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Social Learning and Optimal Advertising in the Motion Picture Industry

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  • Ohio University
  • Department of Economics
  • Hailey Hayeon Joo
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    Abstract

    Social learning is thought to be a key determinant of the demand for movies. This can be a double-edged sword for motion picture distributors, because when a movie is good, social learning can enhance the effectiveness of movie advertising, but when a movie is bad, it can mitigate this effectiveness. This paper develops an equilibrium model of consumers' movie-going choices and movie distributors' advertising decisions. First, we develop a structural model for studios' optimal advertising strategies, taking into account the expected social learning process, and a model for consumers' movie demand, given an initial indicator of movie quality (critic ratings) as well as an initial level of advertising. Consumers are assumed to be initially uncertain about movie quality. This, however, is resolved over time through Bayesian updating. That process depends upon (1) the number of previous viewers and (2) their ratings reported over the Internet. We then estimate the model parameters using data pertaining to 236 movies that were shown in theaters in the U.S. between January 1, 2002 and December 31, 2003. The empirical results show that social learning has a positive multiplier effect on movie advertising, with the multiplier effect being strongest for good movies. The simulation of the effects of social learning relative to a world without such learning shows that for good movies, producers spend substantially more on advertising when there is learning involved than they would if there were no learning. For bad movies, social learning makes much less difference to the level of advertising expenditures. Thus, the studio's advertising spending is sensitive to both consumer uncertainty about movie quality and the speed with which potential movie-goers learn about movie quality.

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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 513.

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    Date of creation: 2009
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    Handle: RePEc:red:sed009:513

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    1. Glaeser, Edward L & Sacerdote, Bruce & Scheinkman, Jose A, 1996. "Crime and Social Interactions," The Quarterly Journal of Economics, MIT Press, vol. 111(2), pages 507-48, May.
    2. Enrico Moretti, 2011. "Social Learning and Peer Effects in Consumption: Evidence from Movie Sales," Review of Economic Studies, Oxford University Press, vol. 78(1), pages 356-393.
    3. Daniel A. Ackerberg, 2003. "Advertising, learning, and consumer choice in experience good markets: an empirical examination," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(3), pages 1007-1040, 08.
    4. De Vany, Arthur & Walls, W David, 1996. "Bose-Einstein Dynamics and Adaptive Contracting in the Motion Picture Industry," Economic Journal, Royal Economic Society, vol. 106(439), pages 1493-1514, November.
    5. Tülin Erdem & Michael P. Keane, 1996. "Decision-Making Under Uncertainty: Capturing Dynamic Brand Choice Processes in Turbulent Consumer Goods Markets," Marketing Science, INFORMS, vol. 15(1), pages 1-20.
    6. Keane, Michael P & Wolpin, Kenneth I, 1994. "The Solution and Estimation of Discrete Choice Dynamic Programming Models by Simulation and Interpolation: Monte Carlo Evidence," The Review of Economics and Statistics, MIT Press, vol. 76(4), pages 648-72, November.
    7. Harikesh Nair, 2007. "Intertemporal price discrimination with forward-looking consumers: Application to the US market for console video-games," Quantitative Marketing and Economics, Springer, vol. 5(3), pages 239-292, September.
    8. Jonathan Beck, 2007. "The sales effect of word of mouth: a model for creative goods and estimates for novels," Journal of Cultural Economics, Springer, vol. 31(1), pages 5-23, March.
    9. Elberse, Anita & Anand, Bharat, 2007. "The effectiveness of pre-release advertising for motion pictures: An empirical investigation using a simulated market," Information Economics and Policy, Elsevier, vol. 19(3-4), pages 319-343, October.
    10. Darren Filson & David Switzer & Portia Besocke, 2005. "At the Movies: The Economics of Exhibition Contracts," Economic Inquiry, Western Economic Association International, vol. 43(2), pages 354-369, April.
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