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The Competitive Effects of “Consideration Payments”: Lessons from Radio Payola

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  • Adam D. Rennhoff
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    Abstract

    It is not uncommon for upstream manufacturers to make payments to downstream firms in order to obtain preferential treatment. These payments may generally be called “consideration payments.” Examples of this include the slotting allowance payments often discussed in the grocery, pharmaceutical, and consumer electronics industries. Payola in the radio industry shares many of the same characteristics as slotting allowances. The prohibition of radio payola in 1960 gives us an opportunity to empirically examine the effect that these payments had on the record labels using them and on overall product variety. We construct a unique variety measure based on the musical styles of Billboard chart artists and supplement this with information on radio airplay from Billboard charts to evaluate the effects of payola. We find that the prohibition of payola reduced musical variety and overall record sales, but may have helped increase access for smaller record labels. These findings support the theory that payola payments, which may impose a non-trivial financial burden on the record label, serve to reduce the radio station’s risk.

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    File URL: http://capone.mtsu.edu/berc/working/rennhoff_payola.pdf
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    Bibliographic Info

    Paper provided by Middle Tennessee State University, Department of Economics and Finance in its series Working Papers with number 200904.

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    Date of creation: Jun 2009
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    Handle: RePEc:mts:wpaper:200904

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    Web page: http://www.mtsu.edu/~berc/working/Economics_Working_Papers.html
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    Keywords: Radio; Payola; Regulation; Slotting Allowances;

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    1. Benjamin Klein & Joshua D. Wright, 2007. "The Economics of Slotting Contracts," Journal of Law and Economics, University of Chicago Press, vol. 50, pages 421-454.
    2. Coase, R H, 1979. "Payola in Radio and Television Broadcasting," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 269-328, October.
    3. Justin Wolfers, 2003. "Did Unilateral Divorce Laws Raise Divorce Rates? A Reconciliation and New Results," NBER Working Papers 10014, National Bureau of Economic Research, Inc.
    4. Sullivan, Mary W, 1997. "Slotting Allowances and the Market for New Products," Journal of Law and Economics, University of Chicago Press, vol. 40(2), pages 461-93, October.
    5. Lindsay, Cotton M & Maloney, Michael T, 1988. "Party Politics and the Price of Payola," Economic Inquiry, Western Economic Association International, vol. 26(2), pages 203-21, April.
    6. Wujin Chu, 1992. "Demand Signalling and Screening in Channels of Distribution," Marketing Science, INFORMS, vol. 11(4), pages 327-347.
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