Joint Econ-S&P: Heterogeneity in Vertical Foreclosure: Evidence from the Chinese Film Industry; Dr Charles Hodgson (Yale University)

Abstract

How do vertically integrated firms' pricing and product provision decisions change with upstream and downstream competition? We answer this question in the context of the Chinese film industry, where vertical integration is pervasive. Weekly variation in the set of available films generates changes in the vertical structure of local markets. We exploit this variation to measure the effect of vertical integration on prices and showings, finding that theaters allocate significantly more showings to vertically integrated films. This effect is particularly pronounced in two scenarios: when an integrated theater faces limited spatial competition in the downstream retail sector, allowing it to divert demand to its own films; and when an integrated film is similar to competing independent films, making foreclosure profitable. We then estimate a model of demand and supply that allows differential substitution based on cinema location and film similarity. Film similarity is measured using a matrix factorization algorithm applied to data on film reviews that places each film in a latent characteristic space. We evaluate policy counterfactuals that consider selective dis-integration based on levels of upstream and downstream competition.