Working Paper #22

Conflicts of Interest in the Hollywood Film Industry


Abstract: We use the movie business as a case study to show how the potential for conflicts of interest in an industry is influenced in important ways by fundamental underlying properties of both the industry’s production process and demand. We show how three key characteristics of the movie business—collaboration on a large scale, large up-front expenses, and tremendous uncertainty—have led to peculiar organizational and contractual practices. These practices appear to be non-competitive and even coercive in nature when they are viewed through an all-inclusive lens such as the Sherman Anti-Trust Act, which is designed to deal with monopolization issues in all industries and, therefore, leads courts to ignore or underestimate the importance of underlying fundamentals in any particular case. We argue, however, that the unique and fascinating practices are reasonable responses to industry conditions. The organizational and contractual practices that we describe are mechanisms that align the incentives of industry participants to prevent conflicts of interest, facilitate the acquisition of information, and insure against risk. Our analysis suggests that in order to properly understand, mitigate, and adjudicate disputes among professionals, it is essential to have an understanding of the industry conditions that lead to the disputes in the first place.