Does vertical integration enhance non-price efficiency? Evidence from the movie theater industry
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Does vertical integration enhance non‑price efficiency? Evidence from the movie theater industry In Kyung Kim1 · Vladyslav Nora1 Received: 18 November 2019 / Accepted: 12 May 2020 © Springer-Verlag GmbH Germany, part of Springer Nature 2020
Abstract This paper examines how vertical integration affects non-price efficiency in the movie theater industry. Adopting a discrete choice framework, we derive consumer welfare under capacity constraints and fixed prices, and show that allocating capacity proportionally to demand is efficient. Applying our approach to estimating the efficiency of movie theaters’ seat allocations, we show that integrated theaters may be more efficient than non-integrated ones at picking movies to screen and allocating seats across them. We propose a theoretical mechanism behind these results. Specifically, we show that integrated theaters have higher incentives to acquire demand information and hence can be more efficient in allocating the seats. Keywords Vertical integration · Efficiency · Movie theater industry JEL Classification C1 · L1 · L8
We thank Michael Baye, Ricard Gil, Ken Hendricks, Joep Konings, Alan Sorensen, Frank Verboven, Andriy Zapechelnyuk, anonymous referees and associate editor for excellent comments and suggestions that helped to improve this article. We are also grateful to seminar participants at the University of Wisconsin-Madison, Nazarbayev University, CORE@50 Conference in Louvain-laNeuve, and the 43rd EARIE Annual Conference in Lisbon. Financial support from the Seed Program for Korean Studies through the Ministry of Education of the Republic of Korea (AKS-2018INC-2230011) and the Small Grant Program at Nazarbayev University (SHSS2018004) is gratefully acknowledged. * In Kyung Kim [email protected] Vladyslav Nora [email protected] 1
Department of Economics, Nazarbayev University, Nur‑Sultan, Kazakhstan
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1 Introduction Vertical integration in retail markets has countervailing effects on efficiency. First, vertical mergers can eliminate double marginalization (Spengler 1950), reduce transaction costs (Williamson 1971; Gil 2007), and align incentives of upstream and downstream firms (Grossman and Hart 1986; Gil 2009), thus helping to achieve adequate investments in marketing, demand forecasting, etc. Second, they can be intended to foreclose competitors or to secure a distribution channel for their own products, restricting consumers’ access to the products of non-integrated firms (Rey and Tirole 2007; Hastings and Gilbert 2005).1 Whereas the resulting price changes have been extensively examined in the empirical literature (Brenkers and Verboven 2006; Hortaçsu and Syverson 2007; Gil 2015), the impact on non-price efficiency is less explored (Chipty 2001; Forbes and Lederman 2010; Lee 2013). Nevertheless, the latter can be important for consumers. For example, mergers between movie theater chains and distributors are often blamed for pushing movies of non-integrated distributors away from screens rather than
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