Accommodate or Fight? Responding to Entry in the Movie Theater Industry
(A2020-62504)

AUTHORS

In Kyung Kim, Nazarbayev University; Mushegh Harutyunyan, Nazarbayev University GSB

KEYWORDS

competitive strategy; entry; capacity allocation

ABSTRACT

We investigate how incumbent movie theaters respond to a competitor’s entry by adjusting their admission prices, movie portfolio and seat capacity allocation across movies. The conventional wisdom suggests that a competitor’s entry will induce the incumbent to reduce its price and improve its product offering in order to avoid losing too many sales to the entrant. We find that an incumbent chain theater’s response to an entry is relatively more accommodating towards the entrant, while an incumbent independent theater tends to be more aggressive. Namely, after entry, the incumbent chain theater becomes less likely to include the most popular movies in its portfolio, reduces the seat share for such movies, and avoids reducing its admission prices. By contrast, an incumbent independent theater reduces its admission prices, and tends to include the most popular movies in its portfolio more frequently. Furthermore, we find that the entering theater charges lower admission prices when the incumbent is independent than when it belongs to a chain. Hence, our results show that the incumbent theater’s organizational type may lead to qualitatively different competitive dynamics between the incumbent and the entrant.