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radio advertising

radio advertising

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Review of Industrial Organization14:239\u2013256, 1999.
\u00a9 1999Kluwer Academic Publishers. Printed in the Netherlands.
Is Radio Advertising a Distinct Local Market? An
Empirical Analysis\ue001
Department of Economics, 203 Lowder Business Bldg, Auburn University, Auburn, AL 36849,
GEORGE S. FORD\ue001\ue001
MCI Telecommunications,1801 Pennsylvania Ave NW, Washington, DC 20006, U.S.A.
Department of Economics, 203 Lowder Business Bldg, Auburn University, Auburn, AL 36849,
Abstract.The recent relaxation of regulations limiting the ability of an entity to own multiple

radio stations has led to a dramatic increase in ownership concentration in local radio markets. As a result, the Department of Justice has, on several occasions, required limited divestiture of multiple station owners. Implicit in the agency\u2019s action is that radio advertising constitutes an antitrust market. Using the framework established by the Merger Guidelines, this paper evaluates whether or not radio advertising is a distinct local market by estimating an own-price elasticity of demand for radio advertising. Our results support the assertion that radio advertising is an antitrust market.

I. Introduction

TheTelecommunications Act of 1996 will have an enormous effect upon the entire communications industry in the United States. Not least will be the impact on the AM and FM radio market, especially at the local levels. Nationally, a single entity may now own an unrestricted number of licenses across the entire country. The strict ownership limitations in local radio markets, where ownership concentration is more controversial, were relaxed but not abandoned. Prior to 1992 a single entity

\ue001The authors would like to thank Jerry B. Duvall, William Drake, David B. Ford, Jennifer Kaiser,

Jeena Kim, Kevin Roth, Rick Warren-Boulton and two anonymous referees for helpful comments and suggestions on earlier drafts of this paper. We are also grateful to the economic staff of the FCC\u2019s Mass Media Bureau, Policy Division, who provided numerous helpful comments on an earlier version of this paper. All remaining errors are the sole responsibility of the authors.

\ue001\ue001Af\ufb01liated Scholar, Auburn Policy Research Center. The analysis and conclusions of this paper

represent those of the author and do not necessarily re\ufb02ect the views of MCI Telecommunications Corporation, its staff, or its subsidiaries or the Auburn Policy Research Center, its staff, or its spon- sors. Comments on the paper can be directed to George S. Ford, 1801 Pennsylvania Ave. NW, Suite 428, Washington, DC, 20006.


could not own more than one radio station of the same service (i.e., FM or AM) in a given market. Now, a single ownership entity may own up to eight stations in a single market, depending upon the total number of radio stations in that market and, to a lesser extent, their relative market shares.1The relaxation of ownership limitations follows a trend that began some years ago in an era of radio station insolvencies that followed the \u201copenly competitive\u201d environment of the 1980s.

Due to Federal Communications Commission (FCC) rule changes, concentra- tion in both national and local markets began to increase in 1992,2reaching new highs of activity by 1996.3While the FCC clings to \u201cpublic interest\u201d ends such as \u201cdiversity\u201d and \u201clocalism\u201d, concentration at the local level has the potential to thwart such goals.4In addition, while issues of diversity are somewhat unique to media markets, the problems arising from high levels of concentration in media industries are not altogether different from those of other industries. In particular, horizontal concentration in a particular geographic market may lead to reduced competition and therefore higher advertising rates, reduced output and constrained consumer choice.

The link between the rapid consolidation of the radio industry and the ensuing potential market power has led the Department of Justice (DOJ) to closely scruti- nize radio mergers. In August of 1996, the DOJ\u2019s \ufb01rst challenge of a radio merger resulted in the divestiture of a single radio station in Cincinnati by the station\u2019s owner Jacor. The DOJ alleged that Jacor\u2019s ownership of the station (WKRQ-FM) would give it control of more than 50 percent of the sales of radio advertising time in Cincinnati, and could enable the company \u201cto increase prices to advertisers and substantially reduce competition in the $80 million Cincinnati radio advertising market\u201d. Implicit in the DOJ\u2019s action is that it has concluded that radio advertising constitutes an \u201cantitrust market\u201d, existing independently of advertising markets for other local media.5

1See Telecommunications Act of 1996, Section 202(b).
2See Notice of Proposed Rulemaking, 6 FCC Rcd 3275 (1991); Report and Order, MM Docket
No. 91-140, 7 FCC Rcd 2755 (1992a);Memorandum Opinion and Order, MM Docket No. 91-140,
7 FCC Rcd 6387 (1992b).
3Mergers of leading radio group owners included deals amounting to $5.2 billion in the \ufb01rst six

months of 1996 alone. The top three \ufb01rms in 1994 (CBS, In\ufb01nity, and Westinghouse) merged (in 1996) to become the largest \ufb01rm in the market. Clear Channel Communications, thirteenth largest \ufb01rm in 1994 became through merger the second largest \ufb01rm in 1996 (Rathbun, 1996, p. 6; Petrozzello and Rathbun 1996). (Other huge media mergers have proceeded apace. The Time-Warner/Turner merger, involving the merger of two movie studios and a dozen cable channels and given the go-ahead in September 1996, raised concerns of the Federal Trade Commission).

4Diversity and localism are, in effect, goals to promote political and other forms of access to
local radio media. Information substitution may, for example, be high for state or national politics,
but a real concern may attend the emergence of local market power vis-`
a-vis local politics.
5Justice Department Requires Jacor to Sell Cincinnati Radio Station, DOJ Public Announcement

(August 5, 1996). In the absence of data to calculate the own-price and cross-price elasticities of de- mand, theMerger Guidelines suggests the use of practical indicia such as buyer and seller perceptions and actions towards the timing and costs of shifting products and/or suppliers, price movements and


In contrast to the position held by the DOJ, the National Association of Broad- casters (NAB) asserts that, at the local level, radio advertising does not constitute a separate market from other local advertising. Other broadcast media and print outlets, in addition to other advertising media are supposed to constitute such a market. Kerr (1996, p. 1), on behalf of the NAB, asserts \u201c. . . radio has no category of advertisers who are dependent on the radio medium to distribute their advertis- ing. Radio stations therefore compete not only against other stations, but against myriad other media to which radio advertisers switch when relative prices change\u201d. A central issue regarding the need for antitrust scrutiny of radio mergers, therefore, is whether or not there is a \u201cradio market\u201d for advertising.6

The purpose of this paper, is to evaluate empirically whether a radio advertising market exists independently of other local advertising markets. Using data on 110 separate radio markets (derived from an initial sample of 200) and other local market media \u2013 newspapers and television stations \u2013 we estimate the own-price elasticity of demand for radio advertising as well as cross-price elasticities between radio and newspapers and television stations. By doing so, we shed light on the issue of whether a separate and distinct market for radio advertising exists. We caution, however, that market de\ufb01nition is only a \ufb01rst step in a complete antitrust analysis and we therefore do not address the issue of whether antitrustshould be used.

The paper proceeds as follows. In Section II we brie\ufb02y discuss the methodology of delineating an antitrust market according to the DOJ\u2019sMerger Guidelines. In Section III, we provide an overview of the evolution and development of radio markets, with particular emphasis on the kind of ownership restrictions that the FCC placed in local and national markets between 1980 and the Telecommunica- tions Act of 1996. In Section IV, we outline a procedure, proposed by Kamerschen (1994), for delineating an antitrust market. In Section V we develop empirical esti- mates of the own-price and cross-price elasticities of demand for radio advertising. Conclusions are provided in the \ufb01nal section.

II. Demand Substitutability and Market De\ufb01nition

Under traditional antitrust analysis, the extent of market power is closely linked to the level of concentration in an industry. Naturally in measuring any degree of concentration, market share is important. But prior to establishing an institutional

shipment patterns, in\ufb02uence of downstream competition faced by the buyers in their output markets, and so forth. This approach, rather than the direct estimation of own-price and cross-price elasticities of demand has heretofore been the approach (at least, to our knowledge) adopted by the DOJ in its investigation of radio mergers.

6By \u201cradio market\u201d we mean a market for radio services by advertisers. Radio stations also com-

pete in the market for audience. However, the competition for audience is simply \u201cmanufacturing\u201d a product to sell to advertisers and in itself generates no revenue for the station. The real question is therefore whether or not advertisers view radio, as a potential outlet for their messages, as having distinct and non-transferable characteristics that differentiate it from other potential outlets.

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