Impact of Competition on Product Quality Provision: Case of the Motion Picture Exhibitors
A. Yesim Orhun
The Stephen M. Ross School of Business at the University of Michigan
Pradeep K. Chintagunta
University of Chicago
University of North Carolina (UNC) at Chapel Hill - Marketing Area
January 24, 2013
Ross School of Business Paper
We study product quality choice as a competitive tool to answer two related questions. What is the impact of competition on the quality provision of firms? How does the ability to adjust quality impact business stealing? We present empirical evidence of quality responses to market structure changes in the movie exhibition industry. We show that competitive incentives, all else constant, exert an upward pressure on quality. The incumbent's quality response to entry is negative if the entrant is owned by the same chain, but either less negative or positive if the entrant belongs to a rival chain. Additionally, incumbents have weaker incentives to increase quality in response to entry if they possess an advantage in a different quality dimension. We also show that not accounting for endogenous product choices confounds business stealing measurement and suggests cannibalization to exceed business stealing (echoing previous literature), a conclusion that is reversed when we control for changes in endogenous product choices.
Number of Pages in PDF File: 37
Keywords: Product Competition, Quality, Cannibalization, Business Stealing
JEL Classification: L10, L40working papers series
Date posted: February 12, 2013 ; Last revised: February 25, 2013
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