W. D. Walls

Uncertainty in the Movie Industry: Does Star Power Reduce the Terror of the Box Office?

Everyone knows that the movie business is risky. But how risky is it? Do strategies exist that reduce risk? We investigate these questions using a sample of over 2000 motion pictures. We discover that box-office revenues are asymptotically Pareto-distributed and have infinite variance. The mean is dominated by rare blockbuster movies that are located in the far right tail. There is no typical movie because box-office revenue outcomes do not converge to an average: revenues diverge over all scales. The studio model of risk management lacks a foundation in theory or evidence, and revenue forecasts have zero precision. Movies are complex products and the cascade of information among film-goers during the course of a films run can evolve along so many paths that it is impossible to attribute the success of a movie to individual causal factors. The audience makes a movie a hit and no amount of “star power” or marketing can alter that. The real star is the movie.

The Changing Role of Hollywood in the Global Movie Market

Does Hollywood dominate world cinema markets with American taste, culture, and values through the exportation of films produced mainly for its domestic (US and Canada) market? Or does Hollywood supply the films that world audiences demand and, because of the logistics of distribution, screen these films first in the domestic market prior to exhibition in foreign markets? In this article, the authors empirically analyzed the global market for motion pictures to provide statistical evidence that can speak to these questions. They examined data on nearly 2,000 films exhibited from 1997–2007, inclusive, in the United States and Canada, Australia, France, Germany, Mexico, Spain, and the United Kingdom—markets that today collectively account for over 75% of worldwide cinema box-office revenue. The empirical evidence provides support for the hypothesis that the supply of Hollywood films has accommodated global demand as the relative size of the U.S. domestic market has decreased. There is no evidence that box-office success in the United States creates a contagion that spreads to other film exhibition markets; however, box-office success in international markets appears to be less uncertain for films that have been successful in their U.S. releases.

PRODUCT SURVIVAL AT THE CINEMA : EVIDENCE FROM HONG KONG

The lifetime of a motion picture is the margin through which supply adjusts to market demand due to demand-invariant admission prices and fixed seating capacity. The lifetimes of a sample of 493 motion pictures that were exhibited at cinemas in Hong Kong during 1994-1996 are examined. It is found that the hazard rate is an increasing function of time, and that the type of movie and the initial box office revenue are economically and statistically significant determinants of a movies life length.

Cross-country analysis of movie piracy

We examine the rate of motion-picture piracy across a sample of 26 diverse countries. The level of piracy is explained empirically by the level of income, the cost of enforcing property rights, the level of collectivism present in a countrys social institution and the level of internet usage. The results of a cross-country regression analysis indicate that piracy is increasing in the level of social coordination and the cost of enforcing property rights, unrelated to income and decreasing in internet usage.

Demand stochastics, supply adaptation, and the distribution of film earnings

A market is analysed in which demand is a stochastic process and supply is contingent on the expected level of demand – a model that provides a realistic depiction of the motion picture market where consumer demand is a process of discovery and information sharing, and the supply of theatre screens expands through contingent contracts to accommodate demand. This model predicts that motion picture earnings will deviate from a power law and instead be distributed according to an exponential of a power law due to finite-size effects in demand. Empirical analysis on a large sample of motion pictures finds significant deviation from the power law distribution and a remarkably good fit for the stretched exponential distribution.

Robust Analysis of Movie Earnings

This article applies recently developed nonparametric kernel regression estimation methods to quantify the conditional distribution of motion picture earnings. The nonparametric, data-driven approach allows the full range of relations among variables to be captured, including nonlinearities that usually remain hidden in parametric models. The nonparametric approach does not assume a functional form, so specification error is not an issue. This study finds that the nonparametric regression model fits the data far better than the logarithmic regression model employed by most applied researchers; it also fits the data much better than a polynomial regression model. The nonparametric model yields substantially different estimates of the elasticity of box-office revenue with respect to production budgets and opening screens, and the model also has very good out-of-sample predictive ability, making it a potentially useful tool for studio management.

Bestsellers and Blockbusters: Movies, music, and books

This paper is a survey on the economics of blockbusters and bestsellers in popular entertainment and culture, with a particular focus on empirical methods and applications to motion pictures, music and books. We first survey various conceptual models on the economics of superstars and the winner-take-all nature of product success. We then survey the range of statistical methodologies that can be used to quantify formally the winner-take-all nature of the distribution of success while estimating the correlates of success across competing titles. In separate subsections for movies, music, and books, we survey the empirical literature that relates to the blockbuster phenomenon. The final section discusses specific current topics related to the distribution of success, focusing on issues that appear to be fruitful areas for future research.

Using Extreme Value Theory to Model Electricity Price Risk With an Application to the Alberta Power Market

Value-at-risk (VaR) is a measure of the maximum potential change in value of a portfolio of financial assets with a given probability over a given time horizon. VaR has become a standard measure of market risk and a common practice is to compute VaR by assuming that changes in value of the portfolio are conditionally normally distributed. However, assets returns usually come from heavy-tailed distributions, so computing VaR under the assumption of conditional normality can be an important source of error. We illustrate in our application to competitive electric power prices in Alberta, Canada, that VaR estimates based on extreme value theory models, in particular the generalized Pareto distribution are, more accurate than those produced by alternative models such as normality or historical simulation.

Natural Gas and Electricity Markets

The natural gas and electric power industries---once the classic examples of natural monopoly---are increasingly being regulated by market forces instead of public service commissions. The emergence of markets in the North American natural gas industry in the mid-1980s resulted largely from the failure of regulation, and a consequence of this regulatory failure was the separation of the energy commodity from its transportation. This simple change in the organization---where the energy commodity was unbundled from its transmission---provides the basis for restructuring natural gas and electricity markets. The natural gas and electricity industries are being transformed so that they more closely resemble a commodity market than a public utility in the move toward market-oriented allocation mechanisms for production, transmission, and distribution.