Dynamic Common Agency, Vertical Integration, and Investment : The Economics of Movie Distribution

This paper analyzes the impact of vertical integration on investment and other strategies in a dynamic common agency framework. Movie distribution is used as a motivating example. The model matches several facts about movie distribution; distributors avoid head-to-head new hit releases, hits have longer runs than flops, and distributors receive the lion?s share of value generated by hits. Welfare comparisons show that integration is privately profitable and may improve social welfare even though it reduces industry profits. The effects of integration on strategies and welfare depend critically on how integration affects the bargaining power of the non-integrated firm.