Heterogeneity in Vertical Foreclosure: Evidence from the Chinese Film Industry

15:40-17:00, Friday, March 21, 2025

I-206, Boxue Building

Dr. Shilong SUN is a postdoctoral researcher at Queen's University's Smith School of Business and Department of Economics. He holds a B.S. in Finance from Shanghai University of Finance and Economics and a Ph.D. in economics from the University of Wisconsin-Madison. His research focuses on empirical industrial organization and applied microeconomics, particularly international trade, antitrust, and market access regulation. He has supported economic analyses for merger enforcement and antitrust litigation. His work has been published in the Rand Journal of Economics.

How do vertically integrated firms' pricing and product provision decisions change with upstream and downstream competition? We answer this question in the context of the Chinese film industry, where vertical integration is pervasive. Exploiting weekly variation in the set of available films, which changes vertical structure of local markets, we study the effect of vertical integration on prices and showings. Vertically integrated theaters allocate significantly more showings to films they distribute. This effect is particularly pronounced in two scenarios: when an integrated theater faces limited spatial competition, allowing it to divert demand to its own films; and when an integrated film is similar to competing films, making foreclosure profitable. Our results show that integrated theaters internalize a substantial portion of their upstream profits, driving foreclosure behavior that distorts showings. The welfare effects of foreclosure vary with upstream competition between films and downstream competition between theaters, and measures of market competition are predictive of these heterogeneous welfare implications.

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