Vertical Integration and Market Foreclosure: Empirical Evidence in the Korean Movie Industry

This paper examines how the firms¡¯ foreclosure incentive is affected by the degree of vertical integration, measured by the number of vertically integrated firms, in vertically-related markets. Using seven-year daily screening data in the Korean movie industry, we empirically investigate how the exhibition behavior of vertically integrated and separated theaters respectively responds to the change in the degree of vertical integration. The vertical separation of a formerly integrated firm in 2007 serves as a structural break in the market structure. Our results show that the foreclosure incentive of vertically integrated firms generally decreases as the degree of vertical integration decreases (i.e., the market is composed of more separated independent firms). However, we find the integrated firms strengthened foreclosure to the newly separated firm after the breakup event. This seems to indicate the strategic behavior of existing integrated theaters to weaken the market position of their formerly integrated rival. We also observe the newly separated firms behave more like other independent firms with no sign of foreclosing behavior.