Media Ownership Working Group On the Substitutability of Local Newspaper , Radio , and Television Advertising in Local Business Sales By C . Anthony Bush

The views expressed in this paper are those of the author alone and do not necessarily reflect the views of the Federal Communications Commission, any Commissioners, or other staff. A current policy issue is whether there is a single local media market or several distinct local markets for newspaper, radio, and television advertising. An important step in defining a market is the estimation of elasticities of demand. In this study we present a model of local business behavior in purchasing advertising for use in sales activities. Using reported data on local radio and television advertising revenue contained in the 2001 BIA's Master Access Database and using data from the Newspaper Association of America on retail ad expenditures, estimates of elasticities of substitution, ordinary own-and cross-price elasticities are derived for a representative local business establishment. The estimated elasticities of substitution and the estimated ordinary cross-price elasticities suggest weak substitutability between local media. In addition, the ordinary demand elasticity for a retail ad in a newspaper is approximately unity and negative. Demands for both local radio and local television ads are inelastic. Finally, the data support the specified model of local business advertising. An important caveat to these results is that varying degrees of measurement error are associated with local radio revenue and revenue from retail ads in newspapers. Due to these limitations inherent in the underlying data, the results of this study cannot be considered conclusive. The results, however, are consistent with economic theory.