Heterogeneity in Vertical Foreclosure: Evidence from the Chinese Film Industry

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. Theaters allocate significantly fewer showings to non-integrated films. This foreclosure effect is particularly pronounced in two scenarios: when an integrated theater faces limited spatial competition, and when an integrated film is similar to competing films. To measure welfare effects, we estimate a model of consumer preferences and theater showings choice using a novel method that combines standard demand data with film ratings data. Our results show that integrated theaters internalize a substantial portion of their upstream profits, driving foreclosure behavior that distorts showings. Counterfactual simulations show that vertical integration increases consumer welfare by 2.4% in the median market, but reduces consumer welfare in 7% of markets. The welfare effects of foreclosure vary with upstream competition between films and downstream competition between theaters, and we show that targeted antitrust policy that removes of integration based on measures of market competition can substantially increase welfare.