Multi-product firms, heterogeneous quality and exporting behaviour: product-level evidence from the movie industry

ABSTRACT

This article examines how quality affects heterogeneous multiple-product firms’ exporting behaviours. We develop a structural model of the global movie market, including both consumers’ movie demand choices and firms’ exporting decisions. A movie studio is a multi-product firm that releases many movies within a year. We model movie quality as a combination of firm-level appeal and product-level attractiveness. We find that both studio-level and movie-level heterogeneity affect demand for movie, and movie-level heterogeneity is relatively more important. We also explore the counterfactual effects of quality improvement and trade liberalization on trade. Our results show that improvement of quality increases both intensive margin and extensive margin of trade. By elimination of quota, we find that trade liberalization increases movie exports to a foreign market by 19%. The results of our study can also help improve understanding of trade in the service industry. For instance, we do not find a positive correlation between the foreign entry costs and the geographic distance, as in the case of manufacture goods.

KEYWORDS:

• Multi-product firm
• product heterogeneity
• trade in cultural services
• movie industry

JEL CLASSIFICATION:

• F14
• F23
• L82

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ These values are computed based on the average box-office of $2,186,283 for a movie in our dataset.

² Abramitzky and Sin (2014) take advantage of the fall of communism in Eastern Europe as a ‘natural experiment’ and estimate the extent to which communism slowed the trade in book translations using data from UNESCO’s Index Translationum. Ferreira and Waldfogel (2013) study trade in popular music.

³ We follow the standard setup in the discrete choice model literature (Berry 1994).

⁴ The choice of these variables is based on the literature of movie demand (Ainslie, Drèze, and Zufryden 2005; Eliashberg, Elberse, and Leenders 2006; Einav 2007; Moul 2007). A sequel is a movie that continues the story of some earlier work.

⁵ Hanson and Xiang (2011) also mentioned that the popularity of a movie depends on the ‘ability’ of its studio. But in their model, each firm produces a single variety, as in the work by Melitz (2003).

⁶ This pricing practice is called the uniform pricing puzzle in the movie exhibition market (Orbach and Einav 2007). The only exception is 3D movies, which is a few more dollars than the regular movie price.

⁷ In the rest of this section, we suppress the time subscript but note that all our specifications have year fixed effects.

⁸ The ASJP is an international project by ethnolinguists and ethnostatisticians. For more details, please see Brown et al. (2008).

⁹ Budget data are also reported at BoxOfficeMojo.com and IMBD. But both data sources report production budget information for only a subset of movies.

¹⁰ Please see the following website for detailed descriptions of the Bankability Index: http://www.the-numbers.com/news/122700830-Analysis-The-Numbers-Bankability-Index-Under-the-Covers.

¹¹ We are grateful that IHS Markit Technology provides us the price data generously.

¹² The MPAA reports provide information on foreign trade policies that its members claim impede their business.

¹³ The following conversions to dollar value in this section are all based on the average box-office of $2,186,283 in our dataset.

¹⁴ To save space, these results are not reported but available upon request.

Additional information

Funding

This work was supported by China National Planning Office of Philosophy and Social Science under the Grant No. 12&ZD097 and Grant No. 15CJL050.