Free Entry and Social Inefficiency in Radio Broadcasting

37 Pages Posted: 14 Apr 1998 Last revised: 1 Oct 2010

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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Date Written: April 1996

Abstract

In theory, free entry can lead to social inefficiency. When new products are substitutes for existing products, the business stolen from incumbents places a wedge between private and social benefits of entry. The business stealing effect can be offset if entry reduces prices or increases available product variety. Our study of the radio industry provides one of the first empirical attempts to quantify the inefficiency associated with free entry. Using data on advertising prices, number of stations and radio listening in 135 U.S. metropolitan markets, we estimate how listening and revenue vary with the number of stations. Using a free-entry assumption, we infer the distribution of station costs, which are fixed with respect to listening. We then use our estimates of revenue and fixed costs to calculate the welfare of market participants (excluding listeners) and the number of stations under free entry and social optimality. Relative to the social optimum, the welfare loss of free entry is 40 percent of industry revenue. However, we calculate that the free entry equilibrium would be optimal if the marginal value of programming to listeners were over three times the value of marginal listeners to advertisers, who pay 4.5 cents per hour.

Suggested Citation

Berry, Steven T. and Waldfogel, Joel, Free Entry and Social Inefficiency in Radio Broadcasting (April 1996). NBER Working Paper No. w5528. Available at SSRN: https://ssrn.com/abstract=4188

Steven T. Berry (Contact Author)

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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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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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