Should Music Labels Pay for Radio Airplay? Investigating the Relationship Between Album Sales and Radio Airplay

Managers in the music industry closely monitor both radio airplay of an album as well as the album's sales. Their interest in radio airplay is due to the belief that airplay can increase an album’s sales. Therefore it is natural for managers to attempt to influence radio airplay so as to subsequently impact album sales and ultimately profits. Over the past several years the concept of “pay-for-play” has resurfaced. If direct payments for radio airplay are to be made, then a precise understanding of the dynamic relationship between sales and airplay is needed. Typically radio airplay and album sales both show an exponential declining pattern. It is natural to ask whether both series are evolving concurrently–but independently–or is there some type of dependence? If there is a causal relationship, what is the direction of causality, or is there be a feedback relationship where both series influence each other? The purpose of this paper is to address these modeling questions using vector autoregressive models (VARMA), and show how these models can be used to answer the substantive question of whether the music industry should pay for airplay.