The American Movie Industry: The Business of Motion Pictures

By Gorham Anders Kindem | Go to book overview

new firms enter the industry, increase the supply of product, and thereby drive down the price.

At the other extreme is the possibility of a "shared" monopoly among the firms. In this scenario, the firms come to realize that every price cut, every new advertising campaign, and every new product innovation results in reaction in kind from one's competitors. While the firm initiating the action may achieve a gain in sales, that gain will be short-lived once the other firms match these price cuts or additional advertising expenditures. In fact, it is frequently true that such action leads to a price or advertising war. When all the dust has settled, relative market shares may be just about the same, but costs have risen, prices have fallen, and profits have significantly decreased.2

After a few of these price or advertising wars, it becomes clear to all competitors that it is a wiser policy to cooperate with each other than to fight it out in the trenches. If everyone "agrees" to maintain high product prices, low input prices, or limited advertising expenditures, then the industry as a whole can generate high profits, and each firm's share of those profits will be "greater" than in a cycle of rivalrous behavior. Of course, direct consultation with competitors over prices, output, territorial exclusivity or the like is illegal under SECTION 1 of the Sherman Antitrust Act. Nevertheless, as the oligopoly matures and the firms come to know and trust each other, a "meeting of minds" can occur, and each competitor acquires the ability to predict with near certainty the behavior of its rivals under differing economic conditions.

Certain common cooperative practices become routinized and regularized in the industry, and no open consultation need occur for the oligopolists to communicate to each other the beneficial policy for the entire industry. Price leadership and standardized markup procedures are two common devices for such "signaling" in an industry.3 If this type of tacit cooperation operates smoothly, the end result may be a "shared" monopoly which generates higher prices for the consumer and a tendency for the industry to maintain the status quo rather than be innovative.

The television networks have maintained a position somewhere between the two extremes of competition and "shared" monopoly. There is a wide variety of areas in which the networks can choose to compete or cooperate. Cooperation would be expected in those areas which are so visible that cheating is easily detected and retaliation can be quick.4 These would include advertising prices, commercial minutes per hour, station affiliation payments, and the percentage of original versus repeat programming.

There is evidence to corroborate a spirit of cooperation in these profit spheres. The networks follow similar policies in setting and changing ad

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