Executive Summary
The motion picture industry in the United States is one of the most critical industries in terms of its contributions both to the economy and to culture. It enjoyed an all-time-high gross revenue of $64 billion in 2003. It is also an example of a typical “experience product” market, characterized by product quality information asymmetry between firms and consumers. To help distinguish between sellers of high- and low-quality products before consumption, consumers in such markets look for credible information that firms can provide through the use “signals,” such as advertising expenditure, warranties, and brand names.
In this article, the authors use real-world data to investigate market dynamics of the motion picture industry. A key contribution of this research is the use of a dynamic simultaneous-equations model to provide new insights into the drivers of and the interrelationships among the behaviors of movie audiences, studios, and exhibitors. Specifically, in contrast to prior research, the current study treats advertising expenditure as well as screens and (expected) box office revenues as endogenous variables to examine previously unexplored interaction roles of advertising expenditure and sequels on box office revenues. The findings extend the movie literature, which has only partially examined the influence of sequels and advertising expenditure on box office revenues. An interesting result of this study is the positive interaction between sequels and ad expenditures. This implies that the same level of ad expenditure has a more positive effect on quality perception and, consequently, a greater boost to box office revenues for sequels than for nonsequels. Thus, studios can advertise potentially less when promoting sequels than when promoting nonsequels.
Furthermore, this study is the first to examine the role of movie critics’ opinions in terms of the “variance” (consensus/disparity) rather than the “mean.” The findings add to the research on the impact of movie critics as influencers or predictors. Moreover, it also has clear implications for studios; just as studios research movies with viewers, they can also conduct research on reviewers and use the results of the likely consensus/disparity among them to decide whether they need to spend more ad money.
Much of the research on signaling in both economics and marketing focuses on the theoretical framework. In this context, another key contribution of the current article is its use of “revealed” market data to test empirically several theoretical conjectures about the role of potential signals on movie market outcomes. Specifically, a diagnostic empirical test for a potential signal is that the presence of information from independent or third-party sources (e.g., Consumer Reports) about a firm’s product in a marketplace should moderate the strength of the signal from the firm. The authors test for systematic empirical evidence of this moderating role of third-party information sources over two plausible signals—sequels and advertising expenditures—and indeed, they find such evidence both at the release phase across movies and over the postrelease phase for any movie. In addition, whereas most firms use multiple signals for their products, theoretical and, in particular, empirical work on signaling models involving the interaction of two or more signals is rare. In the current study, the authors hypothesize and show that sequels and advertising expenditures have a positive interaction effect in addition to their respective main effects.
The empirical findings consistent with potential signaling roles of advertising expenditure and sequels in the movie market also receive support from anecdotal market evidence. For example, evidence suggests that, in general, the largest share of advertising is scheduled before a movie’s release. In addition, two other indicators of possible signaling in a product-market are high levels of (1) total ad budget relative to sales revenue and (2) expenditures on television advertising relative to print advertising. Although the total ad budget typically accounts for only 1% and 4% of sales revenue for search and experience products, respectively, it accounts for as much as 27% for movies. As for the expenditure on television advertising, it is typically 1.2 times that of print advertising for search products compared with 2.5 times and 3.2 times for experience products and the movie market, respectively.
Biography
Suman Basuroy is a phi beta kappa and summa cum laude graduate of Brandeis University. He obtained his PhD in Marketing from the University of Pittsburgh under Wagner A. Kamakura. He is currently Assistant Professor of Marketing at Florida Atlantic University, MacArthur Campus. His teaching interests include marketing management, marketing strategy, and sales management. Before joining Florida Atlantic University, Suman taught at the University at Buffalo and Rutgers University. Suman’s articles have appeared or are forthcoming in Management Science, Journal of Marketing Research, Journal of Marketing, Journal of Business, Quantitative Marketing and Economics, Journal of Consumer Psychology, International Journal of Research in Marketing, Journal of Behavioral Decision Making, Marketing Letters, and Psychology and Marketing, among others. His key research interests include marketing of the motion pictures industry and category management.
Kalpesh Kaushik Desai is Assistant Professor of Marketing at the State University of New York, Buffalo. His has a PhD in Marketing from the University of Texas at Austin and an MBA from Jamnalal Bajaj Institute of Management Studies (India). Dr. Desai specializes in research that applies the principles of categorization, memory, and other cognitive psychology theories to managerial problems in branding, product-level competition, and retail judgments. His specific research interests include category extensions, ingredient branding, brand repositioning, consideration sets, product assortments, context effects, in-store product placement, and price perceptions of retail stores. Dr. Desai’s research draws heavily from his five years of product management experience. His research has been published in Journal of Consumer Research, Journal of Marketing, Journal of the Academy of Marketing Science, Psychology and Marketing, and Journal of Business Research.
Debabrata Talukdar is Assistant Professor of Marketing in the School of Management at the State University of New York, Buffalo. He received his PhD in Marketing and Applied Economics from the University of Rochester. He also holds master’s degrees in Operations Research from the University of Rochester and in International Development from Massachusetts Institute of Technology. Before returning to academia, he worked on economic development policy issues at the World Bank. His primary research interests include consumers’ information processing, new product diffusion, retail market dynamics, and the effect of public policies on consumer and firm behaviors. His articles have appeared in leading international journals of marketing and economic development, such as International Journal of Electronic Commerce, Journal of Consumer Research, Journal of Marketing Research, Marketing Science, and Urban Studies and World Development.
J Marketing Research, Volume 43, Number 2, May 2006
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