Censorship: the Key to Lock-In?

Abstract

Markets for information and entertainment are frequently characterized by increasing returns to scale in production and distribution. This implies that incumbent technologies enjoy an advantage over newcomer technologies; such markets can become locked into an inferior technology. Governments often heavily influence media markets through both direct ownership and censorship. I present a dynamic model with heterogeneity among consumers and firms in order to analyze the role of censorship in media markets. I assume there is a negative consumption externality across consumers and a negative cost spillover which an incumbent producer imposes on a newcomer. In a decentralized equilibrium, there is over-production of media from the incumbent technology. This reduces consumer utility and engenders lock-in of the inferior incumbent technology. I model censorship as a tax on information produced under the incumbent technology. A central planner who censors incumbent media can improve upon the decentralized equilibrium by reducing negative consumption externalities and unlocking the superior technology. I also show that censorship is only Pareto optimal when coupled with lump-sum transfers across consumers.