Analysis of Cinema Demand in Germany (1950-2002): Historical and Empirical Insights

1. XXVIII Simposio de Análisis Económico 2003 Universidad Pablo de Olavide – Sevilla Cinema Demand in Germany Michael Westermann Department of Economics University of Duisburg–Essen Germany December 12th, 2003

2. Guideline • Introduction • Historical Development • Theoretical Framework • Data and Empirical Methodology • Results • Summary

3. 1. Introduction • Subject of this presentation is the German cinema market • Empirical analysis using time series data over a period of 52 years from 1950 to 2002 • Literature on cinema market • Cameron (1986, 1988, 1990, 1999): Analysis of cinema demand and supply, impact of video recorder technology, and rational addiction in cinema demand • MacMillan and Smith (2001): Explaining Post-War Cinema Attendance in Great Britain • Fernández-Blanco and Baños-Pino (1997): Cinema Demand in Spain: A Cointegration Analysis • No existing analysis for Germany

4. 2. Historical Development Figure 1: Cinema Attendance in Germany Source: German Federal Film Board (FFA), Spitzenorganisation der Filmwirtschaft e.V. (SPIO)

5. 2. Historical Development Figure 2: Cinema Supply in Germany Source: German Federal Film Board (FFA), Spitzenorganisation der Filmwirtschaft e.V. (SPIO)

6. 2. Historical Development Figure 3: Gross Real Revenues Source: Spitzenorganisation der Filmwirtschaft e.V. (SPIO), Federal Statistical Office Germany

7. 2. Historical Development – Reasons Reduced demand and supply since the mid/late 1950s • Invention and diffusion of TV sets and Video Cassette Recorders in the 60s and the 70s • Enormous increase of disposable per capita income during the last 50 years leads to an increasing variety of other forms of entertainment Increase in revenues since the 1990s • Structural change within movie markets.

8. 3. Theoretical Framework • Theoretical Approaches for Cinema Demand • Conventional Approach • ATTR(t)=f[P(t),Pother(t),Y(t),Z(t)] • Myopic Behavior • ATTR(t)=f[ATTR(t-1),P(t),Y(t),Z(t)] • Rational Addiction • ATTR(t)=f[ATTR(t-1),ATTR(t+1),P(t-1),P(t),P(t+1),Y(t),Z(t)]

9. 3. Theoretical Framework Empirical Specification of Rational Addiction • Becker, Grosmann, Murphy (1994) ATTR(t)=a0+a1ATTR(t-1)+a2ATTR(t+1)+a3P(t)+a4REUNION • Chaloupka (1991) ATTR(t)=a0+a1P(t)+a2P(t-1)+a3P(t+1)+a4ATTR(t-1)+a5ATTR(t+1)+a6REUNION ATTR(t)=a0+a1P(t)+a2P(t+1)+a3ATTR(t+1)+a4STOCK(t)+a5REUNION

10. 3. Theoretical Framework Simultaneous Approach for Cinema Demand and Supply • Cinema Demand ATTR(t)=f[P(t-1),Pother,Y(t),SCREEN(t-1),TV/VID/PRIVATE] • Cinema Supply SCREEN(t)=g[ATTR(t-2),LOAD(t),POP(t),TV/VID/PRIVATE]

11. 4. Data and Empirical Methodology Data • German Federal Film Board [www.ffa.de] • Spitzenorganisation der Filmwirtschaft [www.spio.de] • Federal Statistical Office Germany [www.destatis.de] Empirical Methodology • Test of integration • Cointegration analysis between cinema attendance, ticket prices and real disposable income • Estimation of the different approaches of cinema demand • Simultaneous approach • 2SLS (identified equations) • SURE (possibly contemporaneous correlation in disturbances)

12. Tabular 1: Cinema Demand – Conventional Approach Note: All variables are in log-form, except dummy variables. Robust covariance matrices are calculated using the Newey-West estimator. The t-ratio for each parameter appears in parentheses. Instrument used is P(t-2). */**/*** indicates significance at the 1%/5%/10% level of confidence. 5. Results

13. 5. Results Tabular 2: Cinema Demand – Myopic Behavior1 1 Estimation Method: Instrumental Variable. Instrument used is P(t-2).

14. Tabular 3: Cinema Demand – Rational Addiction Note: The t-ratio for each parameter appears in parentheses. Robust covariance matrices are calculated using the Newey-West estimator. Instruments used are 4 lagged and 4 leading prices. The variable STOCK was created as the average number of per capita attendance of the past four periods (See Dewenter 2002). */**/*** indicates significance at the 1%/5%/10% level of confidence. 5. Results

15. Tabular 4: Simultaneous Equation Estimation – Demand Note: All variables are in log-form, except dummy variables. Robust covariance matrices are calculated using the Newey-West estimator. The t-ratio for each parameter appears in parentheses. */**/*** indicates significance at the 1%/5%/10% level of confidence. REUNION is dropped in all specifications due to missing significance. 5. Results

16. Tabular 5: Simultaneous Equation Estimation – Supply Note: All variables are in log-form, except dummy variables. Robust covariance matrices are calculated using the Newey-West estimator. The t-ratio for each parameter appears in parentheses. */**/*** indicates significance at the 1%/5%/10% level of confidence. REUNION is dropped in all specifications due to missing significance. 5. Results

17. 6. Summary and Outlook Summary • There is a cointegrating relation between attendance, prices, and income • Strong evidence for habit effects in cinema attendance • No confirmation of the rational addiction hypothesis • But • Biased estimates when not considerating of habit effects • Rational Addiction in annual data must be interpreted carefully • Evidence for interdependencies of cinema admission and screens supplied Outlook • Habit effects may be captured more effectively when using individual data • In order to capture seasonal/regional effects we have to make use of data of higher frequency/cross-sectional data

18. Thank you very much for your attention! www.vwl.uni-essen.de/westermann/ westermann@vwl.uni-essen.de