Cost structure of the Japanese broadcasting industry: A composite cost function approach

Abstract

This paper investigates the cost properties of a sample of Japanese terrestrial broadcasting firms. The Japanese broadcasting market is just starting to change to digitalized services. The Ministry of Internal Affairs and Communication (MIC)) announced that digital broadcasting service would start from July 1st 2011. Several large-scale broadcasters began digital broadcasting services in December 2003, while small-scale broadcasters are now required to construct their network facilities for digital services. The investments for this digitalization impose a large financial burden especially on small-scale broadcasters. For this reason, the Ministry (MIC) decided in March 2004 to permit mergers between small-scale broadcasters facing financial difficulties. Merger of broadcasters may be an effective way to improve productivity, but merger will reduce localism, the goal of Japanese broadcasting policy. It is very important to analyze the cost structure of Japanese terrestrial broadcasters before a big stream of mergers. The purpose of this study was to investigate scale and scope economies in the Japanese terrestrial broadcasting market. We employed a composite cost function approach to a set of firms over the period from 2003 to 2007. The composite cost function combines the log-quadratic input price structure of the translog cost function with the quadratic structure for multiple outputs. We assumed Japanese broadcasters use labor and capital as inputs to produce both television and radio services as outputs. Our main results were as follows. First, networks do not have overall economies of scale, but local stations have overall economies of scale. Second, both networks and local stations have product-specific returns to scale. Third, while networks do not have economies of scope, local stations exhibit economies of scope.