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

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  • Adam D. Rennhoff

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.

Suggested Citation

  • Adam D. Rennhoff, 2009. "The Competitive Effects of “Consideration Payments”: Lessons from Radio Payola," Working Papers 200904, Middle Tennessee State University, Department of Economics and Finance.
  • Handle: RePEc:mts:wpaper:200904
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    File URL: http://capone.mtsu.edu/berc/working/rennhoff_payola.pdf
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    References listed on IDEAS

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    1. Justin Wolfers, 2006. "Did Unilateral Divorce Laws Raise Divorce Rates? A Reconciliation and New Results," American Economic Review, American Economic Association, vol. 96(5), pages 1802-1820, December.
    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. Wujin Chu, 1992. "Demand Signalling and Screening in Channels of Distribution," Marketing Science, INFORMS, vol. 11(4), pages 327-347.
    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 461-493, 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 203-221, April.
    6. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Radio; Payola; Regulation; Slotting Allowances;

    JEL classification:

    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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