial practice simply forces radio stations to steer away from audience welfare
by selecting songs that facilitate the sale of products to particular demographics but
that are more weakly correlated with listening utility. I construct a simple payoff
matrix to illustrate how profit maximizing stations, in the absence of payola
transactions, are likely to further deviate from maximizing audience welfare, reduce
program diversity and increase advertising levels suboptimally.