bias is both instrumental and opportunistic. In that case, the media biases its report in favor of regulation to mitigate both a market failure represented by the externality and a government failure due to a(super)majority requirement. Media bias thus can be welfare enhancing The media's bias provides incentives for concealment by its sources, but in equilibrium it is only the activist that conceals information. Concealment by the activist increases the opportumity for the media to bias its report in favor of regulation. Bias thus induces an alignment of interests between the news media and the activist; i. e, with the party whose interests are favored by the bias, Concealment and bias are thus sy nergistic. When it biases its report, the media need not fear being exposed because the interest group that could Expose it has preferences for regulation that are aligned with those of the media. because the bias is only in one direction, the public believes a report that the issue is not serious nd is skeptical of a report that it is serious, The public becomes more skeptical of the media's report the more likely is the activist to conceal unfavorable information. Since the news media biases its report against the interests of the industry, the industry has no incentive to conceal unfavorable information The activist. however, conceals with positive probability, and that probability is limit ed only by the risk of being exposed for having concealed information. The activist may conceal unfa vorable information with prob- ability one if the damage to its reputation from being exposed is small. The informational compet ition between the activist and the industry is thus one-sided. The media is assumed to conduct investigative journalism only if it receives no hard formation from its sources, Investigative journalism is costly, and the incentive to bear the cost comes from the possibility of both becoming better informed and enhancing its reputation by exposing concealment by one of its sources. it could conceal the hard information from its sources or its investigative journalism the media will do so only in the same event in which the activist has an incentive to conceal its hard information. The equilibrium for the case in which the media can conceal ormation is thus qualitatively the same as when it cannot conceal hard information. Moral suasion by the news media reduces the harm from the externality and decreases the public support for regulation. Moral suasion is thus a substitute for regulation and for biased media reports, Moral suasion may eliminate the media's informational influence
bias is both instrumental and opportunistic. In that case, the media biases its report in favor of regulation to mitigate both a market failure represented by the externality and a government failure due to a (super)majority requirement. Media bias thus can be welfare enhancing. The media’s bias provides incentives for concealment by its sources, but in equilibrium it is only the activist that conceals information. Concealment by the activist increases the opportunity for the media to bias its report in favor of regulation. Bias thus induces an alignment of interests between the news media and the activist; i.e., with the party whose interests are favored by the bias. Concealment and bias are thus synergistic. When it biases its report, the media need not fear being exposed because the interest group that could expose it has preferences for regulation that are aligned with those of the media. Because the bias is only in one direction, the public believes a report that the issue is not serious and is skeptical of a report that it is serious. The public becomes more skeptical of the media’s report the more likely is the activist to conceal unfavorable information. Since the news media biases its report against the interests of the industry, the industry has no incentive to conceal unfavorable information. The activist, however, conceals with positive probability, and that probability is limited only by the risk of being exposed for having concealed information. The activist may conceal unfavorable information with probability one if the damage to its reputation from being exposed is small. The informational competition between the activist and the industry is thus one-sided. The media is assumed to conduct investigative journalism only if it receives no hard information from its sources. Investigative journalism is costly, and the incentive to bear the cost comes from the possibility of both becoming better informed and enhancing its reputation by exposing concealment by one of its sources. If it could conceal the hard information from its sources or its investigative journalism, the media will do so only in the same event in which the activist has an incentive to conceal its hard information. The equilibrium for the case in which the media can conceal information is thus qualitatively the same as when it cannot conceal hard information. Moral suasion by the news media reduces the harm from the externality and decreases the public support for regulation. Moral suasion is thus a substitute for regulation and for biased media reports. Moral suasion may eliminate the media’s informational influence 9
and hence it s incentives to bias its news report In the model the bias of the news media is due not to the personal preferences of those in the news organizat ion but is instead due to the objective of serving the int erest of the public. That is, the media provides information about a market failure and a collective choice that benefit s the public as a whole but is not preferred by a sufficient majority to overcome the st at us quo advant age in pivot al politics. This comes at the expense oftrut hful I. ime Line and information structure Figure 2 identifies the sequence of act ions in the game. In the information st age the ac- tiv ist and the firms search for informat ion about the issue, and in the communication st age they send messages to the news media. The media then set s a price for a subscription, and izen consumers who expect to benefit subscribe to the media reports. The media decides Thet her to conduct invest igat ive journalism, and if it does, it searches for informat ion The media then provides a report. Citizen consumers next collect ively choose whet her to regulate the product, and given that decision, the firms set prices for their product s, and cit izen consumers make their consumpt ion decisions A state of nature 0 can take on two values 0 E (01, 0H, 0L<OH, and the common knowledge prior probability is p= Pr(0=0H. The interpretation is, for example, that OH corresponds to global climate change being very serious, whereas Or means it is not serious. The state OH is favorable to the activist's cause of dampening demand and obtaining regulation of the externality, and the state Or is favorable to the interests of the firms. n the information stage the activist and the firms search simultaneously for informa- tion about the state, and each search is successful with probability q E(0, 1)and unsuccess- ful with probability 1-g. For the news media, investigative journalism is successful with probability qM. A successful search provides hard information that is conclusive evidence that the state is cessful search vields no inf tion which will b denoted by g. The cast to the public of verifying hard information is assumed to be high, Journalists may also have individual preferences that influence news stories. Pat- terson and Donsbach(1996), for example, survey ed journalists in five countries and con cluded there is a significant correlation between journalists' personal beliefs and their news decisions
and hence its incentives to bias its news report. In the model the bias of the news media is due not to the personal preferences of those in the news organization but is instead due to the objective of serving the interest of the public.6 That is, the media provides information about a market failure and a collective choice that benefits the public as a whole but is not preferred by a sufficient majority to overcome the status quo advantage in pivotal politics. This comes at the expense of truthful reporting. IV. Time Line and Information Structure Figure 2 identifies the sequence of actions in the game. In the information stage the activist and the firms search for information about the issue, and in the communication stage they send messages to the news media. The media then sets a price for a subscription, and citizen consumers who expect to benefit subscribe to the media reports. The media decides whether to conduct investigative journalism, and if it does, it searches for information. The media then provides a report. Citizen consumers next collectively choose whether to regulate the product, and given that decision, the firms set prices for their products, and citizen consumers make their consumption decisions. A state of nature θ can take on two values θ ∈ {θL, θH}, θL<θH, and the common knowledge prior probability is p = P r(θ = θH). The interpretation is, for example, that θH corresponds to global climate change being very serious, whereas θL means it is not serious. The state θH is favorable to the activist’s cause of dampening demand and obtaining regulation of the externality, and the state θL is favorable to the interests of the firms. In the information stage the activist and the firms search simultaneously for information about the state, and each search is successful with probability q ∈ (0, 1) and unsuccessful with probability 1 − q. For the news media, investigative journalism is successful with probability qM. A successful search provides hard information that is conclusive evidence that the state is θH or θL, and an unsuccessful search yields no information, which will be denoted by φ. The cost to the public of verifying hard information is assumed to be high, 6 Journalists may also have individual preferences that influence news stories. Patterson and Donsbach (1996), for example, surveyed journalists in five countries and concluded “there is a significant correlation between journalists’ personal beliefs and their news decisions.” 10
so the activist and the firms cannot communicate their information direct ly to the public The public relies on the soft report by the news media. The activist and the firms thus communicate to the public through the news media. The news media is assumed to be able to evaluate the information provided by the activist and the firms, so the sources cannot fake information The rest of the model is int roduced in the following sect ions beginning at the end of the game. Because of the complexity of the st rat egic situation the model is formulat ed in a relatively simple form V. The public A The public as cit izen Consumers Each member of the public makes a privat e decision whet her to purchase the product e.g., a low fuel economy vehicle, and collect ively the public chooses whether to regulate th product, e. g, impose a fuel economy standard. Citizens differ only in their valuat ion v for the product, and the public is assumed to consist of n cit izens with valuations dist ributed uniformly on the interval 0, v. That is, the distribution is Nf (v) where f(v)=3,VE[0, v Purchasing a low fuel economy vehicle generat es one unit of emissions, wl is assumed to be a pure public bad that costs each cit izen ffi Regulation in the form of a st andard s E(0, 1) can be imposed to reduce the emissions proportionately to(1-s)ffi Regulation also affect s the value of the product. The valuat ion wit h regulation is assumed to be given by v(1-as), where a E0, is a parameter. The aut omakers argue that a>1, reflecting downsizing, reductions in power, and reduced safety An indicat ion that a> 1 was given in congressional test imony by Edward B. Cohen, vice president of Honda North America. He st at ed, "If the current car feet were st ill at 1981 performance, weight and transmission levels, the passenger car CAFE would be almost 36 mpg inst ead of the current level of 28. 1 mpg. The trend is particularly pr since 1987. Based on EPAs data, technology has gone into the fleet from 1987 to 2000 at a rate that could have increased fuel economy by about 1. 5% per year, if it had not r The specifications(1-s)ffifor the emissions and (1-as)v for the valuation are to be nt Honda is the only aut omobile company operating in the Unit ed States that is not a nderst ood as local rat her than global properties of regulation member of the Alliance of Aut omobile Manufact urers and the only one not opposing a subst antial increase in fuel economy st andards. Honda has the highest fleet fuel economy
so the activist and the firms cannot communicate their information directly to the public. The public relies on the soft report by the news media. The activist and the firms thus communicate to the public through the news media. The news media is assumed to be able to evaluate the information provided by the activist and the firms, so the sources cannot fake information. The rest of the model is introduced in the following sections beginning at the end of the game. Because of the complexity of the strategic situation the model is formulated in a relatively simple form. V. The Public A. The Public as Citizen Consumers Each member of the public makes a private decision whether to purchase the product, e.g., a low fuel economy vehicle, and collectively the public chooses whether to regulate the product, e.g., impose a fuel economy standard. Citizens differ only in their valuation v for the product, and the public is assumed to consist of N citizens with valuations distributed uniformly on the interval [0, vˆ]. That is, the distribution is Nf(v) where f(v) = 1 vˆ , v ∈ [0, vˆ]. Purchasing a low fuel economy vehicle generates one unit of emissions, which is assumed to be a pure public bad that costs each citizen θ. Regulation in the form of a standard s ∈ (0, 1) can be imposed to reduce the emissions proportionately to (1 − s)θ. Regulation also affects the value of the product. The valuation with regulation is assumed to be given by v(1 − αs), where α ∈ [0, 1 s ) is a parameter.7 The automakers argue that α>1, reflecting downsizing, reductions in power, and reduced safety. An indication that α>1 was given in congressional testimony by Edward B. Cohen, vice president of Honda North America.8 He stated, “If the current car fleet were still at 1981 performance, weight and transmission levels, the passenger car CAFE would be almost 36 mpg instead of the current level of 28.1 mpg. The trend is particularly pronounced since 1987. Based on EPA’s data, technology has gone into the fleet from 1987 to 2000 at a rate that could have increased fuel economy by about 1.5% per year, if it had not 7 The specifications (1 − s)θ for the emissions and (1 − αs)v for the valuation are to be understood as local rather than global properties of regulation. 8 Honda is the only automobile company operating in the United States that is not a member of the Alliance of Automobile Manufacturers and the only one not opposing a substantial increase in fuel economy standards. Honda has the highest fleet fuel economy. 11
inst ead focused on ot her vehicle attribut es demanded by the market. There is no reason y trend of to fuel econ continue. "9He indicat ed that average vehicle weight had increased by 12% from 1987 to sepower increased by 70% industry has responded to consumer demand by using improved fuel efficiency to provide creases in vehicle size and power, result ing in no improvement in fuel economy. This suggests that higher fuel economy st andards would have subst ant ially reduced the value of the vehicles to consumers. The analvsis t hus focuses on the case of ax B. Private Choice Cit izen Us expected utility wy from consumpt ion is specified as ux2=xn(v(1-as+)-y-(1-s+)0+nN), where y is the price ofthe product, 0+ denotes the mean of v's post erior beliefs about 0 given the media's news report, s+E[0, s is the st andard corresponding to 0+, and zy E 10, 1 an indicat or variable with zy=1 denot ing a purchase and zy=0 denoting no purchase. o The cost to citizen v of the ext ernality from her purchase is(1-st)e+, and n[N,1 denotes the ext ent to which the citizen takes into account the effect of her purchase on n=N corresponds to ignoring those effect s, and n= l corresponds to taking them fully into account. The parameter n is thus a measure of ot her-regardednes free-rider problem is present when n<l. The parameter n is a charact erist ic of preferences nd is independent of informat ion about the seriousness of the issue. Initially, n is treat ed as fixed and small, and in Sect ion X it is viewed as responsive to moral suasion. A citizen with a valuation v satisfying U2U”(s+,0+,y) +(1-s+)0+mN purchases the product, and the ot hers do not. The demand X(st, 0+, y) for the product is X(s+,0+,y) U(s+,0+,y) 9 St at ement of Edward B. Cohen, vice president, Honda North America, before the Senate Committee on Commerce, Science and Transport ation, December 6, 2001 10 o simplify the model, s+ is assumed to be eit her 0 or s. That is, s is the st andard when the media reports that the ext ernality is very serious, and otherwise the st andard
instead focused on other vehicle attributes demanded by the market. There is no reason why this technology trend of improved efficiency (as opposed to fuel economy) should not continue.”9 He indicated that average vehicle weight had increased by 12% from 1987 to 2000 and average horsepower increased by 70%. This testimony implies that the auto industry has responded to consumer demand by using improved fuel efficiency to provide increases in vehicle size and power, resulting in no improvement in fuel economy. This suggests that higher fuel economy standards would have substantially reduced the value of the vehicles to consumers. The analysis thus focuses on the case of α≥1. B. Private Choice Citizen v’s expected utility uv from consumption is specified as uv = zv(v(1 − αs+) − y − (1 − s+)θ+ηN), where y is the price of the product, θ+ denotes the mean of v’s posterior beliefs about θ given the media’s news report, s+ ∈ {0, s} is the standard corresponding to θ+, and zv ∈ {0, 1} is an indicator variable with zv = 1 denoting a purchase and zv = 0 denoting no purchase.10 The cost to citizen v of the externality from her purchase is (1 − s+)θ+, and η ∈ [ 1 N , 1] denotes the extent to which the citizen takes into account the effect of her purchase on others. Thus, η = 1 N corresponds to ignoring those effects, and η = 1 corresponds to taking them fully into account. The parameter η is thus a measure of other-regardedness. A free-rider problem is present when η<1. The parameter η is a characteristic of preferences and is independent of information about the seriousness of the issue. Initially, η is treated as fixed and small, and in Section X it is viewed as responsive to moral suasion. A citizen with a valuation v satisfying v ≥ v∗(s+, θ+, y) ≡ y + (1 − s+)θ+ηN 1 − αs+ purchases the product, and the others do not. The demand X(s+, θ+, y) for the product is then X(s+, θ+, y) = N 1 − v∗(s+, θ+, y) vˆ . (1) 9 Statement of Edward B. Cohen, vice president, Honda North America, before the Senate Committee on Commerce, Science and Transportation, December 6, 2001. 10 To simplify the model, s+ is assumed to be either 0 or s. That is, s is the standard when the media reports that the externality is very serious, and otherwise the standard is 0. 12
The price is established by Cournot compet it ion conditional on 8+ and s+. Each of the n firms in the indust ry is assumed to be identical, and to simplify the model each is assumed to have zero cost. The profit Ti of firm i then is 丌i=P(X)xi where Ti is the out put of firm i, X=fl ci, P(X)is the inverse demand function obt ained from X(s+, 0+, y)and (s+, 0+, y). The equilibrium price ,(s+, 0+) (s+,.+) so the price reveals the informat ion the firms have. From(1) information that the ex ternality is more serious(higher 0f) reduces demand, and the firms respond with lower prices. Despite the lower price, demand is lower the higher is 0+. The marginal valuation (s+,0+)6(s+,+,yf(s+,.+) which is strict ly increasing in 6+ and in st for a > l, so regulation decreases the demand x(s+,0+)0X(s+,O 0+) (s+,O+ 0(1-as+)-(1-s+)+m Thich is positive if 1 S+)0+IN which will be assumed to be the case when n is small. I1 That some consumer who purchases. The ext ernality 0+X(s+, 0+) could exceed 0; 1. e, the externality could be quite serious The profit f(s+, 0+) of firm i is NyP(0+)2 r(s+,0+) (1 N((1-as+)-(1-s+)0+nN)2 (7+1)2(1-a8+)b extent (n) to which consumers internalize the externality / (n)a in i. Similarly, the The price in(2)is decreasing in 0+, n, a,8+, and n and increasi Ing in 0+ or a>l, the compet it iveness The proport ion of mers who purchase is increasing in i and limy,a Profit is decreasing in the st andard only if a>l. The increases in CAFE st andards three aut makers to the producers of smaller, higher fuel economy vehidles. from the big during the 1970s and 1980s shift ed considerable market share and profits
The price is established by Cournot competition conditional on θ+ and s+. Each of the n firms in the industry is assumed to be identical, and to simplify the model each is assumed to have zero cost. The profit πi of firm i then is πi = P(X)xi, where xi is the output of firm i, X = Σn i=1xi, P(X) is the inverse demand function obtained from X(s+, θ+, y) and v∗(s+, θ+, y). The equilibrium price y∗(s+, θ+) is y∗(s+, θ+) = 1 n + 1 vˆ(1 − αs+) − (1 − s+)θ+ηN , (2) so the price reveals the information the firms have. From (1) information that the externality is more serious (higher θ+) reduces demand, and the firms respond with lower prices. Despite the lower price, demand is lower the higher is θ+. The marginal valuation v∗(s+, θ+) ≡ v∗(s+, θ+, y∗(s+, θ+)) is v∗(s+, θ+) = vˆ n + 1 + n(1 − s+)θ+ηN (n + 1)(1 − αs+) , (3) which is strictly increasing in θ+ and in s+ for α > 1, so regulation decreases the demand for the product. Demand X(s+, θ+) ≡ X(s+, θ+, y∗(s+, θ+)) is X(s+, θ+) = n n + 1 N (1 − αs+)ˆv vˆ(1 − αs+) − (1 − s+)θ+ηN , (4) which is positive if ˆv> (1−s+)θ+ηN (1−αs+) , which will be assumed to be the case when η is small.11 That is, there is some consumer who purchases. The externality θ+X(s+, θ+), however, could exceed ˆv; i.e., the externality could be quite serious. The profit π∗ i (s+, θ+) of firm i is π∗ i (s+, θ+) = Ny∗(θ+)2 (1 − αs+)ˆv = N(ˆv(1 − αs+) − (1 − s+)θ+ηN)2 (n + 1)2(1 − αs+)ˆv . (5) The price in (2) is decreasing in θ+, η, α, s+, and n and increasing in ˆv. Similarly, the profit is decreasing in θ+, s+ for α>1, the competitiveness (n) of the industry, and the extent (η) to which consumers internalize the externality.12 11 The proportion of consumers who purchase is increasing in ˆv and limvˆ→∞ v∗ vˆ = 1 n+1 . 12 Profit is decreasing in the standard only if α>1. The increases in CAFE standards during the 1970s and 1980s shifted considerable market share and profits from the big three automakers to the producers of smaller, higher fuel economy vehicles. 13