In theory, free entry can lead to social inefficiency. We study the radio industry
in a first attempt to quantify this inefficiency. Using cross-sectional data on advertising
prices, the number of stations, and radio listening, 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 free entry equilibrium would be optimal if the marginal value of programming
to listeners were about three times the value of marginal listeners to advertisers.