Free entry and social inefficiency in radio broadcasting

In theory, free entry can lead to social inefficiency. We study the radio i ndustry in a first attempt to quantify this inefficiency. Using cross-secti onal data on advertising prices, the number of stations, and radio listenin g, we estimate the parameters of listeners' decisions and of firms' profits . Relative to the social optimum, our estimates imply that the welfare loss (to firms and advertisers) of free entry is 45% of revenue. However, the f ree entry equilibrium would be optimal if the marginal value of programming to listeners were about three times the value of marginal listeners to adv ertisers.