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Free Entry and Social Inefficiency in Radio Broadcasting

Author

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  • Steven Berry
  • Joel Waldfogel

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

  • Steven Berry & Joel Waldfogel, 1996. "Free Entry and Social Inefficiency in Radio Broadcasting," NBER Working Papers 5528, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5528
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    References listed on IDEAS

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    1. Michael Spence, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Oxford University Press, vol. 43(2), pages 217-235.
    2. 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.
    3. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    4. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, vol. 60(4), pages 889-917, July.
    5. 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.
    6. Daniel McFadden, 1977. "Modelling the Choice of Residential Location," Cowles Foundation Discussion Papers 477, Cowles Foundation for Research in Economics, Yale University.
    7. 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.
    8. Spence, Michael, 1976. "Product Differentiation and Welfare," American Economic Review, American Economic Association, vol. 66(2), pages 407-414, May.
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    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media

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