Alon Eizenberg

Optimal Product Variety in Radio Markets

A vast theoretical literature shows that inefficient market structures may arise in free entry equilibria. The inefficiency may manifest itself in the number, variety, or quality of products. Previous empirical work demonstrated that excessive entry may obtain in local radio markets. Our paper extends that literature by relaxing the assumption that stations are symmetric, allowing instead for endogenous station differentiation along both horizontal and vertical dimensions. Importantly, we allow station quality to be an unobserved station characteristic. We compute the optimal market structures in local radio markets and find that, in most broadcasting formats, a social planner who takes into account the welfare of market participants (stations and advertisers) would eliminate 50%-60% of the stations observed in equilibrium. In 80%-95% of markets that have high quality stations in the observed equilibrium, welfare could be unambiguously improved by converting one such station into low quality broadcasting. In contrast, it is never unambiguously welfare-enhancing to convert an observed low quality station into a high quality one. This suggests local over-provision of quality in the observed equilibrium, in addition to the finding of excessive entry.

Fixed Costs and the Product Market Treatment of Preference Minorities

It is well documented that, in the presence of substantial fixed costs, markets offer preference majorities more variety than preference minorities. This fact alone, however, does not demonstrate the market outcome is in any way biased against preference minorities. In this paper, we clarify the sense in which the market outcome may in fact be biased against preference minorities, and we provide some conditions for such bias to occur. We then estimate the degree of bias in a particular industry using an empirical model of entry into radio broadcasting with two types of listeners, a preference majority and a minority, and the two types of stations targeting those respective listeners. Listening model estimates are used to infer fixed costs, which can then be used to find optimal station configurations as well as the welfare weights on different groups that rationalize the current configuration. The ensuing estimates reveal welfare weights that are 2-3 times higher for whites than blacks, and 1.5-2 times higher for non-Hispanic than Hispanic, listeners. The difference between the black and Hispanic results arises from the different patterns of importing and exporting: Hispanics listen to non-Hispanic-targeted stations more than blacks listen to white-targeted stations; and whites listen to black-targeted stations more than non-Hispanics listen to Spanish-language stations. Researchers and policy makers might add product markets to labor markets and other contexts that warrant attention for disparate treatment of minorities.

Optimal product variety in radio markets

A vast theoretical literature explores inefficient market structures in free-entry equilibria, and previous empirical work demonstrated that excessive entry may obtain in local radio markets. We extend that literature by relaxing the assumption that stations are symmetric, allowing for endogenous horizontal and (unobserved) vertical station differentiation. We find that, in most broadcasting formats, a social planner who takes into account the welfare of market participants eliminates 50%–60% of the observed stations. In 80%–94.9% of markets where high-quality stations are observed, welfare could be unambiguously improved by converting one such station into low-quality broadcasting, suggesting local overprovision of quality.