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Free Entry and Social Inefficiency in Radio Broadcasting

  • Steven T. Berry
  • Joel Waldfogel

In theory, free entry can lead to social inefficiency. We study the radio industry in a first attempt to quantify this inefficiency. Using cross-sectional data on advertising prices, the number of stations, and radio listening, we estimate the parameters of listeners' decisions and of firms' profits. Relative to the social optimum, our estimates imply that the welfare loss (to firms and advertisers) of free entry is 45% of revenue. However, the free entry equilibrium would be optimal if the marginal value of programming to listeners were about three times the value of marginal listeners to advertisers.

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Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 30 (1999)
Issue (Month): 3 (Autumn)
Pages: 397-420

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Handle: RePEc:rje:randje:v:30:y:1999:i:autumn:p:397-420
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  1. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, vol. 60(4), pages 889-917, July.
  2. Spence, Michael, 1976. "Product Differentiation and Welfare," American Economic Review, American Economic Association, vol. 66(2), pages 407-14, May.
  3. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  4. Anderson, Simon P & de Palma, Andre & Nesterov, Yurii, 1995. "Oligopolistic Competition and the Optimal Provision of Products," Econometrica, Econometric Society, vol. 63(6), pages 1281-1301, November.
  5. David Dranove & Mark Shanley & Carol Simon, 1992. "Is Hospital Competition Wasteful?," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 247-262, Summer.
  6. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
  7. Spence, Michael, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Wiley Blackwell, vol. 43(2), pages 217-35, June.
  8. Daniel McFadden, 1977. "Modelling the Choice of Residential Location," Cowles Foundation Discussion Papers 477, Cowles Foundation for Research in Economics, Yale University.
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