30 December 2004

Twiddledum and Twiddledee are now one!

As 2004 ends, the Singapore media market enters into a phase of rationalisation.

The orthodox line, as proclaimed by the authorities and the media players, is that there is too little space in this tiny city of 4 million for even 2 media/news networks. The decision to remerge Twiddledum and Twiddledee is a rational, economically-justified one. In other words, it's yet another one of Singapore's "done deals" that the authorities hope the populace won't analyse too deeply and start picking on the flaws.

Instead of asking whether the merger was inevitable, we should be questioning: under what circumstances and actions would this outcome be considered inevitable?

I will forgo the details of the Prisoner's Dilemma, and instead treat the Twiddledum and Twiddledee situation as a similar game.

Picture, if you will, the situation in June 2000. Dum and Dee, the state-owned monopolists of the print and tv media, have been granted licenses to operate in each other's domains. There are two strategies open to both players, namely, S1: Beggar thy neighbour by lowering advertising prices in your papers, magazines and broadcasts below fair prices, in order to bankrupt the competitor out of the market; and S2: Grow the pie by innovating and introducing new, different programmes and formats.

Here's the table of outcomes:

Dee (S1)

Dee (S2)

Dum (S1)

-50, -50

100, -50

Dum (S2)

-50, 100

50, 50

Evidently, if one player adopts the nice-guy strategy, he'll be competed out of the market (and possibly his previous dominant position) if the competitor plays the beggar thy neighbour cards. The "win-win" outcome is achieved if both players in the media market had adopted S2. Both would have some gains, as advertisers would buy airtime in two tv networks with very different programming.

And if both players adopt S1? Both of them might go bust. There would be a mediated outcome, courtesy of the government, to return both players to their previous monopoly decisions, rescind the market liberalisation, and declare the experiment a failure.. And it's not the most optimum outcome, given the wastage of resources from both sides when they employ the beggar-thy-neighbour strategy.

However, this is the most likely outcome. The Nash Equilibrium. Both players, not knowing the strategy of the other, will rationally pick the strategy that pays off the most for itself (S1). Nash Equilibrium refers to the strategies where "no
player can benefit any more by changing her strategy while the other players keep their strategies unchanged", and the corresponding outcomes or payoffs. And here, the Nash Equilibrium is the lose-lose outcome, as with the Prisoner's Dilemma, where both players get heavy jail sentences because they both choose to confess.

We should note that mutual cooperation (S2, S2) is not an equilibrium point: a player can obtain better results for himself by playing mean while the other still cooperates...

Sometimes rational decisions aren't sensible.

Notes: it is a fact that is acknowledged, but rarely discussed - Twiddledum and Twiddledee had record year-on-year increases in advertising volume in the period June 2000 - present, yet their advertising revenue had plumetted completely in the same period. Beggar thy neighbour indeed.

If they had been less rational, both media players could've walked away with spanking profits, just that they wouldn't be the sole players on the hill.

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