Government Intervention to Prevent Bankruptcy: The Effect of Blind-Bidding Laws on Movie Theaters

Article excerpt

I. INTRODUCTION

The recent bailouts of the U.S. automotive and banking industries have generated renewed concern about the incentives that government intervention give failing firms in need of significant restructuring. Government intervention to help failing firms has a long and varied history. For example, the Robinson-Patman Act (1936) has been widely criticized for diminishing the cost advantages of larger, more efficient stores at a time when the retail industry was experiencing an increase in average store size in response to changing demographics and lower transportation costs (Posner 1976; Ross 1984). (1) A large literature also suggests a loss in efficiency resulting from governmental restrictions on hostile takeovers, such as the Williams Act, given that the threat of a hostile takeover can be a mechanism for encouraging existing management to restructure failing firms during periods of rapid technological change (Holmstrom and Kaplan 2001).

While identifying the impact of a specific government intervention empirically is often difficult, the motion picture industry presents a unique opportunity for a natural experiment of government intervention to save failing firms. As a result of the Supreme Court's 1948 landmark decision, United States vs. Paramount et al., the five major, vertically integrated studios/distributors were no longer allowed to own theaters. The major studios eventually adjusted to this decision and to the changes in postwar demographics by producing a smaller number of large budget films and changing their distribution strategies. An important change in their distribution strategy was an increased use of nonrefundable guarantees and blind bidding, which required theater owners to bid 6 months to 1 year in advance of a film's release. As bids were submitted prior to the completion of the movie, theater owners bid without seeing a finished copy. (2)

In response to complaints from theater owners that blind bidding and nonrefundable guarantees were shifting excessive risk to them and would drive them out of business, the federal government initially limited the use of blind bidding but then removed all restrictions in the mid-1970s. Theater-owner trade associations soon convinced 24 states to pass laws banning blind bidding. Seven of the blind bidding laws also limited the use of nonrefundable guarantees. In this study we find that while the strictest of the state laws (that is, the ones that also limited the use of nonrefundable guarantees) helped some theater owners remain in business longer, this effect was short-lived. We show empirically that the laws, whether they limited guarantees, could not offset the impact of significant structural changes in the market. Prior to the passage of the first law, some theater owners were beginning to increase the number of screens per theater in order to diversify risk and exploit economies of scale. We find that the number of screens per theater was the main factor influencing the survival of theater chains during this time period. While our main focus is the impact of the laws on theater survival, for completeness we also offer empirical evidence concerning the conflicting claims of the theater owners and studios about the effect of laws banning blind bidding and guarantees on ticket prices and release dates of new movies. We find no support for theater-owner assertions about higher ticket prices in states that permitted blind bidding and the studios' assertions about longer delays in release dates in states that banned blind bidding.

In the next section, we review the historical evolution of the blind-bidding laws and the literature on contractual relations between the studios and theater owners. In Section HI, we present the empirical models and results concerning theater survival. Sections IV and V present the evidence of the laws' impact on prices and delays in release dates. Section VI provides a conclusion.

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