Digitization and Distribution: The Ends Against the Middle

Abstract

We examine the transition from 35mm film to digital cinema technologies in the movie industry. First, we develop a theoretical model of theaters' scheduling decisions that allows us to examine the impact of digitization—a distribution cost reduction—on product assortment. The model predicts that digitization increases (decreases) the degree to which theaters concentrate the supply of screens to the top movie (namely supply concentration) when there is a supply shortage (excess) of screens for the movie. Second, we empirically investigate the South Korean movie market using detailed data on theaters’ daily scheduling decisions between 2006-16. We use two quasi-experimental analyses to assess the overall impact of digitization on two assortment dimensions: product variety and supply concentration. Although digitization helps theaters provide consumers with increased product variety, we show it also leads theaters to disproportionately increase supply concentration. Third, we test the model predictions about the impact of digitization on concentration by exploiting within-week variation in demand for movies. As predicted, we find that the increase in supply concentration is limited to weekend evenings. In other time slots, digitization decreases concentration. Overall, this study highlights the role of distribution costs as a mechanism through which digitization reshapes product assortment.

Keywords: Digitization, Intermediation, Product Variety, Concentration, Movies, Quasi-Experiment

JEL Classification: D22, L11, L82, O33