Trade, Endogenous Quality, and Welfare in Motion Pictures

Trade benefits consumers and producers, and the effects of trade can operate through product quality: larger markets can have greater investment and therefore higher quality products. We explore this channel in the movie industry, where quality is produced exclusively with sunk costs, these sunk costs are high, and international revenue is important. We develop a structural econometric model of the global movie market, which we use to document that half of world consumers’ – and virtually all of US consumers’ – gains from trade operate through quality. We also analyze the counterfactual impact of the elimination of European film subsidies.