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Abstract
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.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 It is mentioned that the Chinese gross box office reached 60.97 billion yuan in 2018 in the article listed on the website, http://www.sohu.com/a/286975727_100008019.
2 Using Danish employer-employee matched data covering from 1995 to 2007, Utar (2014) examines the within firm adjustments to intensified low-wage competition due to abolition of the MFA quotas on Chinese textile products and China’s accession to the WTO. The results show a negative competition effect on employment, value-added, and intangible assets of the Danish firms. De Loecker (2011) estimates the productivity effects from abolished quota protection in the Belgian textile market. Correcting for unobserved prices and demand shocks leads to lower productivity gains (2 percent compared to eight percent using the standard measures of productivity).
3 The first imported movie was ‘The Fugitive’ in 1993, which grossed 3 million dollars in China.
4 In practice, more movies have been imported into China each year under a fixed flat fee since 2016. (https://107cine.com/stream/97959/)
5 As of January the 1st, 2018, the National Business Daily listed on its website http://m.nbd.com.cn/articles/2018-01-01/1178011.html
6 In the US, the American Classification and Ratings Administration (ACRA) rates movies on a scale of G, PG, PG-13, R, and NC-17 (Adults Only).
7 Source: SAPPRFT Reiterates Film Censor Criteria, H.K. TRADE DEV. COUNCIL, available at http://info.hktdc.com/alert/cba-e0804c-2.htm
8 It is referred to as the ‘uniform pricing puzzle’ in the movie exhibition market. There are several papers studying this issue (Orbach and Einav Citation2007; Ho et al. Citation2018). Note that in China, price may vary across auditoriums and differ at different showing times within a theater. But within a theater, 2D (3D) movies screened in the same auditoriums at the same showing time have the same prices.
9 We obtain this information from OpusData database, which provides keywords of the movie content for US produced movies.
10 In order to prevent American movies from dominating the Chinese movie market, in 2004 SAPPRFT issued the regulation that among the allowed 20 imported revenue-sharing movies, there should be at least six non-American movies. In some year, the number of imported US movies exceeded 34. This is because some of the movies are imported through the ‘cultural exchange program’, which do not fall into the quota slot.
11 Data source: www.cbooo.cn
12 See Moul (2007).
13 Data source: http://www.cbooo.cn/year?year=2017
14 The use of total surplus implicitly assumes a unit of currency (e.g. a dollar) to each person in the society is the same, whether that person is a consumer or a producer, rich or poor.
15 Note that we assume there is no change in the number of movies supplied by the Chinese producers. Therefore, our baseline simulation estimates an upper bound to the welfare loss of producers.
16 Because of the uniform pricing practice, we drop the subscript of price.
17 Note that calculation of market share is based on the nested logit model and hence takes account the outside options (not watching any movies). The Appendix shows how Eq. (11) is obtained.
18 Data source is the MaoYan.
19 In the area of competition policy, for instance, many countries apply a consumer welfare standard which aims to protect consumers, by effectively setting the weight to producer surplus to zero.
20 See Motion Picture Association of America MPAA Comments Regarding the 2016 National Trade Estimate Report on Foreign Trade Barriers
21 Several papers (Elberse and Eliashberg 2003; Dalton and Leung Citation2017; Holloway 2017) investigate sequential entry of movies.
22 Data source: www.cbooo.cn. Wolf Warrior 2 is also the second highest-grossing movie of all-time in a single market behind only Star Wars: The Force Awakens (US$936.7 million in North America), according to the article ‘China's Top 10 Box Office Hits of All Time Include Four Domestic Films Released in 2017’ by Huang, Zheping (Quartz) and ‘All Time Domestic Box Office Results’ (http://www.boxofficemojo.com/alltime/domestic.htm)
Additional information
Notes on contributors
Yihong Tang
Yihong Tang is a professor of the School of International Trade and Economics, University of International Business and Economics.
Jing Yan
Jing Yan is an associate professor of the Central University of Finance and Economics.
Feng Yu
Feng Yu is an assistant professor of the School of Economics and Management, University of Science and Technology Beijing.