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Signaling for access to high-demand markets: evidence from the US motion picture industry

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Abstract

We develop a signaling model in which imperfectly competitive firms signal quality through expenditures in segmented markets. Separation in this model results in high-quality firms selling their products in a high-demand, and highly quality elastic, period. Low-quality firms sell their product in a low demand but less quality-sensitive period. A dataset including 1697 US theatrical releases between 1998 and 2008 is compiled and explored for evidence of this separating equilibrium. We find that our measures of signal intensity and realized quality (budgets and critical ratings, respectively) are both significantly greater during high-demand periods. Ticket sales are also shown to be more sensitive to expected quality as measured by budgets during the high-demand season. Other seasonal differences and implications are explored.

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Notes

  1. In reality, some studios may be unable to send a signal due to credit constraints and our model therefore applies to the set of firms that have the capacity to signal. We do not believe this constraint to be binding with very many films; only 6.7 % of the movies shown in our dataset were released by non-major studios.

  2. Studios frequently and costlessly change release dates but once the date is announced to the public during the promotion phase it becomes costly to change. Our focus is on consumers’ behavior and its implications for a separating equilibrium rather than post-entry competition in either the high-demand or low-demand market. For this reason, we treat the “pre-release” announcement period as an adjustment to a Nash Equilibrium and assume that it takes place instantaneously (i.e., we ignore the adjustment period and assume that studios’ announcements to the public represent a credible commitment).

  3. Again, quality here refers to mass appeal. There is no loss in assuming that these customers are in fact cinephiles interested in quality of a sort that does not appeal to the masses.

  4. While there are many pooling and partial pooling equilibria in this game, as in all signaling games, they can be eliminated by the use of refinements such as D1 (see Cho and Kreps 1987).

  5. While profits are frequently negative in reality, we have assured positive profits by assuming that there is no uncertainty regarding demand and that there are only two levels of quality.

  6. Our main results are unchanged if we include these 114 titles along with a control for whether a film is released by a major studio.

  7. One important source of signaling is advertising, which Einav (2007) reports to be a fixed percentage of the overall budget for movie production. Roger G. Friedman, vice chairman of the Motion Picture Group and COO of Paramount Pictures, estimated the average advertising expenditures to be 30 million dollars, of which 2.5–8 million dollars are spent on so called creative costs that include costs of creating the marketing campaign as well as travel expenses for promotional appearances of filmmakers (Friedman 2004, p. 292).

  8. Since the number of “release weeks” varies between 51 and 53 and key dates occur in different weeks across years, we make this determination using the 3-week average including the prior week and the following week.

  9. Only three movies in the dataset have a rating of NC-17.

  10. Again, we smooth the data here by using the 3-week average that includes the week before and the week after.

  11. The first stage regression results can be found in the Online Appendix.

  12. Seemingly Unrelated Regression results for the model are quite similar to those given here.

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Acknowledgments

The authors would like to thank the editor, Kathryn Graddy, two anonymous referees, Christopher S. Brunt, and seminar participants at Georgia Southern University and the 40th Annual Conference of the European Association for Research in Industrial Economics for helpful comments and suggestions. Any remaining errors are our own.

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Authors and Affiliations

  1. Department of Finance and Economics, Georgia Southern University, Statesboro, GA, USA

    Amanda S. King & John T. King

  2. Qatar National Research Fund, Doha, Qatar

    Michael Reksulak

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  1. Amanda S. King
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King, A.S., King, J.T. & Reksulak, M. Signaling for access to high-demand markets: evidence from the US motion picture industry. J Cult Econ 41, 441–465 (2017). https://doi.org/10.1007/s10824-016-9273-x

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