Dynamic Product Positioning in Differentiated Product Markets: The Effect of Fees for Musical Performance Rights on the Commercial Radio Industry

Abstract

This article investigates how product positioning decisions in the radio industry would be affected if, as has recently been proposed, music stations have to pay fees for musical performance rights. A rich dynamic model, which captures many features of the industry such as multi-station ownership, economies of scope and both vertical and horizontal product differentiation, is formulated, estimated and (approximately) re-solved for different levels of fee, by applying the method of parametric policy function iteration in the context of a dynamic game. The estimated model predicts that fees could have substantial effects on product positioning. For example, if music stations have to pay 10% of their revenues as performance fees – which would be consistent with the fees currently paid by cable and satellite providers – the number of music stations would fall by 11% over a 15 year period. The article also considers how industry characteristics such as heterogeneous listener tastes, multi-station ownership and substantial repositioning costs affect the size and speed of adjustment.