Fixed Costs and the Product Market Treatment of Preference Minorities
34 Pages Posted: 15 Sep 2014
Date Written: September 2014
It is well documented that, in the presence of substantial fixed costs, markets offer preference majorities more variety than preference minorities. This fact alone, however, does not demonstrate the market outcome is in any way biased against preference minorities. In this paper, we clarify the sense in which the market outcome may in fact be biased against preference minorities, and we provide some conditions for such bias to occur. We then estimate the degree of bias in a particular industry using an empirical model of entry into radio broadcasting with two types of listeners, a preference majority and a minority, and the two types of stations targeting those respective listeners. Listening model estimates are used to infer fixed costs, which can then be used to find optimal station configurations as well as the welfare weights on different groups that rationalize the current configuration. The ensuing estimates reveal welfare weights that are 2-3 times higher for whites than blacks, and 1.5-2 times higher for non-Hispanic than Hispanic, listeners. The difference between the black and Hispanic results arises from the different patterns of importing and exporting: Hispanics listen to non-Hispanic-targeted stations more than blacks listen to white-targeted stations; and whites listen to black-targeted stations more than non-Hispanics listen to Spanish-language stations. Researchers and policy makers might add product markets to labor markets and other contexts that warrant attention for disparate treatment of minorities.
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