MARKET STRUCTURE, PROGRAM DIVERSITY, AND RADIO AUDIENCE SIZE

I. INTRODUCTION In the last 50 years, theorists have developed several hypotheses on the links between market structure, product diversity, and audience size in mass media markets. Theoretical models suggest that these links are especially important in advertiser-financed broadcast programming such as radio. The seminal paper by Steiner (1952) and more general models by Spence and Owen (1977) demonstrate that advertiser-supported media are likely to discriminate against programming aimed at small audiences. Empirical work by Haring (1975) and Borenstein (1986) support these conclusions in the radio sector. (However, the results in these papers are more narrowly focused than the results reported here, and no corresponding analyses of broadcast television exist.) In advertiser-supported media, the primary incentive of the firms is to deliver the largest possible audience to the client. Consequently, even though a small group may place a much higher total value on its preferred programming than does a large group, the media firms will cater to the latter. With advertiser-supported media, listener or viewer willingness-to-pay does not count. As the number of media firms grows, however, many firms have to share the popular programming types. In this situation, the profitability of reaching a small audience with a "minority" taste may be greater than that of reaching a small portion of a large audience with more "common" preferences. Thus, ceteris paribus, increasing the number of stations within a market may increase programming diversity, thereby raising the likelihood that "minority" demands will be met. This paper first examines the relationship between the number of programming formats and the number of advertiser-supported radio stations, testing the hypothesis of Steiner and others that increasing the number of stations will increase programming diversity. Furthermore, this relationship may be used to construct a link between the size of the radio audience - i.e., listenership - and the number of stations. Assessing the format effects of increasing the number of stations has implications for recent proposals by the Federal Communications Commission (FCC) and Congress to loosen rules on multi-station ownership (see FCC, 1991a). In the past, the FCC has restricted ownership of multiple radio and television stations in order to foster competition and diversity. The FCC presently limits the number of radio stations owned by one firm to one AM, FM, or AM/FM combination in any given market and to 14 of either type for the entire country (see Besen et al., 1984, pp. 21-30). Recently, however, the financial plight of AM radio stations has suggested to the FCC that its pursuit of viewpoint diversity through ownership restrictions may have been excessive, denying these stations efficiency benefits that may have increased their survival prospects. If the current rules prevent owners from attaining any cost savings arising from common ownership, relaxing the rules will permit some stations that otherwise would fall silent to remain on the air (see FCC, 1991b, paragraph 4; Anderson and Woodbury, 1988). If program diversity increases with the number of stations, then more permissive ownership policies will foster program diversity by enabling some stations that otherwise would fail to remain financially viable. The empirical research in this paper permits inferences regarding the order of magnitude of the rule-induced increase in the number of stations required to effect significant changes in diversity. The analysis permits one to conclude only whether the effects of the proposed rule change must be "small" or "large" to result in quantitatively important increases in diversity. Estimating the effect of the rule on the number of stations, on format responsiveness, and on program quality is beyond the scope of this paper. To help establish a link between diversity and consumer welfare, the analysis estimates a second relationship, that between total audience size (listenership) and diversity, as reflected in the number of formats offered in a given local market. …