A vast theoretical literature shows that ineﬀicient market structures may arise in free entry equilibria. 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 (observed) horizontal and (unobserved) vertical dimensions. We 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%–94.9% 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.
Berry, Steven T.; Eizenberg, Alon; and Waldfogel, Joel, "Optimal Product Variety in Radio Markets" (2015). Cowles Foundation Discussion Papers. 2464.