Dynamic Common Agency and Investment: The Economics of Movie Distribution

This article analyzes investment and other strategies in a stationary dynamic common agency model of movie distribution. Contract choices interact with other strategic choices. The model explains several facts; movie distributors avoid head-to-head new hit releases, hits have longer runs than flops, and distributors receive the lion's share of value generated by hits. The model yields testable implications about the effects of vertical integration on inventory turnover, release decisions, run lengths, and allocations, but the results depend on how integration affects relative bargaining power. Vertical integration is privately profitable and may improve social welfare even though it reduces industry profits. (JEL L14, L22, L82, C61) Copyright 2005, Oxford University Press.