REVISITING THE AM STEREO PROCEEDING:
THE WISDOM OF THE "MARKETPLACE" DECISION

David W. Sosa Department of Agricultural & Resource Economics
University of California Davis, CA 95616 dwsosa@ucdavis.edu

EXECUTIVE SUMMARY

After a long and contentious proceeding, the FCC decided in 1982
to allow the marketplace to choose among competing technical
standards for stereo broadcasting in the AM radio band.
At the time of this "marketplace" decision the Commission
acknowledged the uncertainty surrounding a market-determined
solution to the AM stereo selection process. In the case where
broadcasters failed to adopt AM stereo, the FCC identified,
ex ante, three possible explanations: lack of consumer demand,
heterogeneous consumer preferences across systems, or broadcaster
and consumer fears of being stranded with an obsolete technology.
Although the FCC concluded that there was "no convincing reason"
why it should "supplant the free decisions of consumers with those
imposed by government," it has been subsequently argued that the
Commission's refusal to impose a de jure standard is the reason AM
stereo has not been widely adopted either by consumers or broadcasters.
Using station-level data from several radio markets for the
period 1975-1996, this paper examines the diffusion process of
AM stereo. Analysis of the data suggests that adoption of AM
stereo had little effect on station audience size. This result
holds, even when we control for markets with more than one
(incompatible) stereo system. These results suggest that we may
attribute the failure of AM stereo to a lack of consumer demand
and not heterogeneous preferences nor uncertainty about the future
of the technology.