Market Size and Product Composition: Evidence from Hollywood

Abstract

This paper examines how outside and inside competition affect the number and composition of product offerings. The question is addressed using the example of the U.S. motion picture industry, which has experienced declining attendance in the past decade due to outside competition from streaming services and smart phone applications. Using data on 1,486 releases between 2009 and 2018, we estimate a structural model of endogenous product choice in which studios allocate a fixed budget to low-, medium-, and high-budget movie projects each year. Counterfactual estimates using our parameter estimates indicate that an increase in the value of the outside option leads to a significant reduction in the number of medium-budget movies but little change in the number of low- and high-budget movies. Additional counterfactual exercises that simulate a change to the level of competition inside the market, such as a merger between two studios or the entry of a new studio, confirm the existence of an inverse relationship between competition and the number of medium-budget movies.

Keywords: product choice, product quality, competition, movies

JEL Classification: L11, L15