Measuring the Effect of Multimarket Contact on Competition: Evidence from Mergers Following Radio Broadcast Ownership Deregulation

This paper examines the effects of multimarket contact on advertising prices in the U.S. radio broadcasting industry. While it is in general difficult to measure the effect of multimarket contact on competition, the 1996 Telecommunications Act substantially relaxed local radio ownership restrictions, giving rise to a major and exogenous consolidation wave. Between the years of 1995 to 1998, the average extent of multimarket contact in major U.S. media markets increased by 2.5 times. Importantly, the extent of change in multimarket contact varies across markets, and the change in multimarket contact varies separately from the change in concentration. Using a panel data set on 248 geographic U.S. radio broadcast markets, 1995-1998, we find that multimarket contact has little effect on advertising prices. This paper contributes to the empirical literature on multimarket contact by analyzing a different industrial context and using longitudinal data surrounding an ownership deregulation. ∗Corresponding author: Julie Wulf, Wharton School, University of Pennsylvania, 2023 SteinbergDietrich Hall, Philadelphia, PA 19104 Industrial economists and strategy researchers have long thought that multimarket contact (MMC) might soften competitive behavior. Consequently, considerable effort has been devoted to documenting the effects of multimarket contact on competition, especially since Bernheim and Whinston’s formal characterization (1990). A large group of cross sectional studies finds competition to be weaker in markets whose participants also interact in other markets. A consensus has emerged, based on this evidence, that multimarket contact reduces competition. Yet, measurement of the effect of multimarket contact requires exogenous variation in multimarket contact that the cross-sectional context cannot plausibly provide. Recognizing this, researchers in industrial organization and strategy have looked to longitudinal data surrounding deregulatory episodes to measure effects of multimarket contact on competition. Notably, Evans and Kessides (1994) and Gimeno and Woo (1996, 1999) examine the relationship between the changes in prices and changes in multimarket contact surrounding airline deregulation, finding that markets with increased multimarket contact also experience increased prices. In this study, we make use of longitudinal data surrounding a major ownership deregulation in radio broadcasting to revisit the question of whether multimarket contact affects competition. The effect found in the airline studies might be unique to the structure of that industry or specific to the deregulation of airlines. Multiple studies in other industrial contexts using longitudinal data are needed to determine the generality of this effect. We examine the effects of changes in multimarket contact and ownership concentration on radio advertising prices in the period surrounding the 1996 Telecommunications Act. While firms had previously been limited to owning two stations per market and 40 stations nationally, under the Act, they could own up to 8 stations in each of the largest markets and an unlimited number nationally. The Act set off a major consolidation wave, increasing local ownership concentration by more than 30% over the four-year period. Beyond that, the average number of markets in which the ten largest firms operated doubled from less than 15 to more than 30, increasing multimarket contact significantly. In 1995, the two largest owners in each of 248 markets interacted in 1.27 markets on average. By 1998, this measure had increased to over 3—2.5 times the level in 1995. While this sharp increase in multimarket contact was accompanied by an increase in local ownership concentration—itself an important potential determinant of Jayachandran, Gimeno and Varadarajan (1999) and Korn and Baum (1999) summarize the results of the research on multimarket contact and competition. While the results are somewhat mixed, the majority of the studies suggest that firms compete less aggressively (using various measures such as pricing, entry/exit rates, profitability) in markets in which they jointly compete. Combining the list of papers from both summaries, 22 of the 27 studies find that multimarket contact reduces competition. Contributions to Economic Analysis & Policy 1 Waldfogel and Wulf: Measuring the Effect of Multimarket Contact on Competition