| This paper analyzes vertical restraints imposed by distributors on movie theaters in the movie exhibition industry. It focuses on two restraints, which together act as a form of exclusive dealing: minimum exhibition period and no screen-sharing. Two questions are asked: what is the welfare cost of these restraints, and is lifting them an equilibrium outcome for the distributors? A structural model of industry demand and supply is estimated using a uniquely detailed panel data set of attendance and movie rental contracts collected directly from a sample of US exhibitors. Counterfactual results indicate lifting the restraints would result in an increase in consumer welfare, exhibitor and distributor profits of 3.9% to 17.1%, 5.6% to 20.3% and 1.8% to 10.1%, respectively. Restraints are likely to persist, however, because distributors face a prisoner's dilemma and do not have unilateral incentives to lift them. Instead, a policy banning restraints might be necessary to realize the gains in welfare. |
