Doctoral Dissertation Research in Economics: Social Learning, Advertising, and Optimal Waiting Decisions in the Motion Picture Industry

University Of Pennsylvania, Philadelphia PA

Investigators

Abstract

Social learning is considered influential in people's decision making on whether, when, and at what venue to watch movies. Similar to other experience goods, the quality of a movie is difficult to observe in advance and is ascertained only upon consumption. Moreover, perceived quality varies by consumer. Through social learning, potential movie consumers get exposed to the quality of a movie prior to making their choices. A rational consumer may think over to decide whether to see the film immediately or to wait for more word of mouth referrals. This doctoral dissertation research develops an optimal waiting (or stopping) game of movie watching and measures the extent of social learning reflected both in the theatrical market and the home video market. The objective is to identify movie consumers' preference with the data from the aggregate box office statistics, home video sales, and rental data of 243 movies that were released in theaters nationwide in the U.S. between 1/1/2002 and 12/31/2003. This project has the intellectual merit of studying how social learning affects the motion picture marketplace. The model developed through the project can be used to assess a number of interesting policy implications. For example, the estimated model helps determine the optimal advertising strategy for movie studios. Once films are produced, the only means to boosting the movie demand is advertising. Social learning can amplify the effect of advertising for movies that have been reviewed positively. Likewise, it can impede the perceptual effect of advertising if a movie garners negative reviews. This study shows how a change in the advertising expenditure influences the initial box office performance, dynamic social learning patterns, and ultimately the revenue stream of each movie. Moreover, the result of this research can be used to analyze how the change in the advertising expenditure affects people's decisions on movie purchases and rentals over time. The model can also be used to simulate how the quality of a movie influences the demand at theaters and in the home video rental and sales markets. The project is expected to have a broader impact as it applies to numerous other industries. This is because social learning exists not only in the motion picture industry, but also in many other experience goods markets. For example, consumers of Information Technology (IT) products are particularly sensitive to early adopters' evaluation. IT products such as MPEG-1 Audio Layer 3 (MP3) players are produced through a large pipeline of Research and Development (R&D) investments and are characterized by high fixed cost and low marginal cost; intrinsically similar to movies. Furthermore, as most R&D projects involve developing brand new functions, it is difficult to evaluate their worth before consumption. In this regard, early adopters' reviews play a decisive role in triggering the subsequent consumption, which can be explained by a method analogous to the model introduced in this study.