In Defence of Payola

Payola is the payment by record producers to broadcasters to obtain more playing time for their recordings. Economists have defended since Ronald Coase wrote his seminal piece in 1979. This summary is from Sidak and Kronemyer:

The origin and economic function of payola were first analyzed in 1979 by Professor Ronald Coase. He argued three fundamental propositions.

First, every time a radio station plays a song, it in effect advertises a specific product (namely, a phonograph record) that a record company has for sale. Payola is a price mechanism for efficiently allocating this scarce but otherwise unpriced on-the-air advertising of popular music. There is no reason to believe that a record company that dispenses payola will spend its finite advertising resources promoting "bad" music rather than "good" music.

Second, long before the commercial development of radio, a similar pricing system was commonplace in the United States with respect to the inclusion of songs in live performances by popular singers and musicians. At that time, the implicit advertisement was for sheet music sold by music publishers.

Third, since at least the 1890s, movements to prohibit payola have been used as competitive weapons by record and music publishing firms. Those firms have acted, sometimes in concert, not only to reduce their own advertising costs, but also to restrict advertising alternatives by which new entrants could expose to the public their sound recordings and copyrighted compositions.

In a recent piece in Slate, Daniel Gross updates the defence of payola, noting that broadcasters have very little market power these days, what with ipods, itunes, podcasting, and other myriad opportunities to listen to music. He also points out that paying for promotional advantages is common and accepted in nearly every other retail business:

It's a truth universally acknowledged that manufacturers of everything from soap to computers pay the folks who control crucial distribution channels to display their wares prominently. It's legal, and no one minds. Viewers have accepted with equanimity the rise of (disclosureless) product placement in television shows and movies. In June, Randy Kennedy wrote an excellent brief dissertation in the New York Times on "co-op advertising," the process by which book publishers effectively pay Barnes & Noble for guaranteed placement at the front of stores. (No disclosure, no hint of illegality.) Why are Doritos bags stacked so nicely at the end of your supermarket aisle? Because Frito-Lay pays for them to be there. And the Web is one gigantic payola machine, from Amazon.com to the exploding realm of paid search.

He's right. For more read his entire piece; and for other articles on the topic, just Google Coase + payola.