Abstract: I study how liberalization of upstream imports leads to downstream retail expansion—a “forward spillover” effect—which subsequently increases consumer access to upstream domestic products—a “backward spillover” effect in China’s movie market. I estimate consumer demand for domestic and foreign movies and theater profit with a Hotelling-style spatial competition model. I estimate theaters' fixed operating costs from inequality optimality conditions for entry and exit. Imported movies have little substitutability with domestic movies and are economically important for theaters to compensate for fixed costs. Simulations of a return to the protectionist quota suggest that the liberalization benefited consumers and domestic upstream movie producers and that the benefit is magnified by import-induced theater entry into the market.
R&R at Rand Journal of Economics
Abstract: This paper studies the role and incidence of entry preemption strategic motives on the dynamics of new industries, while providing an empirical test for entry preemption, and quantifying its impact on market structure. The empirical context is the evolution of the U.S. drive-in theater market between 1945 and 1957. We exploit a robust prediction of dynamic entry games to test for preemption incentives: the deterrence effect of entering early is only relevant for firms in markets of intermediate size. Potential entrants in small and large markets face little uncertainty about the actual number of firms that will eventually enter. This leads to a non-monotonic relationship between market size and the probability of observing an early entrant. We find robust empirical support for this prediction using a large cross-section of markets. We then estimate the parameters of a dynamic entry game that matches the reduced-form prediction and quantify the strength of the preemption incentive. Our counterfactual analysis shows that strategic motives can increase the number of early entrants by as much as 50 percent in mid-size markets without affecting the number of firms in the long run. By causing firms to enter the market too early, we show that strategic entry preemption leads on average to a 5% increase in entry costs and a 1% decrease in firms' expected value (relative to an environment without strategic investments).
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 movie industry where there is pervasive vertical integration. 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 diminished when there is greater downstream competition. We then estimate a model of demand and supply that accounts for potential direct effects of integration on consumer utility. Preliminary results suggest that our findings are driven by theaters internalizing the upstream revenue share for integrated films.