of W’s who listen to radio is independent of the number of B’s. This is not because the W’s
do not listen to b stations. Rather, it is because the extra b stations crowd out w ones at
exactly the rate that keeps overall W listening the same. As noted above, this is an artifact
of assuming valuation symmetry. If instead other-side valuations were less than s, then
there would be fewer W listeners as M
B
rose. The reason is the dominant crowd-out effect.
Put another way, negative cross preference externalities go hand-in-hand with decreasing
listener shares. Regardless, the prediction for own-side presence is that more listen: the
presence of more W’s increases the equilibrium fraction of W’s who listen.
1.4. EMPIRICAL RESULTS: FACTS RELEVANT TO PREDICTIONS FROM
THEORY
We now turn to assessing the state of empirical knowledge on the predictions arising from
the theoretical models articulated above. There are both positive implications and nor-
mative implications. Among the positive predictions are the following.
First, the positive within-group preference externality: more valuable audiences—
either because they are larger or more valued by advertisers—attract more entry and
deliver group members more surplus. Second, as is implied above, ad prices matter.
Third, there is an inverted pyramid of variety—larger markets have more variety, allow-
ing consumers to trade up from lower second to higher choices. Fourth, when markets
support few products (and most clearly with literally one product), positioning depends
on the relative economic mass of the underlying demand groups. A single product locates
nearer the larger mass of consumers, delivering them greater surplus. Fifth, as a result,
there is a positive own-group effect and the possibility of a negative across-group effect;
with N ¼1, the negative across-group effect is immediate; it can also arise with small
numbers of products as a group grows large enough to attract targeted entry and con-
sumers withdraw from second-choice products to newly available first choices. Finally,
when markets support many products, own-group effects tend to be positive while
across-group effects tend to be zero. In addition to these positive predictions, we can also
explore normative statements. Free entry can deliver a sub-optimal number of products as
well as a sub-optimal mix of products.
This section of the paper proceeds via the following sections. First we review what is
known about the basic own-group preference externality. This is the relationships
between market size and entry, between market size and variety, and between market
size and consumption.
Second, we review what is known about analogous mechanisms in contexts with
multiple groups. This, in turn, differs according to whether there are few (one or
two) or many products. We discuss product positioning by monopolists as well as the
ensuing own-group and cross-group preference externalities. We then review the evi-
dence on how group sizes affect targeted entry and group consumption in contexts that
28 Handbook of Media Economics
can support multiple entrants. Third, we discuss the available evidence on ownership and
product positioning. We then apply the empirical evidence to normative questions with a
review of the empirical literature on the efficiency of entry into media markets.
1.4.1 The Own-Group Preference Externality
1.4.1.1 Market Size and Entry
One stark prediction emerging from both the models reviewed above (as well as common
sense) is that, just as market size tends to promote entry in markets generally, this is also
true in media markets. And this is indeed true for a variety of media. A variety of studies
document that larger markets have more radio stations (
Berry and Waldfogel, 2001;
Rogers and Woodbury, 1996; Sweeting, 2010; Wang and Waterman, 2011
). Larger
markets also have more daily newspapers (
Berry and Waldfogel, 2010; George, 2007;
George and Waldfogel, 2003
), weekly newspapers, and local television stations
(
Waldfogel, 2004).
While all positive, the relationships between market size and entry differ substantially
across media products; and these relationships reveal something about the relative size of
fixed costs in relation to market size across products. The average number of daily news-
papers per market in the top 283 markets was 3.23 in 2001.
33
Around the same time, the
average number of radio stations, including only those broadcasting from inside the met-
ropolitan area, was 24.5 across 246 US markets in 1997.
34
1.4.1.2 Market Size and Variety
Larger markets can support more products. In general, entry might affect consumers
through two mechanisms: prices might fall, or the appeal of the most appealing varieties
might increase with entry. Both are possible with entry in media markets, although we
focus on the second, in part because ad prices are often set outside of local media markets
that are the focus of this chapter.
If entry delivers satisfaction through the variety channel, then it must be the case that
large markets have not only more but more varied products. Radio markets provide an
illustrative example. Using the 1997 data, while the elasticity of the number of stations
with respect to population is 0.31, the elasticity of the number of varieties is 0.27. Hence,
most of the growth in the number of products available in larger markets arises from
growth in variety as opposed to duplication.
35
The relationship between market size and variety is related to the willingness of con-
sumers to accept second-choice alternatives. The willingness to accept second-choice
33
Berry and Waldfogel (2010).
34
Waldfogel (1999).
35
The evidence that the number of varieties increases in market size rests on the idea that differently named
broadcast formats are meaningfully different. There is some question about this (see
DiCola, 2006).
29
Preference Externalities in Media Markets
programming means that a relatively small number of varieties can attract consumption
from a large share of the market. Hence, a small market with few product options can
have a high share of population consuming. As a market becomes large enough to support
more varieties, some consumers formerly choosing the least common denominator will
switch over to a more preferred variety. This has two possible consequences.
The first is that generalist (LCD) programming may lose support as a market becomes
large enough to support specialist programming. It is possible that some generalist pro-
gramming would be withdrawn as consumers with specialized tastes withdraw their sup-
port from generalist programming. This is a potential variant on a negative across-group
preference externality.
A second set of consequences is that larger markets will have more varied program-
ming and, moreover, that share of population listening to generalist format should fall in
market size. Various studies confirm that larger markets have more formats as well as
more stations. The most commonly available format, country music, garners a smaller
share of listening in larger markets. The same is true for other generalist formats, such
as “full service/variety” and oldies. The opposite is true for formats such as jazz and clas-
sical music, which are only supplied by the market in large markets.
1.4.1.3 Market Size and Quality
A feature of the relationship between market size and entry is the nonlinearity in the rela-
tionship between market size and entry. For example, a regression of the log of the num-
ber of daily newspapers in a US metropolitan area on the log of population yields an
elasticity of entry with respect to population of 0.5 (
Berry and Waldfogel, 2010). An anal-
ogous regression using 1997 US data across 260 US markets yields an elasticity of 0.3.
36
By contrast, Berry and Waldfogel (2010) show that the relationship between entry and
population is nearly linear for the restaurant industry.
The deviation from linearity arising in media industries could arise for a variety of
reasons, including price competition in the advertising market. Yet radio ads have close
substitutes in newspaper, television, and outdoor ads, suggesting a limited role for ad price
competition to explain the nonlinearity. A second possibility is that the fixed costs them-
selves rise in market size, and indeed they do. We see strong direct evidence of this in
daily newspaper markets.
Berry and Waldfogel (2010) show that the number of pages
and staff per daily newspaper rise across markets with market size: the elasticities of pages
and staff with respect to population are 0.2 and 0.5 respectively.
Direct evidence on how the costs of radio station operation vary with market size are
not systematically available, but we do have two pieces of evidence indicating higher
costs in larger markets. First,
Duncan (1994) reports some data on annual pay of
on-air talent across about 100 US radio markets in 1993, including the highest reported
36
Authors’ calculation for this chapter, using the data in Waldfogel (2003).
30
Handbook of Media Economics
salary per market and a typical range. A regression of the log of the top salary on log of
population yields an elasticity of 0.87 (with a standard error of 0.04). Using the midpoint
of the typical salary range, the elasticity of salary with respect to market size is 0.26 (0.02).
These size differences in salary dwarf the cost-of-living differences across markets and
therefore clearly indicate higher costs in larger markets. Using the 16 markets for which
a metro area CPI exists, the elasticity of the cost of living with respect to population is
about 0.03. The pay–market size relationship also suggests that higher-quality talent grav-
itates to larger markets and that the stations in larger markets have higher quality.
Second, there is related indirect evidence: the relationship between the number
of listeners per station and market size is strongly suggestive that costs are higher in
larger markets. A regression on the average number of listeners per local US radio
station on metro area population, using 1997 data, yields an elasticity of 0.8. Unless
ad revenue per listener fell sharply with market size—and there is no evidence that it
does—this would indicate that radio stations in larger markets have higher average
revenue. With free entry, revenues tend to provide reasonable approximations for costs,
so the fact that larger-market stations have more revenue indicates that their costs are
higher as well.
37
That larger markets have more media products provides a mechanism by which addi-
tional entry might deliver more valuable choices to consumers. That is, entry is a mech-
anism for the delivery of the basic own-group preference externality. Costs that rise with
market size seem on the face of it to mitigate the positive effect of market size on the
desirability of options for media consumers, but that depends on what gives rise to higher
costs in larger markets. For example, if larger markets had higher costs simply because of
higher input prices (land, etc.), then the deviation from linearity of entry in market size
would inhibit the welfare benefit of fellow consumers. On the other hand, if the higher
costs in larger markets reflect higher investment—and associated higher-quality
products—then the interpretation would be different.
There is a variety of reasons to see the higher costs in larger markets to be reflective of
greater investment in quality and, moreover, that media markets provide good examples
of
Sutton’s (1991) prediction that market structure need not grow fragmented as markets
get large when quality is produced through investments in fixed costs. In newspapers,
some of the direct input cost measures—page length and staff size—are directly suggestive
of quality. Moreover, some other measures of quality, such as the number of Pulitzer
Prizes per newspaper, are also higher in larger markets (
Berry and Waldfogel, 2010).
That quality rises in market size provides a second mechanism, in addition to variety
itself, whereby consumers might deliver more surplus to one another.
37
One might worry that this is driven by large markets where spectrum scarcity delivers rents to stations that
can enter, but this seems not to be the case. The elasticity is 0.65 even for markets with fewer than 1
million residents.
31
Preference Externalities in Media Markets
1.4.1.4 Market Size and Consumption
Larger markets have more—and higher-cost—products. If these products are more
attractive relative to the outside good, then markets with more and/or better products
should also have higher consumption. Such evidence would close the loop on the basic
own-group preference externality.
A number of papers on radio broadcasting document that a higher share of the popu-
lation is drawn to consumption in markets with more products. For example, Waldfogel
(1999) shows that AQH listening, which averaged 14.8% of population across 246 US
metro areas in 1997, was 0.3 percentage points higher in markets with 1 million more per-
sons (or 0.2 if allowing for various controls such as region and the percent driving to work).
OLS estimates show that listening is 0.07 percentage points higher in markets with one
additional station and 0.12 percentage points higher in markets with one additional format.
When stations and formats are instrumented with the level of population, the station and
format coefficients rise to 0.10 and 0.18 respectively. This provides evidence that additional
stations attract listeners through the greater product variety.
George and Waldfogel (2000)
provide direct evidence of this mechanism in daily newspaper markets. In a regression of
the share of population subscribing to a local daily on MSA population and controls, they
find a modest positive effect of about 2% per additional million population.
38
1.4.2 Preference Externalities with Multiple Consumer Types
The evidence thus far presented concerned one group of consumer. Given the rather
stark differences in preferences across groups outlined in
Section 1.1—for example,
between blacks and whites and between Hispanics and non-Hispanics—it is useful to
group consumers with similar preferences together, then to ask how preference external-
ities function both within and across groups. As the theoretical discussion of
Section 1.2
highlights, however, preference externalities work differently depending on the number
of products in the market. Here, we begin with the evidence on monopoly (or near-
monopoly) markets.
1.4.2.1 Preference Externalities in Markets with Few Products
Daily newspaper markets have few products per market. Most US metropolitan areas
have only one. In such markets—as the Hotelling-style positioning model above
indicated—the mechanism for preference externalities is the positioning of products,
rather than entry.
George and Waldfogel (2000, 2003) examine daily newspaper markets in the US.
They take the view that a local newspaper makes its targeting decision at the metropolitan
area level. Thus, product characteristics should be a function of the distribution of
consumer types in the metropolitan area. Their consumption data, by contrast, are at
38
George and Waldfogel (2000).
32
Handbook of Media Economics
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