On March 21, ISET hosted Dr. In Kyung Kim, Assistant Professor of Nazarbayev University, Kazakhstan, who presented a recently-authored paper entitled 'Effects of chain affiliation in the movie theater industry'.

According to the paper, one of the most salient features in retail and service industries in the past few decades is the rapid spread of chain establishments. In the U.S., for example, the sales of chain firms ($1.3 trillion) were 9.2 percent of the total GDP in 2009 (Kosova and Lafontaine, 2012). As chain firms have been constantly replacing independent, stand-alone establishments, there is also a growing concern regarding the retail sector becoming more concentrated over time. For instance, the Korea Fair Trade Commission and the National Commission for Corporate Partnership imposed restrictions on the entry of new franchisees in the bakery industry in 2013. Despite its importance, however, there is little empirical evidence on the implication of chain affiliation.

The goal of this paper was to examine the effect of chain affiliation on product variety as well as price. It may reduce cost through economies of scale (for instance, sharing advertising and purchasing costs). While this would lower prices, chain-affiliated retailers may offer better products with higher prices. Therefore, it is important to look at both price and non-price effects to examine the implication of chain affiliation on consumers. The author used product variety as a proxy for efficiency gains due to chain affiliation.

In this paper, Dr. Kim considers the movie theater industry in Korea for the following reasons: firstly, the industry has been drastically expanding since the first theater chain opened in 1998, which was subsequently followed by other chains. While they have aggressively opened new theaters during the 2000s, many independent theaters have become affiliated with theater chains. Secondly, by reducing the uncertainty on the quality of their products or services, retailers affiliated with chains can attract more (risk averse) consumers, and thus increase their revenues. While this effect is more prominent in industries with little \repeat business" where consumers have little prior information on product quality, chain affiliation is not restricted to these industries. As a matter of fact, it is a universal trend across many retail and service industries including those that largely serve \repeat consumers" such as supermarkets and movie theaters. This paper complements previous empirical literature on this topic that mainly focuses on testing the existence of the reputation effect (Mazzeo, 2004; Hollenbeck, 2017).

According to Dr. Kim, this paper is closely related to the empirical literature on chain affiliation. Despite its prevalence, few works have explored the nature of chain affiliation. Williams (1999) shows that the greater the industry risk and the more skilled the entrepreneur, the more likely he is to franchise. Mazzeo (2004) studies the determinants of affiliation in the motel industry, and shows that it is more common where uncertainty in the underlying economic environment is greater. Whereas they mainly study determinants of the franchising decision of an independent business owner, Dr. Kim explores the outcomes of chain affiliation. Hollenbeck (2017) quantifies the cost and revenue effects of chain affiliation in the hotel industry. He finds evidence that chain-affiliated properties gain a large chain premium by signaling quality to consumers with low information (reputation effect), whereas they have no cost advantage over independent hotels. “Complementing his work, I explore the implication of chain affiliation for consumers in an industry that largely serves repeat consumers,” Dr. Kim writes.

“Recent literature on the relationship between market structure and prices also bears on this paper in that chain affiliation would lead to an increase in market concentration. Whereas Davis (2010) and Allain et al. (2017) find that prices rise after merger, Simpson and Taylor (2008) and Aguzzoni et al. (2016) conclude that merger has no impact on prices. Hosken et al. (2018) show that the price effect of merger is geographically heterogenous.3 Similar to Genakos et al. (2018), I find evidence of efficiency gains, that is, an increase in product variety, as well as a price increase when the market becomes more concentrated.

“Another strand of empirical literature that is connected to the paper is that on firms' decision on product variety. Argentesi et al. (2016) find that merging firms decrease the assortment depth in order to avoid cannibalization. Bayus and Putsis (1999) and Hong and Lee (2015) investigate whether incumbent firms strategically use product variety as an entry deterrent. Watson (2009) and Ren et al. (2011) study the effect of competition on a retailer's product variety decision. Building on the literature, I examine the effect of chain affiliation on product variety.”

ISET would like to thank Dr. Kim for both his visit and presentation, and hope he will return in the future.

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