a better product). One of the themes we have explored in this chapter is the potentially
different treatment that media product markets can deliver to different groups.
Berry et al. (2014) explore this question in a two-group extension of Berry and
Waldfogel (1999)
. BEW develop an empirical model of entry into radio broadcasting
with two groups of consumers and two groups of stations, where the groups considered
are (a) blacks and whites and (b) Hispanics and non-Hispanics. In the black–white model,
BEW estimate group-specific nested logit models of radio listening, where blacks and
whites have potentially different preferences for black- and white-targeted programming
respectively. Given data on ad prices by type of listener, the observed entry patterns can
be used along with the listening model to estimate the revenue of the marginal station—
and therefore the fixed costs—of each station type. Estimated fixed costs, along with the
listening demand functions, can be used to infer the welfare weights that the market
attaches to listeners of the two types. They find that the market attaches two to three
times higher welfare weight to white relative to black listeners. Weights are slightly
higher for non-Hispanic than Hispanic listeners.
1.5. TECHNOLOGICAL CHANGE, FIXED COSTS, AND PREFERENCE
EXTERNALITIES
The dependence of one’s consumption options on the preferences of others has its stark-
est impact on isolated consumers. A lone black consumer in an otherwise white metro-
politan area will face no options targeted to his or her group and will be delivered little
satisfaction by the product market. Media products at their economic core are digitizable
audio, video, and text. Given technological change of the past few decades, including the
Internet, satellite radio, and even the earlier innovation of cable television, media prod-
ucts are easily transportable (easily communicated) across space.
This has important consequences for the operation of preference externalities. The basic
idea of preference externalities is that consumer s’ options and ultimate satisfaction (in their
capacity as product consumers) are limited by the economic mass and preference mix of the
fellow consumers with whom they share the market. With the development of contempo-
rary communication technologies, one’s fellow consumers need not be geographically local.
Beginning in the late 1990s newspapers and radio programming began to be distrib-
uted online and therefore in non-local markets. For example, the New York Times and the
Wall Street Journal began online distribution in 1996, while USA Today appeared online
even earlier, in 1995.
39
Many local newspapers, ostensibly targeted to local consumers,
also appeared online in the mid to late 1990s. With this development, consumers around
the country (and the world) could get access to many products not specifically targeted to
their local populations.
39
See http://en.wikipedia.org/wiki/The_New_York_Times#Web_presence, http://en.wikipedia.org/
wiki/The_Wall_Street_Journal#Internet_expansion, http://en.wikipedia.org/wiki/USA_Today.
36 Handbook of Media Economics
While Internet distribution was a radical departure from local physical distribution, it
had a precursor in national physical distribution of papers such as the New York Times and
the Wall Street Journal. The New York Times, a paper targeted at upscale New York res-
idents as well as educated and cosmopolitan readers outside of the New York metropol-
itan area, launched a national edition in 1980 and expanded national distribution to 100
cities between 1996 and 2000.
George and Waldfogel (2006) document that as the Times became available—and
purchased—across the US, the circulation of local papers declined among targeted
readers. That is, the highly educated readers turned their attention away from local
papers. At the same time, the local papers, ceding the readers lost to the Times, shifted
their targeting toward more local issues. These changes increased circulation among less
educated readers. With the national distribution of the Times, educated consumers in
locales around the country had access to a more appealing product than could profitably
have been made available by a product targeting one local community at a time.
40
Effects need not have been unambiguously positive. While educated consumers
gained access to a product with more extensive national and global coverage, those
among them forgoing the local product for the Times would lose ready access to local
news. Similarly, those consumers continuing to purchase the now-more-locally-targeted
local newspapers would have less ready access to non-local information.
The spread of the Internet, a conduit giving consumers access to both local and distant
products and information, holds the promise of “liberating” consumers from the tastes of
their neighbors.
Sinai and Waldfogel (2004) provide some evidence of liberation along
these lines. Despite the well-known “digital divide,” that blacks are less Internet-
connected than whites,
Sinai and Waldfogel (2004) document that blacks are more likely
to connect as they are more geographically isolated. That is, blacks living in metropolitan
areas with fewer fellow black consumers were more likely to connect than blacks in areas
with larger local black populations, conditional on individual characteristics. Two mech-
anisms may have accounted for this result. First, the local within-group preference exter-
nality would tend to provide more products more appealing to blacks in local markets
with large black populations. Second, those consumers lacking local preference compa-
triots would be more likely to find products of interest online, whose economic constit-
uency was drawn from around the country. These examples show that technological
change that links consumers and products across space have changed the way that pref-
erence externalities function.
40
George (2008) and George and Hogendorn (2013) provided related evidence that the spread of the Inter-
net has drawn younger and more educated readers away from traditional newspapers.
Mooney (2010)
documents the role of new technology in changing the distribution of listeners among programming for-
mats in radio.
37
Preference Externalities in Media Markets
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