Impact of Competition on Product Decisions: Movie Choices of Exhibitors

We empirically study the impact of the entry of a new theater on two important product decisions that incumbents in the movie exhibition industry face: (1) whether to invest in screening movies that are expected to be popular, and (2) when to adopt new releases. For theaters, both of these decisions feature a cost-demand trade-off inherent in quality decisions: Although screening popular and recent movies brings more patrons to the theater, distributors take a higher share of the revenue for such movies. The impact of competitive entry on the incumbent's quality decisions is ambiguous, as it may simultaneously increase the competitive pressure to invest more in these dimensions of quality and also change the demand conditions that incumbents face. We find that incumbent theaters do not increase the provision of popular and recent movies in response to rival entry. To identify the role of competitive incentives, we study the differential impact of entry based on whether the entrant belongs to the same parent firm as the incumbent theaters. This comparison reveals that competitive incentives push incumbents to screen movies with high expected success more frequently and to adopt movies sooner. The product responses we document have important implications for the revenue impact of entry and the conclusions that researchers can draw from this impact. Ignoring the provision of these quality dimensions suggests cannibalization to exceed business stealing, a conclusion that is reversed when we account for endogenous product responses. We also show that our findings on popularity and recency cannot be explained by concomitant changes in theaters' other product decisions, such as the variety of movies screened.