Competition and Strategic Budget Choices in the Motion Picture Industry*

Abstract

In this article, we study the effect of differentiation on firms' optimal investments in advertising and product quality in the specific context of the motion picture industry. To guide our empirical analysis, we develop a stylized model uncovering that competition in advertising is the highest for intermediate levels of horizontal differentiation, while product quality increases monotonically in differentiation. We corroborate our theoretical predictions with a large dataset on the movie industry confirming both the inverted U‐shaped relationship between advertising and differentiation, and the monotonically increasing relationship between product quality and differentiation.