Asymmetric cultural discounting and pattern of trade in cultural products: Empirical evidence in motion pictures

• Date: 01 November 2019
• Published date: 01 November 2019
• DOI: http://doi.org/10.1111/twec.12861
• Author: Sunny Y. Shin,Jordi McKenzie

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wileyonlinelibrary.com/journal/twec World Econ. 2019;42:3350–3367.

© 2019 John Wiley & Sons Ltd

DOI: 10.1111/twec.12861

ORIGINAL ARTICLE

Asymmetric cultural discounting and pattern of

trade in cultural products: Empirical evidence in

motion pictures

Sunny Y.Shin

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JordiMcKenzie

Department of Economics,Macquarie University, Sydney, NSW, Australia

KEYWORDS

cultural discount, cultural trade, home market effect, motion pictures

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INTRODUCTION

The home market effect (Helpman & Krugman, 1985; Krugman, 1980) predicts that a country with

larger demand net exports in the monopolistically competitive industry as a result of interaction be-

tween increasing returns to scale and transport costs. While most empirical applications have been on

the manufacturing sector (Davis & Weinstein, 1999, 2003; Feenstra, Markusen, & Rose, 2001; Hanson

& Xiang, 2004; Head & Ries, 2001), studies on the home market effect in the service sector have also

emerged. In particular, US dominance in the global audio‐visual industry has been considered in a

number of studies (Hanson & Xiang, 2009; Lee & Waterman, 2007).1

In applying the home market effect to the audio‐visual sector (or other service sectors where trans-

port costs are negligible), it is necessary to introduce some other type of trade friction that replaces the

role of transport costs. For example, this could be a measure of ‘cultural discount’ as considered by

Rauch and Trindade (2009). Cultural discounting represents the tendency for consumers to value for-

eign cultural products less because it is difficult to appreciate unfamiliar social values and/or lan-

guages.2 Cultural discounting can be considered as a type of trade friction in the consumption of

1 The large domestic film market of the US has been identified as an explanation for the global dominance of Hollywood

films, for example, Wildman and Siwek (1988) and Hoskins and Mirus (1988).

2 The idea that cultural difference plays a role in determining the trade volume is not unique to trade in cultural products. For

example, it is a conventional practice in estimating the gravity equation to include cultural variables such as the use of

common language.

This paper is a revised version of Sunny Y. Shin's PhD thesis. Earlier versions were presented at: (a) Association of Cultural

Economics International Conference, Montreal (June, 2014); (b) Sydney University, Sydney (November, 2015); (c) 17th

Mallen Conference of Filmed Entertainment Conference, New York (November, 2015); (d) Association of Cultural

Economics International Conference, Valladolid (June, 2016); (e) Portsmouth University (July, 2016); and (f) European

Workshop on Cultural Economics, Krakow (September, 2017). We thank the editor and the anonymous reviewer for valuable

comments that improved our final manuscript.

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SHIN aNd MCKENZIE

cultural products such as films, music, books and so on.3 Although interchangeably used in some

contexts, our understanding is that the concept of cultural discount differs from cultural distance or

cultural proximity: the former is about familiarity, whereas the latter, similarity. Generally speaking,

similarity would enhance familiarity, and however, the two do not necessarily refer to the same thing.

Although the home market effect under cultural discount, which can be considered as a special

case of the original proposition, provides a seemingly intuitive explanation of US dominance in the

global audio‐visual sector, there are two strong reasons that suggest it is not the only channel that

determines the pattern of trade in the film industry. First, the global market share of US films has

been increasing despite the declining relative size of US domestic film market over the last decade or

so (Walls & McKenzie, 2012), which is the opposite to the predictions implied by the home market

effect. Second, the home market effect itself does not explain other cases of unbalanced trade patterns,

where smaller economies are net exporters or larger non‐US. countries are net importers. For example,

the home market effect does not have a say as to why the UK net exports films to China.

In this paper, we relax the assumption of cultural discount symmetry in the home market effect

model and propose asymmetric cultural discounting as another channel through which the pattern of

trade in cultural products is determined. Asymmetry in cultural discounting addresses the commonly

observed phenomenon that the appreciation on culture between two countries is not mutual.4 Although

in different language, asymmetric cultural discounting has been discussed in a number of studies as a

potential explanation for the imbalance in trade in cultural products (Frank, 1992; Hoskins & Mirus,

1988; Schulze, 1999). To date, such an effect has not been addressed within new trade theory. We in-

corporate this idea into the standard home market effect model (Helpman & Krugman, 1985) and

propose that, in addition to the home market effect, a country whose cultural contents are relatively

less discounted (i.e. more appreciated by or accessible to foreign consumers)5 tends to become a net

exporter in the service sector under increasing returns to scale.

We test for asymmetric cultural discount (‘cultural discount effect’ henceforth) using international

box office revenues given that the film industry satisfies many of the assumptions of the theoretical

model. We find evidence that supports the existence of this effect. Notably, a country that produces

films that are less culturally discounted (i.e. more accessible) tends to have a higher production share

against its trading partner. In operationalising the degree of asymmetry in cultural discount, we de-

velop a proxy based on tourist‐arrival statistics.

In Section 2, we outline the theoretical model and empirical specification. In Section 3, we explain

data and present a preliminary analysis. In Section 4, we present estimation results along with identi-

fication issues. In Section 5, we summarise and conclude.

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THEORY

2.1

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Model with asymmetric cultural discounting

In predicting the pattern of trade in cultural products, we modify and extend the seminal home market

effect model (Helpman & Krugman, 1985, Section 10.4, ‘the reference model’ hereafter) by replacing

3 The term ‘cultural discount’ was initially coined by Hoskins and Mirus (1988) in explaining the US dominance in television

programming trade.

4 Why this asymmetry occurs is out of scope in this paper but is an interesting question. Some explanation can be found in

Hoskins and Mirus (1988) who illustrate accounts for low/high cultural discount applied to the US exports/imports of TV

programmes.

5 One may view this notion of cultural accessibility in relation to that of ‘cultural hegemony’.