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05 Jul 2006Working Paper Summaries

Advertising and Expectations: The Effectiveness of Pre-Release Advertising for Motion Pictures

by Anita Elberse and Bharat N. Anand

This research examines how advertising affects market-wide sales expectations for pre-release movies. The authors use data on advertising expenditures and an online stock market simulation, The Hollywood Stock Exchange (HSX), to track more than 280 movies released between 2001 and 2003. Their findings show that advertising affects the updating of market-wide expectations prior to release, and that this effect is stronger the higher the product quality. Key concepts include:

Stock market simulations, such as the Hollywood Stock Exchange, can provide data on test markets, and provide clues about the quality of movies and the appeal of initial advertisements.
Studios should spend less money on advertising low-quality movies.

Author Abstract

What is the effect of pre-release advertising on the demand for a product? And does the magnitude of that effect vary according to the quality of the good? We empirically examine these questions in the context of the motion picture industry. We make use of a unique, proprietary data set that covers weekly television advertising expenditures, weekly expectations of the market performance, and quality measures for a sample of nearly 300 movies. We find that advertising affects the updating of market-wide expectations prior to release, and that this effect is stronger the higher the product quality. The latter suggests that advertising plays an informative--and not simply a persuasive--role.