Journal Article | Information Economics and Policy | October 2007

The Effectiveness of Pre-Release Advertising for Motion Pictures: An Empirical Investigation Using a Simulated Market

by Anita Elberse and Bharat N. Anand

Abstract

One of the most visible and publicized trends in the movie industry is the escalation in movie advertising expenditures over time. Yet, the returns to movie advertising are poorly understood. The main reason is that disentangling the causal effect of advertising on movie sales is difficult because of the classic endogeneity problem: movies expected to be more popular (for example, those with a talented director or well-known actor) also receive more advertising. In this study, we use data on a movie's stock price as it trades on the Hollywood Stock Exchange, a popular online market simulation, to study the impact of movie advertising. Since the entire dynamic path of a movie's stock price--a measure of revenue expectations for the movie--prior to release is observed, one can sweep out any time-invariant unobserved factors that affect both advertising and expectations. Furthermore, certain institutional constraints in the advertising allocation process imply that the first-differenced advertising series is plausibly exogenous over the sample period. We find that advertising has a positive and statistically significant effect on expected revenues, but that the effect varies strongly across movies of different “quality.” The point estimate implies that the returns to advertising for the average movie are negative.

Keywords: Advertising; Stocks; Investment Return; Price; Revenue; Quality; Mathematical Methods; Motion Pictures and Video Industry;

Citation:

Elberse, Anita, and Bharat N. Anand. "The Effectiveness of Pre-Release Advertising for Motion Pictures: An Empirical Investigation Using a Simulated Market." Information Economics and Policy 19, nos. 3-4 (October 2007): 319–343. (Special Issue on Economics of the Media.)