An Empirical Investigation of Signaling in the Motion Picture Industry

Abstract

The contribution of this research lies in the use of real-world data to test several hypotheses about the role of two signals—sequels and advertising expenditures—in the motion picture industry. The authors analyze the data with a dynamic simultaneous-equations model of the drivers and the interrelationships of the behaviors of movie audiences, studios, and exhibitors. Specifically, the authors test for the attenuating role of third-party information sources, such as critics' review consensus and cumulative word of mouth, on the strength of the two aforementioned signals. The authors find evidence of such an effect both at the release phase across movies and over the postrelease phase for any movie. Notably, they hypothesize and show that sequels and advertising expenditures have a positive interaction effect on box office revenues. This is an important finding because though most firms use multiple signals for their products, empirical work on the interaction of two or more signals is rare. This study offers several new and interesting empirical insights into the market dynamics of the motion picture industry.