To Review or Not to Review ?

Limited Strategic Thinking at the Movie

Box OfficeBROWN. A, CAMERER. C, LOVALLO. D

American Economic Journal, MicroeconomicsMay 2012

Introduction

• We are in the case of a game with information asymetry.

• The main hypothesis : economic agents can correctly infer what other agents know from their actions.

• A constrasting view : strategic thinking can be limited by cognitive constraint (level-k models, see : NAGEL 1995, STAHL and WILSON 1995, CRAWFORD, COSTA-GOMES and IRIBERRI, 2010).

• This one particular view implies that players with private information can fool other players, whereas in the standard case nobody gets fooled (CRAWFORD, 2003).

Introduction

• The goal of this paper is to determine the strategy of consummers when they are playing a game of asymetrical information and disclosure.

Overview

• The setting is Hollywood. Movie studios generally show movies to critics in advance of their release.

• By doing so, reviews of the movies can be published before the general release of the movies.

• But sometimes, Majors just release a movie without any critics exposure.

• This is called « cold-opening ».

Overview

• Well, these two cases can be reinterpreted as a game.

• A game with a buyer and a seller, where the seller knows the quality of his goods.

• And he can choose, either or not, if he wants to disclose the value of his goods to the buyer.

• This setting is an example of a general class of discolsure game.

Overview

• We have two ways of considering the game :

Buyers are « fully rational »

Buyers are « limited strategy thinking ».

The Setting

• GROSSMAN (1981) and MILGROM (1981) :

In games of strategic disclosure, a fully rational analysis implies that all information should be released at equilibrium

Then, cold-opening should not be considered except for the worst quality of movie

Moreover, at the same level of quality, a « cold-opened » movie and a « regular released » movie should have the same revenue at the Box-Office.

The Setting

• However, this view holds only with several asumptions :

Sellers have private and complete information about their product quality

Disclosure is costless

Monopoly or competitive market with no strategic interactions among competing sellers

Consumers are willing to pay a positive amount for any enhancement of quality

The distribution of available quality is public information

Products are vertically differenciated along a single, well defined dmension of quality

Consumers are homogeneous

Consumers know about a firm’s decision to disclose

Consumers hold a rational expectation on the quality of non-disclosed products.

The Setting

• If we now consider that agents are of the type of « limited strategy thinking », it is shown that Movie studios should consider « cold-opening » not only for the movies of worst quality but also for those who have quality greater than the worst.

• Those movies should receive more revenue (« cold-opening Premium ») than their quality would warrant as moviegoers overestimate their true quality.

The Model

• We consider all the 1404 movies wide released in the U.S. between 01/01/2000 and 31/12/2009 (cold-opening represents 11 % of all these releases)

• For the ratings we consider both the reviews from IMDB (moviegoers) and Metacritic (professional critics)

The Model

• We also consider the number of theatres wich opened the movie, the advertising expenditures, the production budget

• We also consider a set of dummy variables : the year of the release, the genre, the MPAA rating

• The regression model is :

• Where yj is the opening weekend or total box office revenue in

$, qj is the IMDB or Metacritic rating, cj is the dummy variable

for wether the movie was cold-opened or not and Xj a vector of other variables.

The model

• Under the standard equilibrium assumption that all quality of cold-open movie is inferred by logical inferrence of movigoers we should see no difference in revenues, and the cold opening coefficient should be zero.

The model

• Positive effect of cold-opening on box office revenue (increases revenue from 10 % to 30 %)

• It also seems to outlast the first week end of release, and have an effect on the whole cumulative Box-Office revenue

• Loss of significance when removing the choice variables (column 3 and 4)

• Significative effect of the cold-opening when considering only the effect by theatre (column 5 and 6)

• Endogeneity problem in the regression : intuition tells us that a critically acclaimed movie would not benefit from a cold opening

Robustness Check

• Intuition suggests that a movie wich was released « cold-opened » in the U.S. should loose its « cold-open premium » when the information has leaked out.

Robustness Check

Robustness Check

• Cold opening has an effect only on the total revenue of the UK market.

• Mexican market is almost not correlated to the US market.

• In our sample the DVD market is only afected by the cost of production and the IMDB rating.

Robustness Check

• We can suggest that cold-opening is true for a very specific genre of movies.

• In the first regression we were considering all the movie releases, we can imagine that using in the same model big-budget movies (block buster) and smaller, very specific movies wich indeed cold-opened, could lead to a bias in the cold-opening impact.

Robustness Check

Alternative Explanations

• The previous section finds a correlation between cold-opening and higher Box-Office revenue.

• But there can be plenty of other reason for that observed cold-opening Premium.

Alternative Explanations

• Let’s write down the main facts we saw before :

Positive correlation between cold-opening and U.S. Box Office revenue

Same kind of correlation wether quality ratings come from IMDB or Metacritic

Correlation is far less pronounced in non-U.S. markets (especially foreign language markets)

IMDB ratings are lower for cold opened movies than for comparable movies that were not cold-opened

Cold-opening are rare but more and more frequent

Alternative Explanations

• The authors’ first explanation for the cold opening premium is the following :

Movie studios form a judgment, very late in the decision making process, about the audience expectations (E(qm))

If the quality observed by the executives of a studio for a movie is q such that q > (E(qm)), they show the movie to the critics

If q < (E(qm)) they judge the fragility of the audience expectations and deceide wether or not to show the movie to the critics

Alternative Explanations

• The key ingredient in that explanation is that studio executives must think that some moviegoers are strategically naïve, and they are not going to infer the low quality of a movie from the lack of reviews.

• This explanation fits the five facts.

• But there is no observable data for the moviegoers expectations (E(qm)).

Alternative Expectations

• Another explanation provided by the authors about the existence of a cold-opening premium is the fact that critics can angrily react to a movie.

• However this explanation seems pretty weak since critics are supposed to be objective, and besides when it comes to cold-open movies, fans seem to be way more punitive in their ratings than professional critics.

• This explanation does not hold.

Alternative Explanations

• A third explanation is what the authors are calling the consumer-critic heterogeneity.

• Idea is that the cold opened movies are aimed at an audience with tastes wich are different than critics’.

• A good way to check wether cold opened movies have any differences in sensitivity to critic ratings is to examine by genre.

• For exemple fans of exploitation movies are more likely to go to a movie with low critic ratings than fans of other genres.

• Premium would then be a results of the cold opened movies into these genres.

Alternative Explanations

Alternative Explanations

• The last table shows that our last explanation does not hold.

• Indeed, in the cold-opening movies we have, all kind of genres are represented.

• There is no sign of genres-selection effect in the cold-opening process.

Alternative Explanations

• A final explanation provided by the authors is the fact of not knowing about the review.

• In our previous cases we were considering moviegoers to be perfectly informed about a movie quality and the decision of a studio to discolse information or not.

• We write « a » the proportion of consumers uninformed about a movie quality : 0 < a < 1

• We write « b » the proportion of consumers uninformed about a studio’s decision to cold-open a movie : 0 < b < 1

Alternative Explanations

• Note that our previous setting was of the kind a = b = 0

• We consider three cases

• The first one : a = b > 0

• In that case movie studio will just ignore the proportion of consumers that is uninformed (1 – a = 1 – b) and act the same as in our previous case.

Alternative Explanations

• A greater number of moviegoers are unaware of the quality of a movie than when it is cold-opened (a > b ≥ 0)

• This scenario is the least plausible : it would mean that access to information is very costly or recquires some skills.

• In such cases FISHMAN and HAGERTY (2003) shows that if this proportion is large enough, no studio would reveal quality.

Alternative Explanations

• A greater number of moviegoers are uninformed about a movie being cold opened thant about its quality (b > a ≥ 0)

• If one type was aware of the quality but not aware of cold-openings, he could rationaly infer a cold-opening even when he does not possess information about a movie.

• In this case, the model predicts that there will be a disappointment in low quality movies for consumers and that moviegoers will experience a greater staisfaction for good quality movies when they are cold opened.

• The model also predicts that there will be no difference between ratings from IMDB and professional ratings, wich does not hold with our fact 4.

Conclusion

• Assuming that cold-opening premium is real, cold-opening a movie is a studio’s best response to limited strategy thinking of movigoers.

• Asymetrical case when inexperimented players (moviegoers) are facing experimented players (studios executives)

• Results are inconsistent with the hypothesis that strategic thinking of the consumers will lead to a full disclosure.

• We have to put in perspective that the whole movie market was facing a huge transition during the chosen time period (switch from a theatre movie based industry to a home video market).

Appendix

Appendix