Parallel Importation and Service Quality: An Empirical Investigation of Competition between DVDs and Cinemas in New Zealand

Abstract

Investigations into the causes and effects of parallel importing have concentrated on price discrimination but arbitrage can also occur on non-price dimensions. Using a natural experiment in the New Zealand film distribution industry between May 1998 and November 2001 we examine the effect of parallel importing on quality as it relates to the timing of the availability of film media. We demonstrate that a) cinema revenues were undermined as consumers substituted viewing films on parallel imported DVDs for thecinema format and b) that studios responded to the threat of parallel imported DVDs by bringing forward the release of films into New Zealand cinemas. The reduced delay between US and New Zealand cinematic release dates is shown to be consistent with the introduction of competition when timing is a dimension of quality and choice. We conclude that parallel importation of DVDs almost certainly resulted in a net increase in welfare in New Zealand.