Preference Externalities: An Empirical Study of Who Benefits Whom in Differentiated Product Markets

53 Pages Posted: 29 Mar 2000 Last revised: 14 Oct 2010

See all articles by Joel Waldfogel

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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Date Written: October 1999

Abstract

Theory predicts that in markets with increasing returns, the number of differentiated products and resulting consumer satisfaction grow in market size. We document this phenomenon across 246 US radio markets. By a mechanism that we term 'preference externalities', an increase in the size of the market brings forth additional products valued by others with similar tastes. But who benefits whom? We examine the patterns of and mechanisms for preference externalities between black and white and between Hispanic and non-Hispanic radio listeners, and among listeners of different age groups. The patterns are striking: while preference externalities are large and positive within groups, they are small and possibly negative across groups. For example, while black-targeted station entry and the black listening share increase in black population, they are unaffected (or possibly reduced) by the size of the white population. Consequently, small groups receive less variety from the market. Forces that increase the size of the market, such as emerging satellite and Internet technologies, may increase the satisfaction of individuals whose preferences do not match their fellow local residents'.

Suggested Citation

Waldfogel, Joel, Preference Externalities: An Empirical Study of Who Benefits Whom in Differentiated Product Markets (October 1999). NBER Working Paper No. w7391, Available at SSRN: https://ssrn.com/abstract=193775

Joel Waldfogel (Contact Author)

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

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National Bureau of Economic Research (NBER)

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

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