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Impact of Competition on Product Decisions: Movie Choices of Exhibitors
Abstract
We empirically study the impact of the entry of a new theater on two important product decisions that incumbents in the movie exhibition industry face: (1) whether to invest in screening movies that are expected to be popular, and (2) when to adopt new releases. For theaters, both of these decisions feature a cost-demand trade-off inherent in quality decisions: Although screening popular and recent movies brings more patrons to the theater, distributors take a higher share of the revenue for such movies. The impact of competitive entry on the incumbent’s quality decisions is ambiguous, as it may simultaneously increase the competitive pressure to invest more in these dimensions of quality and also change the demand conditions that incumbents face. We find that incumbent theaters do not increase the provision of popular and recent movies in response to rival entry. To identify the role of competitive incentives, we study the differential impact of entry based on whether the entrant belongs to the same parent firm as the incumbent theaters. This comparison reveals that competitive incentives push incumbents to screen movies with high expected success more frequently and to adopt movies sooner. The product responses we document have important implications for the revenue impact of entry and the conclusions that researchers can draw from this impact. Ignoring the provision of these quality dimensions suggests cannibalization to exceed business stealing, a conclusion that is reversed when we account for endogenous product responses. We also show that our findings on popularity and recency cannot be explained by concomitant changes in theaters’ other product decisions, such as the variety of movies screened.
... The findings suggest that the competitive effect from rival theaters is due to local market structure, with a typical theater facing competition from local theaters under different ownership. 2 In related work, Orhun et al. (2016) use an extensive dataset from the North American movie exhibition market to identify the effect of exogenous entry on theater-level film adoption. 3 This geographic market covers a range of theater types that include national and regional chains, as well as independent-owned theaters. ...
... Chisholm et al. (2010) construct similarity indexes at the multi-product, theater level in this market and find an average overall weekly percentage match of film showings of 80.4% across theater pairs (this measure is normalized for differences in screen counts). Related work on the effect of competition on product overlap measures, across multi-product firms, includes Berry and Waldfogel (2001), Sweeting (2010), and Orhun et al. (2016). 5 As documented in the next section, our dataset includes 1,727 film-theater pairs, of which 94 (5.4%) were mid-run at the start of our sample. ...
... 1, it is common, in practice, for theaters to end a film's run prior to four weeks. 15 SeeOrhun et al. (2016) andWalls (1997) for further discussion of related tradeoffs, with more broad geographic coverage, and more variation in film adoption timing. 11 SeeRedstone (2004, p. 394). ...
We present empirical evidence on a firm’s decision to eliminate a product from a multi-product line, in a market with rapid product turnover, using weekly micro-level data from a major metropolitan movie market. While film offerings are broadly similar across the market, the timing for removing a specific film varies at the theater level. Theaters are more likely to end a film’s run when the nearest competitor is showing the same film and is owned by the same chain; a film is more likely to survive when the nearest theater is showing the film, but is under different ownership. Theater- and movie-specific factors affect a film’s run length, including the film’s within-theater relative revenues, number of screens, and film rating.
... Finally, the efficiency scores suggest a steady decline in operational efficiency due to customers' decision to select other entertainment activities and a decline in the technical and managerial capabilities that apparently have not been adjusted accordingly. Screening popular movies earlier can be a good strategic option to attract more customers (Orhun et al., 2016). This approach is used by Cinemark and can be emulated by other operators. ...
... McKenzie (2012) recommends to enhance non-admission related services such as food and both nonalcoholic and alcoholic beverages. Furthermore, the success of environmentally responsible practices in the hospitality sector (Orhun et al., 2016) should be explored in the movie theater industry as well. The trends in technical efficiency suggest revisiting the managerial practices of the movie theater chains to address the challenging business environment of the movie theaters. ...
This paper aims to propose a method to measure the operational efficiency of the movie theater businesses. The method is based on a bootstrap data envelopment approach to test the statistical significance of the performance difference between companies in the movie theater industry. The proposed method is utilized to investigate the operational efficiency of the three major U.S. movie theater chains. This article utilizes data from each company’s individual financial filings to estimate their bias-corrected efficiency scores. An aggregate report of the efficiency scores shows that the movie theater industry is experiencing a significant decline in both scale and technical efficiencies. The efficiency assessment of the three movie theater chains reports statistically significant differences. Based on the constant returns to scale assumption, the efficiency scores are different among the three movie theater chains. Closely, two significant differences are identified when considering the variable returns to scale assumption. The kernel density of the efficiency scores is estimated as well. Results suggest that the movie theater chains are in imperative need of developing an innovative strategic plan to tackle poor attendance and weak managerial practices. Other contributions and managerial issues are also discussed.
... Movie firms need to know what aspects of reviews are the most informative from the consumers' perspective and what aspects of the movie drive box-office revenue up or down. Prior studies have focused exclusively on providing models to detect the relationship between the volume of WOM and box-office revenue [20,23,26]. Users' rating is a subjective evaluation. ...
... The results revealed that the predictions of autoregressive semantic analysis model are more accurate than the bag-of-word approach. Several studies have explored the factors that affect box-office revenue [20,23,26]. Mishne and Glance [23] analyzed movie reviews from blogs and reported that positive reviews had higher influence on theater counts and box-office performance before opening than did the length of the reviews, but they did not develop a model. ...
In the age of Web 2.0, the rapid growth of user-generated content (e.g., consumer reviews) on the Internet offers ample avenues to search for information useful to both people and companies. Prior works in this field relating to movies have focused on the average rating and the number of comments. In this study, we used the content of consumer reviews and propose a novel framework integrating opinion mining and machine learning techniques to explore contextual factors influencing box-office revenue. Moreover, we analyzed movie review data from the website Internet Movie Database to examine the relationship among time periods, users’ opinion, and changes in box-office patterns. Experimental evaluations demonstrated that changes in different aspects of opinions effected a change in box-office revenue. Thus, movie marketers should monitor changes in the various aspects of online reviews and accordingly devise e-marketing strategies.
... By studying the upgrading decisions of app developers, this paper is also related to the literature on endogenous product choices. 16 The literature has studied endogenous product choices in a variety of industries, including retail video (Seim, 2006), retail eyeglasses (Watson, 2009), ice-cream (Draganska, Mazzeo andSeim, 2009), TV (Chu, 2010;Crawford and Yurukoglu, 2012;Crawford, Shcherbakov and Shum, 2019), CPU (Nosko, 2010), newspapers (Fan, 2013), home PC (Eizenberg, 2014), movie (Orhun, Venkataraman and Chintagunta, 2016), ratio (Berry, Eizenberg and Waldfogel, 2016), smartphones (Wang, 2017;Fan and Yang, 2020a), trucks (Wollmann, 2018), vendor allowances contracts (Hristakeva, 2019), and retail craft beer (Fan and Yang, 2020b). However, none of them has examined endogenous product choices in the mobile application industry; neither is there much evidence on the effects of platform design on endogenous product choices. ...
Platforms often display their products ahead of third-party products in search. Is this due to consumers preferring platform-owned products or platforms engaging in self-preferencing by biasing search towards their own products? What are the welfare implications? I develop a structural model of mobile application markets to identify self-preferencing and quantify its welfare effects, taking into account third-party developers’ quality adjustment. A new dataset on app downloads, prices, characteristics, and search rankings is used to estimate the model. Estimates indicate self-preferencing. Simulations show higher consumer welfare and third-party profits without self-preferencing.
... At the local market level, spatial competition and ownership structures have been studied with respect to inter-cinema programming decisions (Chisholm et al., 2010;Chisholm & Norman, 2012;Elizalde, 2013). Entry and exit decisions, as well as competition between city, suburban, and regional cinemas, have also provided research topics in both historical and contemporary contexts (Collins et al., 2009b;Gil & Marion, 2018;Orhun et al., 2016;Sedgwick et al., 2014;Takahashi, 2015). At the cinema level, applied and theoretical research examines the profit implications from common uniform ticket pricing practices of the industry (Chen, 2009; (Bohme & Muller, 2011). ...
Twenty years ago, there were all but a handful of scholarly studies published about the economics of the motion picture industry. Over the first decade of the new millennium, this changed dramatically and many studies began to appear in economics journals and those of cognate disciplines. The following, and most recent, decade has seen this trend continue and the literature on the “economics of movies” has well and truly matured. While economics and marketing disciplines still generate the most output, newer data‐orientated disciplines have increasingly turned their attention towards the industry and its abundance of rich and relatively accessible data. This survey endeavors to concisely but comprehensively review recent literature related to this eternally fascinating industry.
... Gal-Or and Dukes (2003) show that competition for media audiences encourages restrained levels of informative advertising and consequently higher advertising and product prices. Empirically, Orhun et al. (2015) investigate the impact of entry and competitive incentives on product choices and revenues in a movie exhibition industry. Zhang and Sarvary (2011) model com-petition between social media sites, where they show that ex-ante identical sites can acquire differentiated market positions that spontaneously emerge from usergenerated content. ...
This dissertation is composed of three chapters on topics in information economics. They investigate how competition and limited information affect firms' strategies in different markets. The first chapter focuses on the market for online platforms, and the other two chapters on the luxury goods market. The first chapter studies how competition between online platforms alters their incentives to comply with regulations through a unique empirical example: censorship via content removal by three major live-streaming platforms in China. Adopting an event study approach, I show that platforms of different sizes censor a different number of keywords with notably different delays. Motivated by the event study results, I develop and estimate a discrete choice model where the platform's profit depends on its own censorship action as well as that of its competitors. The model allows me to conduct counterfactual analysis while accounting for the strategic interaction between platforms. I derive policy implications for regulating social media in both authoritarian regimes and western democracies. The second and third chapters, which I co-authored with Pinar Yildirim and Z. John Zhang, theoretically investigate two different signaling phenomena in the context of luxury goods market. The second chapter studies the linkage between high-quality counterfeits and an emerging trend of minimalist luxury, where the wealthy purposefully restrain from the consumption of luxury goods to separate themselves from the rest. The third chapter studies the optimal product line decision in combating high-quality counterfeits. We show that the mechanism through which the wealthy can still stand out is to purchase more units of authentic luxury goods leveraging the shopping economies of scope at authorized stores. Our analysis in both chapters draws managerial implications for luxury brands.
... At the local market level, spatial competition and ownership structures have been studied with respect to inter-cinema programming decisions (Chisholm et al., 2010;Chisholm & Norman, 2012;Elizalde, 2013). Entry and exit decisions, as well as competition between city, suburban, and regional cinemas, have also provided research topics in both historical and contemporary contexts (Collins et al., 2009b;Gil & Marion, 2018;Orhun et al., 2016;Sedgwick et al., 2014;Takahashi, 2015). At the cinema level, applied and theoretical research examines the profit implications from common uniform ticket pricing practices of the industry (Chen, 2009; (Bohme & Muller, 2011). ...
... Interestingly, despite the differences in focus and industries, the two papers make similar 3 Examples in this literature include Seim (2006a), Draganska, Mazzeo and Seim (2009), Watson (2009), Chu (2010), Crawford and Yurukoglu (2012), Sweeting (2013), Eizenberg (2014a), Nosko (2014), Crawford et al. (2015a), Orhun, Venkataraman and Chintagunta (2015) and Wollmann (2015). See Crawford (2012) for a survey of this literature. ...
This dissertation develops new methods to analyze firm behaviors and provides estimates and predictions that inform antitrust and innovation policies. The first chapter shows that horizontal merger policies may be tougher when taking into account a merger's effects on the composition of product offerings in addition to the merger's price effects. The second chapter quantifies and decomposes the effects of vertical integration. I show that the investment coordination effects are pro-innovation and dominate the price effects. The results suggest that vertical integration policies should fully consider the potentially positive dynamic implications of a vertical merger. Both chapters are empirical studies in the context of the US smartphone industry. The third chapter develops identification strategies for a general class of matching games and estimates the formation of investment relationships between venture capitalists and biomedical startups. The estimates show that unobservables may be as important as observables in determining which VC invests in which startup firm, and understanding these unobserved factors is important for innovation policies.
... However, it would not be efficient in terms of either cost or time to measure the quality of all 24,520 deals in the data using surveys. Another approach is to infer quality indirectly from observed information, such as brand alliances (Rao andMonroe 1989, Rao et al. 1999) waiting time (De Vany and Saving 1983), or total product sales (Orhun et al. 2015). In our context, however, the use of brand alliances or waiting time is not applicable. ...
We formulate a dynamic model of search and Dirichlet learning to explain consumer behavior at a daily deal website.
... To control for market-level shocks, such as changes in the number of dealers, that may affect vehicle sales, we need to base our analysis on a clear market definition. We follow a similar approach to previous studies such as Olivares and Cachon (2009) and Orhun et al. (2016) to define a geographically isolated market. Specifically, we concentrate on urbanized areas or urban clusters with a population of fewer than 150,000 that have a minimum distance of 30 miles to markets of equal or larger size. ...
When financially distressed firms have overwhelming debts, a prominent option for survival is to file for Chapter 11 bankruptcy protection. We empirically study the effect of Chrysler’s Chapter 11 bankruptcy filing on the quantity sold by its competitors in the U.S. auto industry. The demand for competitors could increase because they may benefit from the distress of the bankrupt firm (competitive effect). By contrast, competitors could experience lower sales if the bankruptcy increases consumer uncertainty about their own viability (contagion effect). A challenge to measuring the impact of bankruptcies is the coincident decline in economic conditions stemming from the Great Recession and the potential effect of the “cash for clunkers” program (among other confounding factors). To identify the effect of the bankruptcy filing, we employ a regression-discontinuity-in-time design based on a temporal discontinuity in treatment (i.e., bankruptcy filing), along with an extensive set of control variables. Such a design is facilitated by a unique data set at the dealer-model-day level that allows us to compare changes in unit sales in close temporal vicinity of the filing. We find that unit sales for an average competitor decrease by 28% following Chrysler’s bankruptcy filing. Several types of evidence suggest that this negative demand spillover effect is driven by a heightened consumer uncertainty about the viability of the bankrupt firm’s rivals. For example, we show that the sales of competitors’ vehicles that compete within the same segments as the bankrupt firm’s vehicles or that provide lower value for money are affected more negatively in response to the Chrysler filing. We also observemoreweb search activity forChrysler’s competitors after the filing.Our findings are robust to different estimation strategies (global versus local), different functional forms, different estimation windows, the inclusion of various controls (e.g., “cash for clunkers,” incentives, advertising, inventory, recalls, price, and consumer confidence), the donut regression discontinuity approach, a potential serial correlation issue, a falsification exercise, and the inclusion of differential trends at various levels. Our study aims to inform policymakers and managers about unintended short-term demand consequences of Chapter 11 bankruptcy.
Marketers frequently create social media content, i.e., firm-generated content (FGC), to ignite interest in new movies. As such, there is a clear need to understand the magnitude and heterogeneity of the effect of FGC on movie demand and associated user-generated content (UGC). The authors empirically examine the complex interactions among FGC, UGC, and sales using social media (tweets) data that is normally available to firms. They investigate two potential mechanisms by which FGC may drive box office revenues: (1) a direct mechanism, such that users who see FGC directly drives revenue, and (2) an indirect “ripple effect,” by which FGC increases movie related UGC, which then drives consumption. By analyzing 145,502 firm-generated and 5.9 million user-generated Twitter posts associated with 159 movies, the authors find a positive and significant effect of FGC on movie sales, which UGC fully mediates, which supports the indirect ripple effect reasoning. Impressions of FGC by followers, as opposed to non-followers of firm accounts, mainly drive the effect of FGC on UGC. In addition, FGC by movie accounts is more effective than that by actors and studios. Firms’ regular posts with a movie-specific hashtag are more effective than a reply, a retweet, and a post without the hashtag. The finding of the ripple effect suggests that movie executives should focus on creating FGC that sparks conversations among followers during new movie releases.
We examine the welfare effect of trade liberalization in the service industry by focusing on the Chinese movie industry. China has been maintaining an import quota of foreign movies since 1990s. Using a unique Chinese movie dataset, we first estimate a nested logit demand model. And based on the estimated demand parameters, we perform counterfactual tests by removing the movie import quota. Specifically, we quantify the loss to the domestic film makers due to greater competition with foreign competitors, and the gains to consumers from consuming more high quality movies. We find that after trade liberalization, the market share of domestic film makers falls by 21–22% on average during the sample period, whereas the gain in the consumer welfare is comparatively smaller with an increase of around 5–9%. We also find that if the domestic film makers react actively by either strategically changing the release dates or by improving the quality of the home-made movies, then the magnitude of decline in the producer welfare will reduce by a large extent.
This paper proposes a text-analytics framework that integrates aspect-level sentiment analysis (ASLSA) with bias-corrected least square dummy variable (LSDVc) – a panel data regression method – to empirically examine the influence of review-embedded information on product sales. We characterize the online perceptions as consumer opinions or sentiments corresponding to the product features discussed within the review. While ASLSA discovers key product features and quantifies the opinions in corresponding content, the LSDVc-based panel data regression analyses the consumer sentiments to explore their influence on product sales. The proposed framework is tested on the mid-sized car segment in India. Our findings suggest that review volume and the sentiments corresponding to the exterior and appearance significantly influence the mid-size car sales in India.
This study investigates the effect of international coproduction on the performance of cultural products in the global markets. As a result of institutional barriers and cultural distances, coproduction, which allows a foreign producer to partner with the local firms, has emerged as a way of increasing cultural product performance in the global markets. Using the data on the Chinese movie market from 2012 to 2018, the authors find that international coproduction can promote movie performance and that the coproduction effect is mainly explained by the institutional variables. They further examine the heterogeneous effects and find that coproduction effect is stronger for culturally sensitive movies, and that the magnitude of the coproduction effect increases with the level of cooperation. They also confirm that the results are robust to different measurements of performance.
This paper examines how the introduction of digital cinema technologies in the South Korean movie industry created flexibility for theaters in movie showings.
In this article, I study the effect of entry and ownership structure on product variety within a city. Using longitudinal data on theaters in Korea, I find that the positive effect of entry on city-wide movie variety is limited only to the first few entrants. This finding, together with the observation that movie variety in a theater does not respond to entry, suggests that a theater's incentive to soften price competition by screening less popular movies not otherwise available in the city decreases as more theaters enter. I also find evidence that movie variety is greater in more concentrated cities, implying that a chain that owns multiple theaters in a city may differentiate the movie lineup offered in each theater more than when the theaters are individually owned in order to avoid cannibalization or to preempt entry.
This paper studies (1) whether, from a welfare point of view, oligopolistic competition leads to too few or too many products in a market, and (2) how a change in competition affects the number and the composition of product offerings. We address these two questions in the context of the US smartphone market. Our findings show that this market contains too few products and that a reduction in competition decreases both the number and variety of products. These results suggest that product choice adjustment may exacerbate the welfare effect of a merger. (JEL D43, G34, K21, L13, L41, L63)
Generating more than $2 trillion worldwide, entertainment encompasses numerous industries, such as the motion picture, publishing, music, sports, broadcasting, gaming, event, and tourism. It is rapidly growing and waging an enormous impact on the global economy, culture, and consumer well-being. It also serves as an essential platform for advertisers, relaying brand messages to entertainment audiences via advertising, sponsorship, and other forms of branded entertainment. The distinct properties of entertainment, such as its experiential nature, short lifecycle, integration with human talents, sequential distribution, and complementary consumption with technology hardware, entail unique challenges to executives and academics. This monograph thus delineates a general framework of entertainment marketing and synthesizestherelevantstudiesthataddresssomeofthesechallenges.It concludes by inviting continued research on the intriguing and rapidly changing entertainment and media landscape.
This paper empirically examines the impact of competition in the television (TV) industry on the number of movie theaters, their attendance, and their box office revenues. Studies of firm entry usually focus on the impact of regulation on economic outcomes within an industry, thereby neglecting its impact on neighboring industries. Using changes in regulation in the Spanish local TV station industry, we estimate the impact of TV entry on the movie theater industry between 1993 and 2005. Our findings show that local TV entry decreased the number of theaters and screens in a province, as well as movie attendance and box office revenues. (JEL L11, L43, L82)
Movie exhibitors currently face two forces vying for the limited footprint of their properties. Recent advances have enabled exhibitors to satisfy consumers' long-standing desire for increasingly larger screens. On the other hand, digital technology has reduced the cost of playing the same movie on multiple screens, thereby creating an incentive for screen proliferation to increase the number of show times for a given movie. Increasing the screens also has the added benefit of allowing the exhibitor to expand the number of unique movies screened at a given time. This is fundamentally a tradeoff between quality (larger screen size) and variety (more movies or showings). The goal of this paper is to evaluate consumers' relative valuations of the large screens vs. more shows tradeoff. We use a new data set on movie showings in India at the movie-chain-market-week level to estimate an aggregate discrete-choice demand model providing measures of customer preferences for the number of movie showings and screen size. India provides a valuable setting to study this question because the densely populated cities face substantial space constraints and regional heterogeneity in tastes and languages suggest the option of more shows may be more important in some cities than others. Our findings suggest that regions which are more urban and have a greater share of people with higher education prefer larger screens (quality) while most other regions prefer more showings (variety).
Prior to a new product launch, marketers need to infer how demand will respond to various levels of marketing mix variables in order to set an appropriate marketing plan. A critical challenge in estimating marketing mix responsiveness from historical data is that the observed decisions were affected by private information possessed by managers about the heterogeneous effects of marketing mix variables on sales. We refer to this as the "slope endogeneity" problem. Such endogeneity differs from the “intercept endogeneity” problem, which has been widely acknowledged in the literature. To correct for the slope endogeneity bias, we develop a conceptually simple control function approach that is amenable to multiple endogenous variables and marketing mix carryover effects. We apply the method to forecasting advertising responsiveness in the U.S. DVD market. Results suggest that advertising responsiveness varies substantially across DVD titles and that estimated marketing mix elasticities would be seriously biased if the slope endogeneity problem were ignored. This analysis also yields findings of substantive interest to researchers and managers involved in entertainment marketing.
The motion picture industry has provided a fruitful research domain for scholars in marketing and other disciplines. The industry has high economic importance and is appealing to researchers because it offers both rich data that cover the entire product lifecycle for many new products and because it provides many unsolved “puzzles.” Although the amount of scholarly research in this area is rapidly growing, its impact on practice has not been as significant as in other industries (e.g., consumer packaged goods). In this article, we discuss critical practical issues for the motion picture industry, review existing knowledge on those issues, and outline promising research directions. Our review is organized around the three key stages in the value chain for theatrical motion pictures: production, distribution, and exhibition. Focusing on what we believe are critical managerial issues, we propose various conjectures—framed either as research challenges or specific research hypotheses—related to each stage in the value chain and often involved in understanding consumer movie-going behavior.
Store brand entry has become a key issue in marketing as it may structurally change the performance of and the interactions among all market players. Based on their multivariate time-series analysis, the authors demonstrate permanent performance effects of store brand entry, typically benefiting the retailer, the consumers, and premium-brand manufacturers, while harming second-tier brand manufacturers. For the , they consistently find two of store brand entry: . This increase in unit margins implies that the retailer strengthens its bargaining position vis-à-vis national brand manufacturers. However, store brand entry only rarely yields category expansion and does not create store traffic or revenue benefits. Second, do not obtain lower prices on all national brands, only on some second-tier brands. However, they benefit from enlarged product assortment and intensified promotional activity that lowers average price paid for two out of four categories. For the , store brand entry is typically beneficial for national brands, but not for national brands. Often, premium brands experience lower long-term price sensitivity and higher revenues, whereas second-tier brands experience higher long-term price sensitivity and lower revenues.
Durable goods manufacturers often design product lines by segmenting their markets on quality attributes—attributes that exhibit a “more is better” property for all consumers. Since products within a product line are partial substitutes, and consumers can self-select the products they want to purchase, multiproduct firms have to carefully consider the cannibalization problem in designing their product lines. Existing research has analyzed the cannibalization problem for a monopolist who faces consumers who differ in their quality valuations. If lower-quality products are sufficiently attractive, higher-valuation consumers may find it beneficial to buy lower-quality products rather than the higher-quality products targeted to them. That is, lower-quality products can potentially cannibalize higher-quality products. The cannibalization problem forces the firm to provide only the highest-valuation segment with its preferred (efficient) quality. All other segments get qualities lower than their preferred (efficient) qualities. When the cannibalization problem is very severe, the firm may not serve some of the lowest-valuation segments.
However, not much is known about how and when the cannibalization problem affects product line design in an oligopoly. Also, consumers may differ not only in their quality valuations but also in their taste preferences. The objective of this paper is to fill these gaps by examining whether the cannibalization problem affects a firm's price and quality decisions in a model with consumer differences in quality valuations, as well as in their taste preferences, in both monopoly and duopoly settings. The paper addresses questions such as the following. With both types of consumer differences, should a firm, even a monopolist, provide efficient quality only to the top segment? Are there conditions under which other segments can also get their preferred quality levels? If so, how do consumer and firm characteristics affect the likelihood of different segments getting their preferred qualities? How does competition affect the firm's choice of qualities?
I develop a model in which the market is made up of two segments, with one segment valuing quality more than the other. Consumers within each segment are distributed over Hotelling's (1929) linear city. Consumers in the two segments can have different taste preferences (transportation costs). Firm locations in the two segments may also be different.
The paper begins with an analysis of the monopoly case. I find that when both segments are fully covered, the standard self-selection results of the high-valuation segment getting its preferred quality and the low-valuation segment getting less than its preferred quality do hold. Interestingly, when both segments are incompletely covered, under some conditions, the monopolist's price and quality choices are not determined by the cannibalization problem. In these cases, the monopolist finds it optimal to provide each segment with its preferred quality. Thus, the equilibrium quality levels in a second-degree price discrimination situation resemble the third-degree price discrimination solution. I characterize the relevant conditions in terms of consumer characteristics.
I then consider the case of two firms competing in the market, each offering two products—one for the high-valuation segment and the other for the low-valuation segment. Here also both types of outcomes are possible, depending on consumers and firm characteristics. Under some conditions, the cannibalization problem does not affect the firms' price and quality choices, and each firm provides each segment with that segment's preferred quality. Each firm finds it optimal to serve both segments. When these conditions do not hold, only the high-valuation segment gets its preferred quality. I interpret the conditions necessary for these results to exist in terms of characteristics of the consumers and the firms.
An interesting insight from the analysis is that as the taste preferences of the low-valuation segment become weaker (their “transportation cost” becomes lower), the more intense competition in the low-valuation segment makes it more attractive for the high-valuation consumers to buy the products meant for the low-valuation segment. This worsens the cannibalization problem, and the low-valuation segment may not get its preferred quality. On the other hand, when the taste preferences of the high-valuation segments are sufficiently weak, more intense competition in the high-valuation segment reduces that segment's incentives to buy the product meant for the low-valuation segment. This mitigates the cannibalization problem and makes it more likely for the low-valuation segment to get its preferred quality.
Similarly, when firms are less differentiated in the low-valuation segment, stronger competition between the firms makes the cannibalization problem worse, and the low-valuation segment may not get its preferred quality. When the differentiation between the firms is sufficiently weak in the high-valuation segment, the high-valuation segment is more likely to be better off buying the product meant for it. As the high-valuation segment's incentives to buy the lower-quality product are reduced, the low-valuation segment is more likely to get its preferred quality.
This paper analyzes how a firm should adjust its marketing expenditures and its price to defend its position in an existing market from attack by a competitive new product. Our focus is to provide usable managerial recommendations on the strategy of response. In particular we show that if products can be represented by their position in a multiattribute space, consumers are heterogeneous and maximize utility, and awareness advertising and distribution can be summarized by response functions, then for the profit maximizing firm: it is optimal to decrease awareness advertising, it is optimal to decrease the distribution budget unless the new product can be kept out of the market, a price increase may be optimal, and even under the optimal strategy, profits decrease as a result of the competitive new product. Furthermore, if the consumer tastes are uniformly distributed across the spectrum a price decrease increases defensive profits, it is optimal (at the margin) to improve product quality in the direction of the defending product's strength and it is optimal (at the margin) to reposition by advertising in the same direction.
In addition we provide practical procedures to estimate (1) the distribution of consumer tastes and (2) the position of the new product in perceptual space from sales data and knowledge of the percent of consumers who are aware of the new product and find it available. Competitive diagnostics, such as the angle of attack, are introduced to help the defending manager.
Consumers rank variety of assortment right behind location and price when naming reasons why they patronize their favorite stores. Consumers care about variety because they are more likely to find what they want when going to a store that offers more varied assortments. When tastes are not well formed or are dynamic, perceived variety matters even more because of the desire to become educated about what is available while maintaining flexibility. Variety perception also matters when the variety-seeking motive operates. Retailers care about variety because customers value variety. Therefore, it is important to understand how people perceive the variety contained in an assortment and how these perceptions influence satisfaction and store choice. Remarkably, except for a recent study by Broniarczyk et al. (1998), there has been no research aimed at understanding the variety perception process itself.
We offer a general mathematical model of variety based on the complete information structure of an assortment, defined both by the multiattribute structure of the objects and their spatial locations. We impose a psychologically plausible set of restrictions on the general model and obtain a class of simpler estimable models of perceived variety. We utilize the model to develop assortments that vary widely in terms of their information structure and study the influence of three factors on variety perceptions: (a) information structure of each assortment (i.e., the attribute level differences between objects); (b) level of organization of the objects and hence their relative spatial positions; and (c) task orientations, promoting either analytic or holistic processing. We also investigate the influence of variety perception and organization on stated satisfaction and store choice. To summarize our major findings:
1. Information structure has a big impact on variety perceptions, though diminishing returns accompany increases in the number of attributes on which object pairs differ.
2. People are more influenced by local information structure (adjacent objects) than nonlocal information structure. Proximity matters.
3. Organization of the display can either increase or decrease variety perceptions. When people engage in analytic processing, organized displays appear to offer more variety. When processing is holistic, random displays are seen as more varied.
4. Both variety perceptions and organization drive stated satisfaction and store choice. People are more satisfied with and likely to choose stores carrying those assortments that are perceived as offering high variety and that are displayed in an organized rather than random manner.
Our work provides a basic framework for thinking about variety. By helping retailers to understand the factors that drive variety perception, it may be possible to design more efficient, lower cost assortments without reducing variety perceptions and the probability of future store visits.
The primary objective of this paper is to develop a parsimonious model for forecasting the gross box-office revenues of new motion pictures based on early box office data. The paper also seeks to provide insights into the impact of distribution policies on the adoption of new products. The model is intended to assist motion picture exhibitor chains (retailers) in managing their exhibition capacity and in negotiating exhibition license agreements with distributors (studios), by allowing them to project the box-office potential of the movies they plan to or currently exhibit based on early box-office results. It is also of interest to practitioners in other software industries (e.g., music, books, CD-ROMs) where the distribution intensity is highly variable over the product life cycle and is an important determinant of new product adoption patterns. The model and its extensions are of interest to academic researchers interested in modeling distribution effects in new product adoption, as well as forecasters looking for ways to leverage historical data on related products to forecast the sales of new products.
We draw upon a queuing theory framework to conceptualize stochastically the consumer's movie adoption process in two steps—the time to decide to see the new movie, and the time to act on the adoption decision. The parameter for the time-to-decide process captures the intensity of information intensity flowing from various information sources, while the parameter for the time-to-act process is related to the delay created by limited distribution intensity and other factors. Our conceptualization extends existing new product forecasting models, which assume that consumers act instantaneously on the motivating information they receive about the new product. The resulting model is parsimonious, yet it accommodates a wide range of adoption patterns. In addition, the stochastic formulation allows us to quantify the uncertainty surrounding the expected adoption pattern. In the empirical testing, we focus on the most parsimonious version of the modeling framework. BOXMOD-I, a model that assumes stationarity with respect to the two shape parameters that characterize the adoption process. The model produces fairly accurate early forecasts using at most the first three weeks of data for calibration, and the predictive performance of the model compares favorably with benchmark models. We propose extensions of the basic model that account for more realistic non-stationary distribution intensity patterns—including a “wide release” pattern that relies on intensive distribution and promotion, and a “platform release” pattern that involves a gradual buildup of distribution intensity. Finally, we present an adaptive weighing scheme that combines initial parameter estimates obtained from a meta-analysis procedure with estimates obtained from early data to produce forecasts of box-office revenues for a new movie when little or no box-office data are available.
An important finding from the empirical testing is that motion picture box-office revenue patterns display remarkable empirical regularity. We find that there are only three classes of adoption patterns, and these can all be represented within the basic model by using a two-parameter. Exponential or Erlang-2 probability distribution, or a three parameter Generalized Gamma distribution. We also find that cumulative box-office revenues can be predicted with reasonable accuracy (often within 10% of the actual) using as little as two or three data points. However, our attempts to predict revenue patterns without any sales data meet with limited success. While the scale parameter can be estimated reasonably well from a historical database of parameter values, we find that it is considerably more difficult to predict the shape parameters using historical data.
The parsimony we seek in developing the model comes at the cost of several limiting assumptions. We assume that the time-to-decide subprocess and the time-to-act subprocess are independent, which may not be the case if decisions on continued exhibition by retailers are endogenously related to box-office revenues over the life cycle. In the basic model formulation, we also assume that the time-to-act process can be represented by an exponential distribution, which may not always be the case. While we provide some empirical evidence to support these assumptions, further research could relax these and other assumptions to enrich the basic model, although this would entail some loss in parsimony.
Assessing a retailer’s performance in a category is important to both manufacturers and retailers. Based on data from 19 food categories sold in 106 major supermarket chains operating in the largest 50 retail markets in the U.S., the work reported in this article uses an analysis of variations in category performance across retailers to infer the key drivers of effective category management and how those drivers depend on the role the category plays in the overall retail portfolio. Not surprisingly, the best performing retailers: (a) offer broader assortments, (b) have strong private label programs, (c) charge significantly lower everyday prices, and (d) use feature advertising to drive store traffic and display to increase in-store purchases. More interestingly, we find systematic differences in the impact of the price, promotion and assortment variables that depend importantly on the role (staple, variety enhancers, niche, or fill-in) that the particular category plays in the store’s overall portfolio.
The relationship between market structure and product variety is critical, since too few or too many products may be produced given a particular market structure. This paper measures empirically the relationship between structure and variety in the music recording industry. Entropy is used to generate a measure of product variety. The results suggest that the relationship is non-monotonic: high and low levels of concentration result in lessened variety, and maximum variety is promoted by a moderately concentrated structure.
This paper examines pairwise assortment similarities at U.S. supermarkets to understand how assortment composition and size are related to underlying factors that describe local store clientele, local competitive structure, and the retail outlets' characteristics. The top-selling items, which cumulatively make up 50% of sales, are sold at nearly every store, but other items are viewed as optional. We find that, within states, supermarkets owned by the same chain carry similar assortments and that the composition of their clientele and the presence of competing stores have effects on assortment similarity that are an order of magnitude smaller than ownership structure. In contrast, we find that, across states, supermarkets owned by the same chain do version their assortment. We explain this difference using extant work on the minimal efficient scale of supermarkets and on local demand effects. Furthermore, we investigate the distribution and role of regional brands. We find that regional brands are primarily distributed by small regional chains or independent stores. "Value" regional brands are primarily distributed by supermarket firms without store brands, whereas the distribution of "premium" regional brands is unrelated to the presence of store brands. We discuss our findings in the context of modeling assortment decisions and manufacturers designing distribution policies.
Prices for goods such as blades for razors, ink for printers, and concessions at movies are often set well above cost. Theory has shown that this could yield a profitable price discrimination strategy often termed “metering.” The idea is that a customer's intensity of demand for aftermarket goods (e.g., the concessions) provides a meter of how much the customer is willing to pay for the primary good (e.g., admission). If this correlation in tastes for the two goods is positive, a high price on the aftermarket good allows firms to extract a greater total price (admissions plus concessions) from higher-type customers. This paper develops a simple aggregate model of discrete-continuous demand to motivate how this correlation can be tested using simple regression techniques and readily available firm data. Model simulations illustrate that the regressions can be used to predict whether aftermarket prices should be above, below, or equal to their marginal cost. We then apply the approach to box office and concession data from a chain of Spanish theaters and find that high-priced concessions do extract more surplus from customers with a greater willingness to pay for the admission ticket.
We study the following question: How does competition influence the inventory holdings of General Motors' dealerships operating in isolated U.S. markets? We wish to disentangle two mechanisms by which local competition influences a dealer's inventory: (1) the entry or exit of a competitor can change a retailer's demand (a sales effect); and (2) the entry or exit of a competitor can change the amount of buffer stock a retailer holds, which influences the probability that a consumer finds a desired product in stock (a service-level effect). Theory is clear on the sales effect—an increase in sales leads to an increase in inventory (albeit a less than proportional increase). However, theoretical models of inventory competition are ambiguous on the expected sign of the service-level effect. Via a Web crawler, we obtained data on inventory and sales for more than 200 dealerships over a six-month period. Using cross-sectional variation, we estimated the effect of the number and type of local competitors on inventory holdings. We used several instrumental variables to control for the endogeneity of market entry decisions. Our results suggest that the service-level effect is strong, nonlinear, and positive. Hence, we observe that dealers carry more inventory (controlling for sales) when they face additional competition.
Movie studios often have to choose among thousands of scripts to decide which ones to turn into movies. Despite the huge amount of money at stake, this process--known as green-lighting in the movie industry--is largely a guesswork based on experts' experience and intuitions. In this paper, we propose a new approach to help studios evaluate scripts that will then lead to more profitable green-lighting decisions. Our approach combines screenwriting domain knowledge, natural-language processing techniques, and statistical learning methods to forecast a movie's return on investment (ROI) based only on textual information available in movie scripts. We test our model in a holdout decision task to show that our model is able to significantly improve a studio's gross ROI.
This article presents two alternative explanations for the role of stars in motion pictures. Either informed insiders signal project quality by hiring an expensive star, or stars capture their expected economic rent. These approaches are tested on a sample of movies produced in the 1990s. Means comparisons suggest that star-studded films bring in higher revenues. However, regressions show that any big budget investment increases revenues. Sequels, highly visible films and "family oriented" ratings also contribute to revenues. A higher return on investment is correlated only with G or PG ratings and marginally with sequels. This is consistent with the "rent capture" hypothesis. Copyright 1999 by University of Chicago Press.
Grocery retailers have been informed that, to remain competitive, they must reduce the number of stockkeeping units (SKUs) offered, in line with consumer demand, or, in other words, adopt “Efficient Assortment.” Retailers have resisted this principle on the basis of a fear that eliminating items would lower consumer assortment perceptions and decrease the likelihood of store choice. In two studies, the authors examine how consumers form assortment perceptions in the face of SKU reduction with a particular emphasis on two heuristic cues: the availability of a favorite product and the amount of shelf space devoted to the category. Results indicate that retailers might be able to make substantive reductions in the number of items carried without negatively affecting assortment perceptions and store choice, as long as only low-preference items are eliminated and category space is held constant. Thus, the potential risk inherent in item reduction might be more limited than initially thought. The authors then discuss the implications of these findings for retailers, as well as additional measurement considerations.
Competitive reactions are recognized as a driving force influencing marketing decisions. The authors seek to explain how established competitors in an oligopoly react to a significant new entry in their market. It has been suggested that at least some established competitors will react to a market entry positively and at least some competitors will react negatively or not at all. Both theory and evidence suggest that not all firms will react to an entry in the same way. The authors posit that interfirm differences in competitive reactions to entry can be predicted by observing, for each competitor, the elasticity of each marketing mix variable. Competitors will retaliate with their effective marketing mix “weapons” and retreat with their ineffective marketing instruments. These predictions are tested by estimating the parameters of an econometric model of demand response functions and reaction functions with data from the market for an over-the-counter gynecological product and from the airline industry. Results, replicated in the two markets, are substantially consistent with predictions.
Manufacturers introducing an industrial product to a foreign market face a difficult decision. Should the product be marketed primarily by captive agents (company salesforce and company distribution division) or by independent intermediaries (outside sales agents and distributors)? This is an issue of downstream vertical integration. The authors explore the issue through an empirical investigation of distribution channel choice in foreign markets by U.S. semiconductor companies. Using original interview data, they develop scales to measure key variables. With these measures they build a logistic regression model of what factors affect the form of the distribution channel chosen in various foreign markets. The results indicate that integration is associated with the degree of transaction specificity of assets in the distribution function and whether or not the product being introduced is highly differentiated. There is evidence that the product will be sold through whatever channel is already in place, if any. Further, American firms seem more likely to integrate the distribution channel in highly developed industrialized countries (Western Europe) than in Japan and Southeast Asia, which are more culturally dissimilar. Implications for managers faced with a channel choice are explored.
The supply chain for movies released for theatrical exhibition consists of the distributor, exhibitor, and the audience, as shown in Figure 5.1. The audience has opportunities to watch moveis in a number of distribution outlets: domestic theaters, foreign theaters, home video, and cable and network TV, where the time lags between the releases of the movies in successive outlets differ but are typically measured in months (Figure 5.2). Despite the availability of these multiple release windows, the theatrical performance of films in the United States has been considered by practitioners to be a critical success driver. "Theatrical exhibition is the major factor in persuading the public what they want to see, even if that public never sets foot inside a motion picture theater. And how well and how long a picture plays in theaters has everything to do with its value in other markets" (Daniels, Leedy, and Sills 1998, p. 34). the main reasons as to why the theatrical experience is believed to have such a significant impact on the performance of the movie in its other distribution channels are the buzz created by the studios prior to and during the theatrical release dates, generated through high advertising spending, and the attention given by the media to box-office performance and figures.
The technique of iterative weighted linear regression can be used to obtain maximum likelihood estimates of the parameters with observations distributed according to some exponential family and systematic effects that can be made linear by a suitable transformation. A generalization of the analysis of variance is given for these models using log- likelihoods. These generalized linear models are illustrated by examples relating to four distributions; the Normal, Binomial (probit analysis, etc.), Poisson (contingency tables) and gamma (variance components).
The implications of the approach in designing statistics courses are discussed.
There has been a growing increase in the emphasis of web-related promotion for new films. This study focuses on the development and empirical testing of a variable mathematical model approach for predicting a film's box-office performance as a function of film website activity, as well as other relevant explanatory variables. The study results support the relative importance and statistical significance of website activity as a predictor of a new film's box-office performance. In conjuction with website activity, variables including screens, film "grade," time from film release, production budget, and seasonality were also found to be significant covariates in the prediction of ticket sales during a film's life cycle. It is concluded that a film website may provide an effective means to promote and maintain film awareness as well as influence site visitors' intention to see a new film. Consequently, a well-designed film website may be an important component of a new film's promotional strategy.
This paper examines the role of consumer preferences, costs, and price competition in determining the competitive product strategy of a firm. In the model studied here, there are two identical firms competing on product quality and price. They face consumers who prefer a higher quality product to a lower quality product, but differ in how much they are willing to pay for quality. The consumers can also choose a substitute if they don't like the product-price offerings of the two firms. For the firms, a higher quality product costs more to produce than a lower quality product. The paper shows that the equilibrium strategy for each firm should be to differentiate its product from its competitor, with the firm choosing the higher quality choosing the higher margin as well. This differentiation, however, is not efficient—that is, it is possible to choose two other products and offer them at prices that cover their marginal cost, and still satisfy consumers' “needs” better in the aggregate. A monopolist, by contrast, would differentiate his product line efficiently. This suggests that cannibalization has different effects on product strategy than competition. The paper also shows that if one firm enters the market first, then it can defend itself from later entrants, and gain a first-mover advantage, by preempting the most desirable product position.
This paper develops a structural model of newspaper markets to analyze the effects of ownership consolidation, taking into account not only firms' price adjustments but also the adjustments in newspaper characteristics. A new dataset on newspaper prices and characteristics is used to estimate the model. The paper then simulates the effect of a merger in the Minneapolis newspaper market and studies how welfare effects of mergers vary with market characteristics. It finds that ignoring adjustments of product characteristics causes substantial differences in estimated effects of mergers. (JEL G32, L13, L82, M37)
Manufacturers introducing an industrial product to a foreign market face a difficult decision. Should the product be marketed primarily by captive agents (company salesforce and company distribution division) or by independent intermediaries (outside sales agents and distributors)? This is an issue of downstream vertical integration. The authors explore the issue through an empirical investigation of distribution channel choice in foreign markets by U. S. semiconductor companies. Using original interview data, they develop scales to measure key variables. With these measures they build a logistic regression model of what factors affect the form of the distribution channel chosen in various foreign markets. The results indicate that integration is associated with the degree of transaction specificity of assets in the distribution function and whether or not the product being introduced is highly differentiated. There is evidence that the product will be sold through whatever channel is already in place, if any. Further, American firms seem more likely to integrate the distribution channel in highly developed industrialized countries (Western Europe) than in Japan and Southeast Asia, which are more culturally dissimilar. Implications for managers faced with a channel choice are explored.
We examine multilateral bargaining in vertical supply relationships that involve an upstream manufacturer who sells through two competing retailers. In these relationships the negotiations are interdependent, and bargaining externality may arise across the retailers. In addition, the timing by which the manufacturer negotiates with the retailers becomes important. In simultaneous bargaining the retailers negotiate without knowing if an agreement has been reached in the other retail channel, whereas in sequential bargaining the retailer in the second negotiation is able to observe whether an agreement was reached in the first negotiation. We show that simultaneous bargaining is optimal for the manufacturer when the retail prices and profitability are similar, and sequential bargaining is preferred when the dispersion in the retail prices is sufficiently large. As a result of ex post renegotiations, the manufacturer may strategically stock out the less profitable retailer who charged a relatively low retail price and exclusively supply only the retailer who charged a relatively high retail price and maintained high channel profitability. Moreover, ex post multilateral bargaining can buffer downstream competition and thus lead to positive retail profits even in markets that are close to perfect competition.
Managers of retail chains who seek to add new stores or close existing ones need to know the net impact of a store's opening/closure on the overall chain performance. This requires inferring the extent to which each store generates incremental sales as opposed to competing with other stores belonging to the chain for the same set of customers. However, when the chain is experiencing a growth or a decline in sales, not accounting for these dynamics in goodwill is likely to yield misleading estimates of incremental sales versus cannibalization. Moreover, firms might have been strategic in opening outlets in locations with favorable characteristics. We need to control for this location endogeneity while inferring the marginal effect of store opening/closure. In this paper, we develop a demand model that accounts for dynamics in goodwill, location endogeneity, and spatial competition between geographically proximate retail outlets. We calibrate the model parameters on both attitudinal and behavioral data for a fast food chain in a large U.S. city. The results imply that consumers perceive a travel cost of $0.60 per mile. As regards the composition of sales at individual stores, on average, 86.7% of sales constitute incremental purchases with the rest derived from cannibalized sales from nearby stores belonging to the chain. We also find significant decay in cannibalization with distance such that when the distance between stores increases by one mile, the sales lost due to cannibalization decreases by 28.1%; there is virtually no cannibalization at a distance of 10 miles. In terms of managerial applications, we discuss how managers can use the model presented in this paper to make two key decisions: (a) isolating locations that can be closed by identifying stores that yield the lowest marginal benefit to the chain and (b) dealing with franchisees' potential concerns about cannibalization.
This paper was accepted by Preyas Desai, marketing.
Extensive literatures show that agency issues and transactions costs influence vertical integration and that market structure influences competitive behavior. However, less consideration has been given to how these issues interact. I address this gap by focusing on moral hazard in retail gasoline markets. I argue that when there are multiple stations affiliated with the same brand in a market, agents at vertically separated outlets have an incentive to compete more intensely with affiliates than the principal would prefer. I empirically test this prediction using rich data, and find that vertically separated stations engage in tougher price competition while free-riding on quality provision in markets with greater numbers of affiliated stations. I further show that principals are more likely to employ vertically separated stations in areas where the number of affiliated stations is small, which is consistent with their desire to minimize competition-driven moral hazard.
Grocery retailers have been informed that, to remain competitive, they must reduce the number of stockkeeping units (SKUs) offered, in line with consumer demand, or, in other words, adopt "Efficient Assortment." Retailers have resisted this principle on the basis of a fear that eliminating items would lower consumer assortment perceptions and decrease the likelihood of store choice. In two studies, the authors examine how consumers form assortment perceptions in the face of SKU reduction with a particular emphasis on two heuristic cues: the availability of a favorite product and the amount of shelf space devoted to the category. Results indicate that retailers might be able to make substantive reductions in the number of items carried without negatively affecting assortment perceptions and store choice, as long as only low-preference items are eliminated and category space is held constant. Thus, the potential risk inherent in item reduction might be more limited than initially thought. The authors then discuss the implications of these findings for retailers, as well as additional measurement considerations.
Movie exhibition contracts entail revenue‐sharing terms that go down with weeks since release. We develop a simple model to show how the form of these contracts can be explained by the distributors’ desire to set flexible prices. We then use detailed data on theater‐movie contracts in Spain, where we exploit the information available at the time of contracting for movies previously released in the U.S., and other movie and theater characteristics, to show how the implications of our flexible pricing argument are supported in the data, and differentiate our explanation from prior, more standard risk‐sharing and moral‐hazard explanations.
The motion picture industry features challenging management problems and appealing research opportunities. Based on research findings, three challenges for managers are the need to (1) view movies as just one part of the product line, (2) consider the evolution of the first-run exhibition channel, and (3) take a global perspective in decision making. For researchers, the motion picture industry is a data-intensive natural laboratory that allows for empirical testing of important research questions. The study of competitive dynamics and contractual issues are highlighted as topics of particular relevance.
In recent years, interest in category management has surged, and as a consequence, large retailers now systematically review their product assortments. Variety is a key property of assortments. Assortment variety can determine consumers' store choice and is only gaining in importance with today's increasing numbers of product offerings. To support retailers in managing their assortments, insight is needed into the influence of assortment composition on consumers' variety perceptions, and appropriate measures of assortment variety are required. This paper aims to extend the assortment variety model recently proposed by Hoch et al. (1999) in Marketing Science. It conceptualizes assortment variety from an attribute-based perspective and compares this with the productbased approach of Hoch, Bradlow, and Wansink (HBW). The attribute- based approach offers an alternative viewpoint for assortment variety. Attribute- and product-based approaches reflect basic conceptualizations of assortment variety that assume substantially different perception processes: a consumer comparing products one-by-one versus a consumer examining attributes across products in the assortment. While the product-based approach focuses on the dissimilarity between product pairs in an assortment, the attribute-based approach that we propose focuses on the marginal and joint distributions of the attributes. We conjecture and aim to show that an attribute-based approach suffices to predict consumers' perceptions of assortment variety.
In operationalizing the attribute-based approach, two measures of assortment variety are described and compared to productbased measures. These two measures relate to the dispersion of attribute levels, e.g., if all products have the same color or different colors, and the dissociation between attributes, e.g., if product color and size are unrelated. The ability of product-based and attributed- based measures to predict consumers' perceptions of assortment variety is assessed. The product-based measures (Hamming) tap the dissimilarity of products in an assortment across attributes. The attribute-based measures tap the dispersion of attribute levels across products (Entropy) and the dissociation between product attributes (1–Lambda) in an assortment. In two studies, we examine the correlations between these measures in a well-behaved environment (study 1) and the predictive validity of the measures for perceived variety in a consumer experiment (study 2).
Study 1, using synthetic data, shows that the attribute-based measures tap specific aspects of assortment variety and that the attribute-based measures are less sensitive to the size of assortments than product-based measures are. Whereas HBW focus on assortments of equal size, study 1 indicates that an extension to assortments of unequal size results in summed Hamming measures that correlate highly with assortment size. The latter is important when assortments of different size are compared. Next, we examine how well the measures capture consumers' perception of variety.
Study 2, a consumer experiment, shows that the attribute-based measures account best for consumers' perceptions of variety. Attribute- based measures significantly add to the prediction of consumers' perceptions of variety, over and above the product-based measures, while the reverse is not the case. Interestingly, this study also indicates that assortment size may not be a good proxy for perceived assortment variety.
The findings illustrate the value of an attribute-based conceptualization of assortment variety, since these measures (1) correlate only moderately with assortment size and (2) suffice to predict consumers' perceptions of assortment variety. In the final section we briefly discuss how attribute-based and product-based measures can be used in assortment management, and when productand attribute-based approaches may predict consumers' variety perceptions. We discuss how an attribute-based approach can identify which attribute levels and attribute combinations influence consumers' perceptions of variety most, while a productbased approach can identify influential products. Both approaches have applications in specific situations. For instance, an attributebased approach can identify influential attributes in an ordered, simultaneous presentation of products, while a product-based approach can assess the impact of sequential presentations of products better. In addition, we indicate how the random-intercept model estimated in study 2 can be further extended to capture the influence of, e.g., consumer characteristics.
The technique of iterative weighted linear regression can be used to obtain maximum likelihood estimates of the parameters with observations distributed according to some exponential family and systematic effects that can be made linear by a suitable transformation. A generalization of the analysis of variance is given for these models using log-likelihoods. These generalized linear models are illustrated by examples relating to four distributions; the Normal, Binomial (probit analysis, etc.), Poisson (contingency tables) and gamma (variance components). The implications of the approach in designing statistics courses are discussed.
FTC Bureau of Economics working papers are preliminary materials circulated to stimulate discussion and critical comment. The analyses and conclusions set forth are those of the authors and do not necessarily reflect the views of other members of the Bureau of Economics, other Commission staff, or the Commission itself. Upon request, single copies of the paper will be provided. References in publications to FTC Bureau of Economics working papers by FTC economists (other than acknowledgment by a writer that he has access to such unpublished materials) should be cleared with the author to protect the tentative character of these papers. Abstract An extensive literature shows that agency issues and transactions costs influence vertical integration. Another mature literature indicates that market structure influences com-petitive behavior. However, less consideration has been given to how vertical integration and market structure may interact. I address this gap by focusing on the potential for moral hazard caused by intra-firm competition in retail gasoline markets. I argue that when multiple stations share a common brand in a market, a vertically separated sta-tion has an incentive to deviate from the cooperative strategy that the brand-owning refiner would prefer. I empirically test this prediction using rich data, and find evidence of such moral hazard. Moreover, I find that refiners behave in a way consistent with the desire to minimize it: They are more likely to employ vertically separated contracts in markets where the number of affiliated stations is small.
This paper utilizes the substantial and rapid increase in the number of Brazilian theater screens experienced between 2002 and 2005 to empirically examine how entry reshapes the competitive landscape. Using a large database containing daily information on box office performance and attendance by movie and screen I study how the entry of new screens affects revenues, attendance, and tickets prices at incumbent screens, and whether or not the effects of screen entry from the same chain are equal to those of competing chains. By including weekly-varying movie fixed effects in the regressions in order to account for unobserved time-varying movie quality, this paper develops an estimation scheme that allows characterizing the nature of business stealing according to the collection of movies exhibited by incumbents and entrants. I examine both: (i) whether or not entrants push incumbents into showing movies with lower potential at the box office, and to what extent a reduction in the quality of incumbents’ product offerings due to entry explains a decline in their amount of business, and (ii) whether the effects of entry on incumbents’ residual demands are similar when incumbents and entrants show identical or different movies. By aggregating the data at the city level this paper also studies the effects of entry on both market expansion and local movie variety.
Retail markets are extremely important, but economists have few practical tools for analyzing the way dispersed buyers and sellers affect the properties of markets. I develop an econometric model of retail demand in which products are location specific and consumers have preferences over both geographic proximity and other store and product characteristics. The model uses data on the observed geographic distribution of consumers within a market to (1) help explain observed variation in market shares and (2) affect predicted substitution patterns between stores. Using data from the U.S. cinema industry, I use the estimated model to evaluate the form of consumer transport costs, the effect of a theater's price and quality choices on rivals, the effects of geographic differentiation, and the nature and extent of market power.
This article shows that mergers between close competitors in the music radio industry lead to important changes in product positioning. Firms that buy competing stations tend to differentiate them and, consistent with the firm wanting to reduce audience cannibalization, their combined audience increases. However, the merging stations also become more like competitors, so that aggregate variety does not increase, and the gains in market share come at the expense of other stations in the same format. The results shed light on the effects of mergers and, more broadly, on how multiproduct firms may use product positioning as a competitive tool.
The motion picture industry features challenging management problems and appealing research opportunities. Based on research findings, three challenges for managers are the need to (1) view movies as just one part of the product line, (2) consider the evolution of the first-run exhibition channel, and (3) take a global perspective in decision making. For researchers, the motion picture industry is a data-intensive natural laboratory that allows for empirical testing of important research questions. The study of competitive dynamics and contractual issues are highlighted as topics of particular relevance.
Franchisees within large branded chains loudly complain of a form of channel conflict known as “encroachment” or “impact.” Encroachment occurs when franchisors add new units of their brand proximately to their franchisees' existing units. Franchisees claim that their revenues have substantially decreased as a result of encroaching same-brand entry. The topic of encroachment has not only dominated franchisee association agendas and trade journal headlines but has also become a hot topic for politicians and policymakers. Yet, until now, evidence of encroachment has been strictly anecdotal. This paper provides the first systematic evidence of encroachment. Using revenue data from the Texas lodging industry in the 1990s, I find that when franchisors approve new same-brand units in the vicinity of incumbent units, these new units cannibalize the incumbents' revenues. In contrast to the result for franchisors, the addition of a new unit by company-owned brands in the vicinity of same-brand units is associated with an increase in the incumbents' revenues. This contrast suggests that encroaching behavior is caused by incentives that result from the governance form of franchising and is not simply an outcome that accompanies all expansion. This finding informs theory on governance forms and exclusive territories. Implications for practitioners and policy are also discussed.
This paper studies the effects of generic entry on post-patent price competition for 18 prescription drugs recently exposed to competition. An independent, validating test of the “generic competition paradox” is conducted using a newly created data set. Each generic entrant is associated with an average 1% increase in the branded price. The one-way error component model accounts for intermolecular competition, market segmentation, and endogeneity of entry and finds branded prices increasing by 2%. Alternative definitions of entry suggest that price competition is confined to the generic market. The unique payer-type feature of the data offers empirical evidence supporting market segmentation.
Quality variations are introduced in the circular model of differentiated products. Two main game structures are analyzed. The three-stage game has entry in the first stage, location in the second, and quality and price choice in the third. The four-stage game replaces the quality and price subgame of the three-stage game with two stages, quality choice followed by price choice. It is found that precommitment in quality (in the four-stage game) allows firms to support the same prices (as in the no-precommitment three-stage game) with lower quality levels and expenditure. This induces entry so that, at the free entry equilibrium, quality is lower and there is a larger number of brands in the precommitment game. In relation to optimality, both games result in higher diversity and under-provision of quality with bigger divergence from optimality observed in the four-stage precommitment game. Compared with a market without competition in quality, the equilibria with quality competition may result in a lower total surplus. A basic inverse relationship is established between the level of quality and the number of varieties at equilibrium. Thus, the establishment of minimum quality standards can reduce the number of varieties and increase total surplus.
Since the early 1970s, movie theaters in the United States have employed a pricing model of uniform prices for differentiated goods. At any given theater, one price is charged for all movies, seven days a week, 365 days a year. This pricing model is puzzling in light of the potential profitability of prices that vary with demand characteristics. Another unique aspect of the motion-picture industry is the legal regime that imposes certain constraints on vertical arrangements between distributors and retailers (exhibitors) and attempts to facilitate competitive bidding for films. We explore the justifications for uniform pricing in the industry and show their limitations. We conclude that exhibitors could increase profits by engaging in variable pricing and that they could do so more easily if the legal constraints on vertical arrangements are lifted.
This article analyzes the effect of competition on a supermarket firm's incentive to provide product quality. In the supermarket
industry, product availability is an important measure of quality. Using U.S. Consumer Price Index microdata to track inventory
shortfalls, I find that stores facing more intense competition have fewer shortfalls. Competition from Walmart—the most significant
shock to industry market structure in half a century—decreased shortfalls among large chains by about a third. The risk that
customers will switch stores appears to provide competitors with a strong incentive to invest in product quality.
"I develop a new empirical model for discrete games and apply it to study the release date timing game played by distributors of movies. The results suggest that release dates of movies are too clustered around big holiday weekends and that box office revenues would increase if distributors shifted some holiday releases by one or two weeks. The proposed game structure could be applied more broadly to situations where competition is on dimensions other than price. It relies on sequential moves with asymmetric information, making the model particularly attractive for studying (common) situations where player asymmetries are important." ("JEL" C13, C51, L13, L15, L82) Copyright (c) 2009 Western Economic Association International.
We measure the effects of chain economies, business stealing, and heterogeneous firms' comparative advantages in the discount retail industry. Traditional entry models are ill-suited for this high-dimensional problem of strategic interaction. Building upon recently developed profit inequality techniques, our model admits any number of potential rivals and stores per location, an endogenous distribution network, and unobserved (to the econometrician) location attributes that may cause firms to cluster their stores. In an application, we find that Kmart and Target benefit most from local chain economies; Wal-Mart's advantage is more global. We explore these results with counterfactual simulations highlighting these offsetting effects.
In any given movie theater, all movies are priced the same regardless of their theatrical success and potential and regardless of the general demand conditions. This phenomenon is an extreme example of the practice of uniform pricing of differentiated goods, for which traditional economic theories provide no explanation. This paper studies the case of the pricing practices in the movie-theater industry that appear to be inferior in comparison to alternative pricing policies. We examine various possible causes for the practice that may shed light on the persistence of such inefficient pricing policies.