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Ronald Coase

Following my recent post on recommender systems such as Spotify charging money for inclusion on a playlist, I re-read Ronald Coase, the Chicago academic who wrote such as long article describing the background to payola – his article is over 20,000 words long. I was struck by his description of the commercial music business. He approaches the market both as an economist, but also using a very different kind of argument. Let’s look at an example.

Coase identifies that arguments against payola are that it is (1) commercial bribery, and (2) done without the knowledge of the customer. He appears not to have any issue with the first argument. Coase, with the peculiar reasoning unique to him, looks at the definition of bribery and decides that payola payments to disc jockeys were not payola, because bribery only takes place when there is no knowledge of the bribery nor consent by the employer of the agent doing the bribing. Since the employer clearly knew about these payments, they were not bribery.

Wait a moment! By the same token, Airbus and Boeing are not guilty of bribery when they pay a foreign government to buy their planes – as long as everyone in the aircraft manufacturing company is aware, it seems. That is not the view taken by the European Commission or the US trade regulatory agencies (see, for example, “Airbus faces a record $4bn fine after bribery probe”, January 2020).  

In a justification of the payola, Coase states “there was a broad congruence of interest between the operators of radio stations and the disc jockeys.”

Coase argues that the disc jockey does not want their show to fall in ratings, so they will only play music that people want to hear. But many disc jockeys, I would guess, realise that it doesn’t matter that much what they play – so why not take the money.

Worse, Coase argues in the most outrageous way that payola was not an issue:

As it is generally agreed that hearing a record is the most powerful factor bringing about its purchase, presumably this disclosure of payola would lead to a decline in the sales of records (as well as less pleasure from the programs). Whether listeners would be happier with disclosure is another matter. The prevalence of self-deception suggests that there are many truths that we prefer not to know.

 [Coase, p310]

In other words, for the consumer not to know what is happening is fine! This reasoning is wrong on two counts. If the same number of songs is played, then changing the songs played will not lead to a decline in total sales of records – just a decline for some record companies compared with others. Secondly, introducing happiness is a very strange line of reasoning. What has become of the economics academic?  Would Mr Coase be happy to discover that the recommendation service suggesting related academic articles for his subject domain of economics was, without his knowledge, being changed following payments from publishers? I think Mr Coase would be very indignant indeed. I suggest also that as long as the topic under discussion is popular music, Mr Coase is not too bothered about devious practice. It would be different closer to home.

Jonathan Aldred, in his Licence to be Bad (2019) charts the sorry progress (or decline) of economics since 1945 away from morally-based actions to the tolerance, even the justification, of self-interest. He devotes a chapter to Ronald Coase, identifies him as one of the intellectual inspirations behind privatization, and exonerates his 1960 Theorem (for which he won the Nobel Prize in Economics) being used as a justification for governments not getting involved in regulation of markets. Aldred claims that Coase was not as doctrinaire as his followers were; my feeling from reading Coase on payola is that he was not particularly bothered by music playlists being secretly manipulated by record companies.

Coase, R. (1979). Payola in Radio and Television Broadcasting. The Journal of Law & Economics, 22(2), 269-328.