Vertical Integration and Downstream Resource Allocation: An Empirical Study in the Movie Industry

Abstract

How does vertical integration affect resource allocation and economic efficiency in downstream channels? By analyzing a fine-grained screen-level panel dataset of 78 domestic movies shown in 47 theater chains in China, this study examines the impact of vertical integration on the screen allocation of theater chains. We find that vertical integration between movie producers or distributors and theater chains results in preferential screen allocation. Although there is no significant difference in the share of overall screens, theater chains allocate more large-sized and less small-sized screens to their integrated movies than nonintegrated movies. Furthermore, the impact of vertical integration on screen allocation is conditional on movie popularity. Specifically, only popular integrated movies gain preferential resource allocation, and unpopular integrated movies get even fewer screens. Our investigation on the economic efficiency of resource allocation shows that, for each seat of the screening room, integrated movies generate lower box office revenues than nonintegrated movies. Our findings suggest that vertical integration brings benefits of preferential resource allocation for upstream suppliers but leads to resource underutilization for downstream firms.