Free Entry and Social Inefficiency in Radio Broadcasting

Steven Berry () and Joel Waldfogel

RAND Journal of Economics, 1999, vol. 30, issue 3, 397-420

Abstract: 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.

Date: 1999
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Working Paper: Free Entry and Social Inefficiency in Radio Broadcasting (1996)
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