Optimal Product Variety in Radio Markets

61 Pages Posted: 12 Oct 2015

See all articles by Steven Berry

Steven Berry

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

Alon Eizenberg

Hebrew University of Jerusalem - Department of Economics

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 2015

Abstract

A vast theoretical literature shows that inefficient market structures may arise in free entry equilibria. The inefficiency may manifest itself in the number, variety, or quality of products. Previous empirical work demonstrated that excessive entry may obtain in local radio markets. Our paper extends that literature by relaxing the assumption that stations are symmetric, allowing instead for endogenous station differentiation along both horizontal and vertical dimensions. Importantly, we allow station quality to be an unobserved station characteristic. We compute the optimal market structures in local radio markets and find that, in most broadcasting formats, a social planner who takes into account the welfare of market participants (stations and advertisers) would eliminate 50%-60% of the stations observed in equilibrium. In 80%-95% of markets that have high quality stations in the observed equilibrium, welfare could be unambiguously improved by converting one such station into low quality broadcasting. In contrast, it is never unambiguously welfare-enhancing to convert an observed low quality station into a high quality one. This suggests local over-provision of quality in the observed equilibrium, in addition to the finding of excessive entry.

Suggested Citation

Berry, Steven T. and Eizenberg, Alon and Waldfogel, Joel, Optimal Product Variety in Radio Markets (October 2015). NBER Working Paper No. w21621, Available at SSRN: https://ssrn.com/abstract=2672735

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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Alon Eizenberg

Hebrew University of Jerusalem - Department of Economics ( email )

Mount Scopus
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Israel

Joel Waldfogel

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

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Minneapolis, MN 55455
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 )

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Minneapolis, MN 55455
United States

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