Revenue Sharing Vertical Contracts in the Movie Industry: A Theoretical Analysis

Baranchuk Nina (), Seetharaman Seethu () and Strijnev Andrei ()
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Baranchuk Nina: Finance, University of Texas at Dallas, Richardson, Texas75080-3021, USA
Seetharaman Seethu: Rice University, Houston, TX77005, USA
Strijnev Andrei: The University of Texas at Dallas, Richardson, TX75080, USA

Review of Marketing Science, 2019, vol. 17, issue 1, 81-116

Abstract: For many years, the movie industry has been characterized by a unique (compared to other industries) type of vertical contracting practice, called sliding-scale contracting whereby the distributor (studio) takes a much larger (usually around 70%) share of box-office revenues than the exhibitor (theater) in the week of a movie’s release, with the exhibitor’s share increasing, in gradual steps, over subsequent weeks. In this paper, we propose a game-theoretic model that provides a new rationale for these contracting choices. Specifically, we show that these contracts effectively resolve conflicts of interest between studios and theaters over movie release timing and display length, in a way that is beneficial for both parties. Our model also stipulates conditions under which sliding scale become dominated by aggregate deals, i.e. deals based on total rather than weekly box office revenue. The testable predictions based on these conditions can be used by future empirical research once the available evidence on the use of aggregate deals in practice goes beyond anecdotal.

Keywords: movie distribution; vertical contracts; revenue sharing contracts; sliding-scale contracts; aggregate contracts; movie release timing (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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DOI: 10.1515/roms-2019-0059

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