Revenue Sharing Distortions and Vertical Integration in the Movie Industry

Abstract

I analyze how variation in firm boundaries affect economic outcomes in the movie industry. Specifically, I focus on movie distributors and their contracts with exhibitors to show their movies on their screens. I argue that vertical integration solves the distortion on movie run length created by the revenue sharing contracts used in the industry. Since I observe the same movie showing in the same period under different organizational forms in the Spanish market, I use a difference on different approach to exploit this variation and study differences in outcomes across organizational forms. I show that integrated theaters run their own movies longer than other movies, and longer than nonintegrated theaters do. This effect is stronger for movies of more uncertain demand due to higher contractual complexity. I also find that integrated distributors specialize in the movies of higher demand uncertainty. (JEL L14, L22, L82) The Author 2008. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

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