Vertical Foreclosure with Product Choice and Allocation: Evidence from the Movie Industry

Abstract

This paper investigates foreclosure effects resulting from vertical integration in the movie industry that has some special features such as demand uncertainty, price uniformity, and revenue-sharing contracts. Based on a simple theoretical model to describe the decision making of exhibitors and distributors, we derive two hypotheses on contract foreclosure and screen foreclosure. Our empirical results suggest that integrated exhibitors impose a higher quality standard for unintegrated movies and that integrated exhibitors play their affiliated movies more. The magnitude of foreclosure effects varies over movie quality. It also suggests the Korean movie market's leaning phenomenon toward vertically integrated distributors-exhibitors. Our empirical evidence is in line with growing criticism on vertically integrated distributors-exhibitors in the Korean movie industry.