Free Entry and Social Inefficiency in Radio Broadcasting

Posted: 16 Jun 1999

See all articles by Steven Berry

Steven Berry

Yale University - Department of Economics; National Bureau of Economic Research (NBER); Yale University - Cowles Foundation

Joel Waldfogel

University of Minnesota - Twin Cities - Carlson School of Management; National Bureau of Economic Research (NBER); University of Minnesota - Twin Cities - Department of Economics

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Abstract

In theory, free entry can lead to social inefficiency. We study the radio industry in a first attempt to quantify this inefficiency. Using cross-sectional data on advertising prices, the number of stations, and radio listening, we estimate the parameters of listeners' decisions and of firms' profits. Relative to the social optimum, our estimates imply that the welfare loss (to firms and advertisers) of free entry is 45% of revenue. However, the free entry equilibrium would be optimal if the marginal value of programming to listeners were about three times the value of marginal listeners to advertisers.

JEL Classification: L82, L1

Suggested Citation

Berry, Steven T. and Waldfogel, Joel, Free Entry and Social Inefficiency in Radio Broadcasting. Rand Journal of Economics, Vol. 30, No. 3, Available at SSRN: https://ssrn.com/abstract=164430

Steven T. Berry (Contact Author)

Yale University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Yale University - Cowles Foundation

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Joel Waldfogel

University of Minnesota - Twin Cities - Carlson School of Management ( email )

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United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
Minneapolis, MN 55455
United States

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