The "dysfunctional economics" of the U.S. movie business

Essay by jmancordUniversity, Master'sA+, February 2005

download word file, 4 pages 4.3

When it comes to the U.S. motion picture industry, legendary screenwriter William Goldman put it best when he said "Nobody knows anything." For the most part, this statement is true, and it's this fact that makes the economics of filmmaking such a risky business. The economics of filmmaking just do not work and what you see could best be described as the "dysfunctional economics" of filmmaking, but through various articles, case studies, and videos such as De Vany &Walls, Arundel Partners, and The Trillion Dollar Bet--it's easy to see how and why people continue to wrestle with the economics behind this industry. As De Vany & Walls theorize, "Nobody knows what makes a hit or when it will happen." This means that the only time you'll know whether or not a movie is going to be a success is after it has been released! As De Vany & Walls also point out, "Film audiences make hits or flops and they do it, not by revealing preferences they already have, but by discovering what they like."

This is when an information cascade begins to form--which will either boost a film or sink it. So the question remains, how can you attempt to economically quantify, measure, or model a film in such an unpredictable industry?

One of the best analogies for the economics of filmmaking comes from the documentary, The Trillion Dollar Bet in which three brilliant economists, Fischer Black, Myron Scholes, and Robert Merton discover a mathematical breakthrough that revolutionized modern finance. Their model worked in theory as well as in the real world. But it was only a matter of time before their theories collided with the reality of unforeseen events--events that their model could not handle. The same rings true for the economics of filmmaking. There is no silver...