Optimal Timing of Sequential Distribution: The Impact of Congestion Externalities and Day-and-Date Strategies

Abstract

The window between a film's theatrical and video releases has been steadily declining with some studios now testing day-and-date strategies (i.e., when a film is released across multiple channels at once). We present a model of consumer choice that examines trade-offs between substitutable products (theatrical and video forms), the possibility of purchasing both alternatives, and a congestion externality affecting consumption at theaters; this permits a normative study of the impact of smaller release windows (0-3 months) for which there is a scarcity of relevant data. We characterize the market conditions under which a studio should pursue direct-to-video, day-and-date, and delayed video release strategies. During seasons of peak congestion, we establish that day-and-date strategies are optimal for films with high content durability (i.e., films whose content tends to lead consumers to purchase both alternatives) whereas prices are set to perfectly segment the consumer market for films with low content durability. We find that lower congestion effects provide studios with incentives to delay release and price the video to induce multiple purchasing behavior. However, an increase in congestion effects can actually lead to higher studio profitability. We also illustrate that, at the lower range of quality, an increase in movie quality should be accompanied by a later video release time. Surprisingly, however, we observe the opposite result at the upper range of movie quality: an increase in quality can justify an earlier release of the video. Finally, we explore the effect of piracy on studio strategy, finding a day-and-date strategy works better for plain vanilla video offerings such as video-on-demand and reduced-feature DVDs while a delayed release strategy can increase profits for feature-rich Blu-ray offerings.