Friday, December 7, 2018

Vertical Integration in Hollywood

The WSJ reports that the US DOJ is "mulling over" repealing many rules governing how movies are distributed. The so-called Paramount decision of 1948 severely restricted movie studios' ability contract over how movies would be displayed. In the intervening 70 years, this decision has been the subject of much scrutiny by economists. As related in Hanssen's (2010) examination of how vertical integration facilitated consumer benefit enhancing length-of-run decisions:
The passage of time has not been kind to the economic arguments underlying the Paramount decision. Kenney and Klein (1983) and Hanssen (2000) provide efficiency rationales for block booking. De Vany and Eckert (1991) and Orbach and Einav (2007) discuss how minimum ticket prices reduced monitoring costs. De Vany and Eckert (1991) argue that the system of runs, clearances, and zoning served to provide low-cost access to large numbers of filmgoers.

Granted, these and other studies resulting from the decision greatly enhanced our understanding of when vertical foreclosure might harm consumers. However, I am not sure this somewhat esoteric knowledge has been worth 70 years of inefficiency, lost consumer surplus, and diminished producer profit.

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