The impact of supplier bargaining power on the advertising costs of movie sequels

Abstract

Movie sequels, a type of brand extension, are prevalent in today's motion picture industry. Prior literature on brand extensions supports the intuition that attaching established brand names (e.g., titles of box-office hits) to new products decreases advertising costs. We counter this intuition and examine factors that may increase advertising costs for movie sequels. Specifically, we investigate the consequences of asset specificity and bargaining power-concepts from transaction cost economics-in the context of the motion picture industry. We find a positive relationship between the bargaining power of the movie studio's suppliers and advertising expenditures for the movie sequel. We also find evidence of a moderating effect: higher bargaining power of the movie studio dampens the impact of supplier bargaining power on advertising. This is the first study to measure the effect of supplier bargaining power on movie studios' marketing decisions. In a broader context, our findings not only challenge the notion that brand extensions are cost saving, but are also novel in linking transaction cost constructs to the advertising behavior of firms.

Economics of motion pictures: the state of the art

“…In the next paper in this special issue, Ma et al (2015) examine the role of bargaining power in influencing studios' expenditures on advertising and promoting sequel films. The brand-extension literature suggests that sequels, with their inherent brand-name recognition, should require studios to invest less in advertising relative to non-sequels.…”

Attaining Bargaining Power over the Intermediate Firm from Supplier-Buyer Alliance: A Case from the Motion Picture Industry

“…The bargaining power of ordinary production crew ranges from low to medium, mainly because, first, there are many qualified suppliers in the film project; second, existing companies face low supplier switching costs in the early stage of production; third, due to their asset specificity, the production staff are heavily dependent on the industry. The asset specificity refers to the suppliers' unique set of professional knowledge and skills which have significantly more value in the motion picture production than their other intended use [8] [9]. They can increase their bargaining power through accumulating working experiences and exceling in professional skills, which differentiate their offerings.…”

“…The movie was a failure at box office, if not a financial disaster, for the studio. According to IMDB.com, an online database for movie, TV show, and celebrity rela ted information widely accepted in the marketing literature [8], the film's worldwide gross was only $658 million, despite its estimated $300 million budget. The direct reason for the poor quality and performance of Justice League was the inconsistency cau sed by the halfway step-out of the original director Zack Snyder and the takeover of director Joss Whedon, who was later brought onboard by the studio.…”

The economics of movies (revisited): A survey of recent literature

“…With respect to relevant strategic supply-side considerations, studies investigate the relationship between advertising and sequel (as well as parent) films (Kim & Bruce, 2018), while other research examines whether changes to the creative team between installments affect outcomes (Filson & Havlicek, 2018;Opitz & Hofmann, 2016). Related research investigates the relationship between the increased bargaining power of stars in sequel films with advertising (Ma et al, 2014a). Based on an historical analysis, Pokorny et al (2019) highlight that sequels have become an important risk management tool of studios, who operate a portfolio approach to film production.…”