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Description
The observed seasonality of box-office revenues reflects both seasonality in underlying demand for movies and seasonality in the number and quality of available movies. I separately identify these aspects by estimating weekly demand for movies, using movie fixed effects, a long panel of movies' weekly revenues, and restrictions on their decay pattern. I find that the estimated seasonality in underlying demand is much smaller and slightly different from the observed seasonality of sales. The biggest movies are released at times when demand is highest, amplifying the underlying seasonality. Price rigidities in the industry may facilitate this amplification effect.
1. Introduction
* The number of Americans who go to the movies varies dramatically over the course of the year and sometimes more than doubles within a period of two weeks. At the same time, the first week accounts for almost 40% of the box-office revenues of the average picture. As a result, the release date of a new picture is a major focus of attention for distributors of movies. With virtually no price competition, the movie's release date is one of the main short-run vehicles by which studios compete with each other. These endogenous timing decisions, in turn, generate a strong seasonal pattern of release dates. Therefore, the observed seasonal pattern of sales is a combination of both seasonality in underlying demand and seasonal variation in the quality of movies released. The goal of this article is to decompose the observed seasonal pattern of sales into these two components.
In economics, seasonality is typically considered as systematic "noise" that has to be adjusted for, so the analysis can focus on more fundamental patterns in the data. In some industries, however, timing decisions can be crucial for the success or failure of a business. In these cases, opening the seasonality "black box" and explicitly analyzing seasonal patterns is key to our understanding. (1) The analysis should take the underlying seasonal pattern as given, with the understanding that this seasonal pattern will induce an equilibrium market reaction. (2) This idea has been employed for at least two decades to analyze price competition. Prices are not set exogenously; they are the sum of equilibrium marginal costs and markups. Just as we have to separate costs from markups when analyzing pricing decisions, we have to separate underlying seasonality from seasonal market reaction when analyzing timing decisions. This distinction is essential to address standard policy questions when timing decisions are an important part of the competitive environment. (3) For example, if the seasonal variation is mainly explained by changes in underlying demand, then distributors should release their movies when sales and demand are high. In contrast, if the seasonal variation is mainly explained by changes in movie quality, then movies should be released in a low sales period, when competition is soft.
The relationship between the underlying seasonality and the market reaction can be classified into two types. First, an amplification effect occurs when the market reaction to high demand increases overall demand. For example, more or better products may be introduced in high-demand seasons. Second, a dampening effect occurs when the market reaction dampens demand changes. For example, prices may increase in high-demand seasons. I discuss this distinction in more detail at the end of the article.
Movie distributors tend to release their (ex ante) biggest hits in the beginning of the summer and during the Christmas holiday season, and the choice set of moviegoers varies dramatically over the year. We face a classic identification problem: is the strong box-office performance of, say, Memorial Day weekend the result of higher demand, better movies, or both? One might control for variations in the set of available products in order to identify underlying demand. Such an exercise is not feasible in the motion picture industry; with weak predictors for a movie's box-office success, one cannot control for movie quality. (4)
Identification is achieved by estimating a nested logit model of weekly demand for movies. Movie quality is identified by movie fixed effects and assuming that, conditional on observables, the decay in average consumer utility from a given movie is independent of the movie's release date. The market-expansion effect is identified by variation in the number and quality of movies available in the same calendar week, in different years. This variation is assumed to be the realization of exogenous random shocks in the movie-production process. This is a reasonable assumption as long as distributors believe that underlying seasonality in demand is stable during the observation period. Given a measure of movie quality and an estimate of the market-expansion effect, the residual seasonal variation in sales is attributed to underlying demand. Section 4 discusses the basic identification assumptions, their rationale, and their limitations. In Section 5, I verify that the main results are robust under alternative specifications.
Many articles estimate demand for motion pictures. (5) Absent good predictors for the boxoffice success of movies, most of the literature conditions on the movie's first week revenues and investigates the effects of various variables, such as advertising, reviews, and Academy Awards, on revenue patterns over the movie's subsequent life cycle. By using movie fixed effects, I follow a similar approach, but not as the main objective of the analysis. To the best of my knowledge, this is the first article to recognize the potential difficulty in the interpretation of the seasonal effects in the industry and to address it explicitly. (6) I assemble a sample that includes all movies released nationwide in the United States from 1985 to 1999. This panel is much longer than those used in the literature. In my article, one important source of variation is across the same calendar week in different years. In a shorter panel, the results may depend on the particular observation period. I also employ discrete-choice estimation methods to control for changes in competition and seasonal effects in a systematic way. The key identifying assumption of using the decay pattern as described above is a novel contribution.
My estimation results imply that about a third of the seasonal variation in sales can be attributed to seasonal changes in the number and quality of movies. In contrast, the industry's conventional wisdom attributes most of the seasonality in sales to demand factors. Moreover, the estimated seasonal pattern in underlying demand differs slightly from the observed pattern of sales. For example, industry revenues gradually fall from the end of July until early September, but my estimates suggest that underlying demand is stable over the summer, with a sharp decrease after Labor Day. The difference occurs because the biggest movies are typically released in the beginning of the summer. These results have important implications for the timing of release dates by movies' distributors. At the end of Section 5, I provide some crude quantitative estimates for these effects. A more rigorous analysis of the release date decisions is relegated to a companion article (Einav, 2003), in which the strategic timing game is modelled empirically.
The rest of the article is organized as follows. In Section 2 I describe the industry. Section 3 describes the data, and Section 4 presents the estimation strategy and the identification assumptions. I present the results in Section 5, which are followed by sensitivity analysis and several implications for release behavior. Section 6 concludes by discussing the potential relevance of the results to other industries.
2. Industry description
* The motion picture industry comprises of three main players: producers, distributors, and exhibitors. (7) Producers are in charge of all aspects relating to the production of the movie, distributors deal with the nationwide distribution of the completed movie, and exhibitors own the theaters. The industry is dominated by the major studios that have integrated production and distribution. In addition, there are a number of small independent producers ("independents"), who use either the major studios' distribution division or one of a number of independent distributors. Finally, with few exceptions, exhibitors are not vertically integrated with producers or distributors.
I now examine in greater detail the process by which a movie is exhibited after its completion. The first stage is distribution. The main decisions involve setting the release date, deciding the initial scope and locations of the release, negotiating contracts with exhibitors, and designing the national advertising campaign. The two important considerations for the release date are the strong seasonal effects in demand and the competition that will be encountered throughout the movie's run. Typically, movies with higher expected revenues are released on higher (perceived) demand weekends, and there is a tradeoff between the seasonal and the competition effects. The importance of the release date is magnified because the first week accounts for almost 40% of total domestic box-office revenues on average (Figure 1). In addition, revenues in the first week are believed to create information and network effects that increase revenues in subsequent weeks.
The identity of the competing movies also matters when setting the release date. Distributors are wary of releasing a movie in close proximity to strong, popular movies. As documented in Einav (2002), distributors often change release dates in response to new information concerning release dates of similar movies. They also announce their movie's release date early, hoping that other distributors will avoid the announced date. This practice is common for movies that are thought likely to succeed.
Distributors also decide the scope of a movie's release. There are three types of release: wide release, platform release, and limited release. Wide releases are the most common with the main distributors. Screening of the movie begins in a large number of theaters, typically several thousand, accompanied by an extensive national advertising campaign. Platform releases involve an initial release in a small number of theaters, often only in big cities, with advertising concentrated in local newspapers. The movie then expands to additional screens and to more rural areas. Distributors typically use such releases with movies that do not... |
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