Movie Economics

by Russ Roberts on January 4, 2007

in Movies

I’ve been browsing over at Art De Vany’s blog. He has very provocative things to say about fitness, diet, sports and the movie business. He notes, for example, the parallels between movie making and pharmaceutical research–a few blockbusters generate an overwhelming proportion of the profits.

Here’s an excerpt from an Orley Ashenfelter review of De Vany’s book, Holywood Economics:

This is a remarkable assembly of two decades of Arthur De Vany’s
efforts to study the movie industry using the tools of modern
economics. Okay, movie lover, if that sounds dry, what about a
hard-headed, dollars-and-cents answer to film critic Michael Medved’s
question: "Does Hollywood make too many R-rated movies?" De Vany’s
answer: a resounding "yes."

His answer isn’t based on a red state versus blue state discussion,
but on careful analysis showing that, at the production rates in the
period he examined, G-rated movies had lower risk at each rate of
return than did R-rated movies. From 1985 to 1996, De Vany found,
Hollywood churned out more than 1,000 R-rated movies. If it had made
more than a mere 60 (you read that number right) G-rated movies in that
stretch, De Vany asserts, the industry would have been far better off
economically.

Hollywood Economics brings to the movies what some call the New
Economics of Art and Culture. A key ingredient in his approach is what
he considers the industry’s key characteristic, what screenwriter
William Goldman (Butch Cassidy and the Sundance Kid, A Bridge Too Far)
calls the "Nobody Knows Anything" principle. The basic idea: In
Hollywood, a movie’s revenues, costs-and thus returns-are extremely
uncertain.

BTW, if you like movies, William Goldman’s books on his career as a screenwriter are fascinating.

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{ 5 comments }

Ryan January 4, 2007 at 12:33 pm

Prof. Moul at Washington University in St. Louis has written a book on the Economics of the Movie Industry as well. Here is the Amazon link:

http://www.amazon.com/Concise-Handbook-Movie-Industry-Economics/dp/0521843847

spencer January 4, 2007 at 12:49 pm

I have not read the book , but does it bring up the very different role unions play in the industry. In contrast to other industries, including drugs, most employees in the movie industry are not full time employees of one firm in the sense we are use to. Rather, they are contract employees that are hired to work on one project– a movie. Because of this the movie firms do not provide the standard benefits like health insurance and retirement that most large scale industries do. Consequently, most people that work in the movie industry depend on the union to provide these benefits. So the movie industry union is a very different creature then in other industries. For the most part I'm talking about the technical workers — ever watch the tail end of the credits and see how many of them there are?

I've often wondered if this model would not work for much of the high tech industry were people like programmers are often hired to work on a single project and when that is over move on to a completely different project, ususally for a different firm.

PenskeFile January 4, 2007 at 12:50 pm

FWIW,

I got turned on to De Vany's blog a year ago via a link on Marginal Revolution. I adopted many of his "evolutionary fitness" concepts and in the past year have lost about 60 pounds of fat, gained ten pounds of muscle and am in the best shape since I was 20 years old (I'm 39 now)

Check it out if you've got one of those new years resolutions!

K January 4, 2007 at 3:01 pm

I recommend 'Final Cut' by (I believe) Bach. It is about the fiasco of making 'Heavens Gate' about 25 years ago.

It doesn't say much about the accounting aspect of film. More the production end.

Matt C. January 4, 2007 at 4:09 pm

Is it possible that the R-rated market is overly saturated and that the G-rated market is not?

Also, would it be unwise to make the assumption that most G-rated movies are animation movies? If that is the case would it be less expensive to make animation movies than it would for a full production set movie? Let's say there are more South Park like movies, would they be more profitable?

Don't know much about the movie biz, so I don't want to take a stance either way.

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