The U.S. motion picture industry has long dominated world markets, but its recent expansion has been especially dramatic. Hollywood's current share of the world film market has doubled since just 1990, whereas the European film industry is about one-ninth the size it was in 1945. In the 1960s foreign films constituted 10% of the U.S. market; by 1986 they made up 7%, and today only about three-quarters of 1%. Remarkably, the global dominance of American films has evolved despite extensive protectionist efforts by other countries and virtually no barriers to trade by the United States. As to other countries, we might expect to find much more active, effective protectionism against a culturally sensitive product than against generic products and services. The characteristics of the product would suggest that the fate of U.S. motion picture exports would have at least mirrored the decline in American textiles and steel. To the contrary, the U.S. motion picture industry has been winning the global ballgame despite three strikes against it--protectionism, rising real domestic costs, and relatively stable real domestic ticket prices.
We address this quandary of why protectionism fails in a cultural industry where protectionism is expected to succeed. We do so first by examining the structure of the U.S. domestic motion picture industry. As it turns out, this structure provides a special impetus for exports. We next examine the nature of protectionism in a world of soaring demand for films. In this setting the American movie is a world product in a different sense than, say, the automobile. The American movie is a world product because its presence is dominant; the automobile is a world product mostly because its parts are interchangeable. By its nature the American movie appears to have few substitutes, even though Hollywood can use foreign locales for filming.
American movies encounter different protectionist strategies in different places. The divides fall either side of highly industrialized nations versus less developed nations, English-speaking versus non-English-speaking people, literate versus less literate people, and so on. Some countries and regions combine fees with subsidies, whereas others engage in piracy, quantitative, or service restrictions. Few countries have traditional tariffs.
Once we have defined the characteristics of the U.S. movie industry and foreign strategies of protectionism, we can better identify the relevant variables and appropriate models to explain not only industry exports but also the failure of protectionism. We end up with a complex gravity-iceberg model as a method of estimating U.S. motion picture exports. Because of the nature of the industry, our approach shares some of the characteristics of earlier studies in which economies of scale and imperfect competition are present. Although early gravity models have focused on spatial distance, some economists have interpreted the effects of "distance" as possibly nonphysical. Thus, "cultural distance" applied to a culturally sensitive industry could be a reasonable interpretation for distance effects. After using microdata to explore protectionist strategies, we then aggregate these data for the formal model.
II. STRUCTURE OF THE U.S. MOTION PICTURES INDUSTRY: WHY EXPORT?
What determines the structure and size of market for American films'? Movie studios are both producers and distributors. Though movie studio revenues depend directly on net revenues (gross revenues minus total costs), the size and extent of the movies market remain tightly linked to gross revenue, including domestic box office. From the perspective of the studios, aggregate market size (S) is
(1) S = [n.summation over (i=1)] ([R.sub.i] + [X.sub.i]),
where [R.sub.i] is gross domestic box office and [X.sub.i] is the U.S. dollar value of exports (rentals, video tapes) of the ith of n movie studios. …