Telecommunications Deregulation

What prevents a wider array of musical choices in radio station listener markets?

Background:
I live in Minneapolis and my favorite radio station was recently purchased by a large media company. Now that company owns all of the major popular music stations in town. I am sad that I can no longer listen to the music of my choice, but I really have nothing against the companies involved in an exchange that I might have made if I were they.

The recent "communications deregulation" seems to have had the effect of bidding up bandwidth in local areas such that the barriers to entry have reduced choice. This seems to have happened in the absence of the government regulation existing before this legislation passed.

I now don't have many clues to predict what will happen. I don't know of bandwidth prices will come down when the majority of the changing hands has taken place, or the prices will stay up - perhaps because of regulations or subsidies that I know nothing of.

Answer:
The problem that you describe has very little to do with the recent Telecommunications Act passed in Feb. 1996. The problem stems from the governments reluctance to auction off the electromagnetic spectrum to private owners. There are two limitations that are relevant to your problem The first is the fact that there is a finite amount of spectra available for any use which simply means that the supply is fixed by nature (the S curve is vertical). Therefore any demand for the use of this resource will generate rents to the owners of the resource. The second is the limitation imposed by the government. It is this limitation that creates the entry barrier because new entrants may have to bid for the use of the spectrum whereas incumbent users may have received it through some other allocation process. In addition, the government may limit the use of certain bandwidth to specific types of users which may or may not be the most efficient users of that bandwidth.

The solution as proposed by Ronald Coase in 1959 would be to auction off the property rights to the highest bidder. In this case, this would ensure that the most efficient user would get the resource. However, in an auction setting, the government would collect the rents since it currently controls the resource.

Now why would the government be reluctant to use this allocation system? One answer as provided by Thomas Hazlett is that nonprice rationing (think about Congress giving broadcasters the right to use bandwidth of digital TV for free) is that it allows Congress to extract "favors" from broadcasters that probably would not pass constitutional muster if they were written into a statute or regulation (e.g. expanded air time for political purposes). In other words, Congress is controlling this scarce resource because they can collect the "rents" in a variety of forms from the bidders.

I would urge you to read some of the early articles by Ronald Coase and more recent articles by Thomas Hazlett on this subject. Believe it or not, this is not a recent phenomenon, but rather one that dates back to the formation of the FCC and the problem of allocating the broadcast spectrum.

Donald Alexander
Associate Professor of Economics
Western Michigan University
Adjunct Scholar
Mackinac Center for Public Policy

Michael LaFaive, staff economist at the Mackinac Center for Public Policy would like to add a few additional remarks regarding your query.

I look at the private auctioning of the electromagnetic spectrum just as I look at land values on Manhattan in New York. There is a finite amount of space and a very high demand for it. Therefore, individuals who choose to own and operate businesses (or live in apartments) pay a steep premium. That premium is paid by the consumer in higher prices--for rent, parking, laundry services, and meals. Have you ever heard of a low volume, low price restaurant in New York City?

What do you do if the high demand for real estate in Manhattan prices you out of the market? You seek the next best alternative. Living in one of the other Boroughs of New York City may not be ideal, but you are not denied complete access to living quarters, laundry services, and restaurants. More importantly for libertarians, in this example, government does not force people who are able and willing to pay a premium for Manhattan locations to do business next to a restaurant that few would patronize without government involvement.

Does the radio business drive out "alternative" stations in favor of pop stations as they try to capture the largest, most homogeneous segment of the population. Yes. And it it's not the only industry to do so. Professional beer tasters (I consider myself one of them) can't tell the difference between American brands because each manufacturer is trying desperately to capture the center of the consuming market. This isn't a bad thing. It simply forces people to pay a premium for the exotic. You should recognize, however, that with free trade, deregulation, and technological advances the price and choice of exotic beer concoctions has dropped dramatically.

This brings me to your choice of music. In the short run, you may be forced to limit your listening pleasure to tapes and compact discs of your own choosing. However, in the long run, consider the beneficial aspects of free trade, deregulation, and technological advances.

One of the reasons you and I are able to communicate so efficiently and effectively is the advent of the personal computer--the industry reinvents itself every two years and does so, in-part, because of the ease of entry and exit of firms in the marketplace. This industry is also providing you with the opportunity to pipe your style of music in from anywhere in the country (including small markets with avant garde tastes). I am particularly excited by this as it will individualize further the nations consumption habits, thereby furthering the gap between we libertarians and those who want us to be of one mind. My boss can immerse himself in the Internet's "Best of Englebert Humperdink" web-site while I access Cheap Trick, Iron Maiden, and MegaDeth from the L.A. web-site radio station of KNAC. Isn't freedom great?

Lastly, research is being done on the next level of cellular/digital technology that will end your inability to hear the music you want over your car or home radio. That's another beautiful thing about the free market. Necessity (and profit) is the mother of invention.