Does vertical integration enhance non-price efficiency? Evidence from the movie theater industry

Abstract

This paper examines how vertical integration affects non-price efficiency in the movie theater industry. Adopting a discrete choice framework, we derive consumer welfare under capacity constraints and fixed prices, and show that allocating capacity proportionally to demand is efficient. Applying our approach to estimating the efficiency of movie theaters’ seat allocations, we show that integrated theaters may be more efficient than non-integrated ones at picking movies to screen and allocating seats across them. We propose a theoretical mechanism behind these results. Specifically, we show that integrated theaters have higher incentives to acquire demand information and hence can be more efficient in allocating the seats.