The arguments against illegal payola were first extended by Murray Rothbard. In a talk at the Mises Institute some time in the past couple of years, Martin S. Fridson gave a little blurb about the arguments that brought my attention to them. He also wrote a short chapter in his book "Unwarranted Intrusions" about the history of payola. Here is my off-the-cuff take on the arguments.
The best way for labels to promote their music is for people to hear it. In the 1800's labels would promote sheet music by paying artists to play it in public forums. During the 20's labels would pay artists like Al Jolson (the person who built my apartment complex fyi) to sing a song, because anything that he sang was guaranteed to become a hit. And of course, in the radio era, labels began to pay disc jockeys to spin their albums, thus the beginning of payola. Bottom line; there is a MARKET for having your music heard.
By making payola illegal the market still exists, but it becomes a BLACK MARKET. Labels still pay to play, but now their payments are higher to account for the risk they are taking that they may be prosecuted. This greatly inflates the price to play and makes it nearly impossible for independent labels to enter into that market.
If payola were legalized (as it was during Chess/Sun era) then it would take that risk out of the price of radio airtime. This would normalize the price of the cost for airtime and allow larger independent labels such as Sub Pop, Matador, Merge, Saddle Creek, etc to enter into the market.
As it is now, with inflated prices of payola, the radio business is a
racket. This incentivizes conglomerates to take control of large shares
of the radio market in order to reap tons of payola money. If the risk
of illegality was taken out of the payola price then the margins on
owning radio stations would be greatly diminished. Once the margins go
down, the incentives to enter into the radio market are greatly reduced
for conglomerates. This works the same way that the decline in CD sales
margins due to the emergence of MP3s has greatly reduced the incentive
to enter into the recording label market -- and hence why so many large
labels are falling apart.
If everyone is paying the same price for radio airplay then the decision as to whether to play a song or not is no longer about who can afford to take the risk, but about who provides the best product.
This works the same way as shelf space at a supermarket. Goods manufacturers pay for shelf space in your local WalMart. All who want shelf space pay the same price, but WalMart decides who gets shelf space based on who they think will sell better. So they choose the product with the best quality. This incentivizes goods manufacturers to spend their money on research and development to make a better product. If buying of shelf space was illegal, you can bet that the R&D money would instead be spent on paying the inflated price on black market shelf space, rather than on making a better product.
So the argument follows, that if radio stations pick the songs they play based on how good the song is, and not on the money, then record labels will be incentivized to produce better music.
Illegal payola encourages rent-seeking. Labels spend their money on getting a bigger share of the pie which has been limited by the legislation. This leads to a net social loss dealt to the consumers, because that money is not being spent on making better music, its being spent on making the company survive on artificially limited resources.
Legalizing payola encourages profit-seeking. Labels spend their money on making products that make us, the consumer, happy. In an unrestricted market companies survive by making us happier by making better products. Their money is not wasted needlessly on inflated costs of shelf space; the money is spent on us.
Furthermore, by distorting the market with risk of prosecution, it makes the market larger than it should be. This encourages bigger, meaner players to enter into the market and impose large market tactics on what should be a small market game. The next Beatles or Nirvana may have already come and gone without any recognition, but because the market has been artificially enlarged, the bigger players were not nimble enough to notice or cultivate that talent.
If everyone is paying the same price for radio airplay then the decision as to whether to play a song or not is no longer about who can afford to take the risk, but about who provides the best product.
This works the same way as shelf space at a supermarket. Goods manufacturers pay for shelf space in your local WalMart. All who want shelf space pay the same price, but WalMart decides who gets shelf space based on who they think will sell better. So they choose the product with the best quality. This incentivizes goods manufacturers to spend their money on research and development to make a better product. If buying of shelf space was illegal, you can bet that the R&D money would instead be spent on paying the inflated price on black market shelf space, rather than on making a better product.
So the argument follows, that if radio stations pick the songs they play based on how good the song is, and not on the money, then record labels will be incentivized to produce better music.
Illegal payola encourages rent-seeking. Labels spend their money on getting a bigger share of the pie which has been limited by the legislation. This leads to a net social loss dealt to the consumers, because that money is not being spent on making better music, its being spent on making the company survive on artificially limited resources.
Legalizing payola encourages profit-seeking. Labels spend their money on making products that make us, the consumer, happy. In an unrestricted market companies survive by making us happier by making better products. Their money is not wasted needlessly on inflated costs of shelf space; the money is spent on us.
Furthermore, by distorting the market with risk of prosecution, it makes the market larger than it should be. This encourages bigger, meaner players to enter into the market and impose large market tactics on what should be a small market game. The next Beatles or Nirvana may have already come and gone without any recognition, but because the market has been artificially enlarged, the bigger players were not nimble enough to notice or cultivate that talent.
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