Preference Externalities

Theory predicts that in markets with increasing returns, the number of differentiated products – and resulting consumer satisfaction – grow in market size. We document this phenomenon across 246 US radio markets. By a mechanism that we term “preference externalities,” an increase in the size of the market brings forth additional products valued by others with similar tastes. But who benefits whom? We examine the patterns of – and mechanisms for – preference externalities between black and white and between Hispanic and non-Hispanic radio listeners, and among listeners of different age groups. The patterns are striking: while preference externalities are large and positive within groups, they are small and possibly negative across groups. For example, while black-targeted station entry and the black listening share increase in black population, they are unaffected (or possibly reduced) by the size of the white population. Consequently, small groups receive less variety from the market. Forces that increase the size of the market, such as emerging satellite and Internet technologies, may increase the satisfaction of individuals whose preferences do not match their fellow local residents’. I am grateful for much stimulating discussion to Jeff Milyo and Peter Siegelman, who is a coathor on a related project, and to Spencer Glendon, Dennis Yao, and Severin Borenstein for comments. Thanks to seminar participants at Columbia, Wharton, Yale, the University of Pennsylvania Economics Department, MIT, the Federal Reserve Bank of New York, the University of Chicago, Dartmouth, the US Department of Justice, and the Winter 2000 meetings of the NBER IO group at Stanford for helpful comments. Seminar participants at the FCC, the George Washington College of Law, and Cornell provided comments on a related paper containing some results reported herein. All errors are my own.