The Impact of Bundling on Product Variety: Evidence from the Paramount Antitrust Case of 1948

Abstract: Bundling has been over the years the origin of much antitrust litigation due to its impact on quality, variety and innovation. On the other hand, firms have argued that bundling lowers transaction and search costs and therefore its net effect on welfare is ambiguous. In the antitrust case of US vs. Paramount, the Supreme Court mandated in 1948 that Paramount and seven other studios to sell their US theater holdings and stop contracting practices such as bundling and price fixing. In this paper, I use this exogenous change in contractual practices in the US motion picture industry to measure the impact of bundling on product variety. For this purpose, I use a new data set collected from old Variety issues between 1945 and 1955. This data set provides weekly movie theater information on prices, revenues, theater ownership and movie screening for an unbalanced sample of 393 movie theaters located in 26 different cities in the US resulting in over 142,000 observations. The high frequency of the data allows the analysis to use city, year and theater fixed effects while focusing on the before and after of the change in contractual practices due to the Paramount decree. Preliminary findings show that movie theaters previously owned by major studios decreased the percentage of movies screened from their parent studios after disintegration and therefore increased their movie variety in their screens. The paper also offers results on the change in independent theaters.