Academic journal article
By De Vany, Arthur S.; Walls, W. David
Economic Inquiry , Vol. 35, No. 4
On any given day in every major city there may from 50 to 100 motion pictures playing on theater screens. Each is unique and its producer hopes it will catch that bit of magic that lights up the screen and the box office. Yet, few achieve this feat and most lead brief, unpredictable lives. Each film competes for screens and audiences during its brief life against a changing array of imperfect and equally unique substitutes. How is one to understand this market? Is there any sense in which this market could be called competitive and how is it organized? What institutions and contracts are adapted to this market environment and how do they shape the results?
We seek to answer some of these questions by examining the relationship between contractual practices and motion picture hazard and survival distributions. Our modeling is based on a large sample of motion picture revenues and theater bookings during their theatrical runs. Our detailed sample of motion picture lifetimes is a rare look at this fascinating industry whose unusual and complex features challenge economic theory in interesting ways. As Smith and Smith [1986, 506] observe, "Given the interesting characteristics of movies as ideal examples of differentiated products and of the institutional arrangements governing their production and distribution, such increased data availability would make this an exceptionally attractive area for applied micro-economic research."
Much of the empirical work on the motion picture industry has focused on the attributes of successful movies. Smith and Smith  examined the impact of Oscar awards on the cumulative rentals of movies released from the 1950s through the 1970s. In more recent work, Nelson et al. [undated] have quantified the value of an Oscar award on movie revenues using a large panel of data and an event study methodology. In a somewhat broader empirical study, Prag and Cassavant  examined the determinants of movie revenues and marketing expenditures. They found that marketing expenditures and quality are important determinants of a film's success, and that production cost, star actors and awards are positively related to marketing expenses.
In the present paper, we attempt to account for the dynamic patterns in the data. Because each film is unique and plays in its own way, its life as a commercial product in the theatrical market is hazardous. Indeed most motion pictures have short and unpredictable lives because audiences must discover what they like and films compete against an ever-changing cast of competitors. For these reasons it is productive to use evolutionary models of survival and death to model the data.(1) We model competition among films in the theatrical market as an evolving rank tournament of survival.(2) Motion pictures live and die in the box office tournament as they are challenged during their run by a randomly evolving cast of new competitors. The challengers come from films previously released and from newly released films. The contending films are ranked by film-goers, and those with high rank survive and are carried over to the next week. Low ranked films fail and are replaced by new contenders.
These attributes of the motion picture market contribute to increasing returns and give the box office revenue distribution the distinctive convex shape of a tournament prize distribution.(3) The leading products command a disproportionate share of the market and they have longer runs. Even then, a film's rank in the tournament is ephemeral and its life unpredictable. "In fact, of any 10 major theatrical films produced, on the average 6 or 7 are unprofitable, and 1 will break even" (Vogel [1990, 29]).
II. THE MOTION PICTURE EXHIBITION MARKET
Once a film is produced, it is distributed to theaters who "exhibit" it for audiences. The distributor chooses a release pattern - the number and location of theaters in which the film is "booked" or licensed to play. …