Vertical Integration During the Hollywood Studio Era

Abstract

The Hollywood "studio system" - with production, distribution, and exhibition vertically integrated - flourished from the late teens until 1948, when the U.S. Supreme Court issued its famous Paramount decision. The Paramount consent decrees required the divestiture of affiliated theater chains and the abandonment of a number of vertical practices. Although many of the banned practices have since been posited to have increased efficiency, an efficiency-enhancing rationale for ownership of theater chains has not been developed. This paper explores the hypothesis that theater chain ownership promoted efficient ex post adjustment in the length of film runs. Post-contractual run length adjustments are desirable because demand for a given film is not revealed until the film is actually exhibited. To test the hypothesis, the paper employs a unique data set of cinema booking sheets. It finds that run lengths for releases by vertically integrated (into exhibition) film producers were significantly - economically and statistically - more likely to be altered ex post. The paper also discusses additional contractual practices intended to promote flexibility in run lengths, some of which were instituted following the Paramount divestitures.

Keywords: vertical information, contracting, vertical restraints, motion pictures

JEL Classification: D2, D4, D8, G3, K2, L1, L2, L4, L8