Interesting article in Variety:
... consider the outlook for studio chiefs in summer '06: The most expensive sequels and franchise movies in history are colliding on successive weekends from May through July.
Hence, though everyone (including the studio chiefs) acknowledges that the business model is broken, the movies of summer '06 have to produce record numbers or heads will roll. Last summer the insiders could complain that movie attendance was sagging. No excuses this year. ...
... the clashes on several weekends will be downright Darwinian. "Mission: Impossible 3" gets little breathing room before "Poseidon" floats by, to be imminently followed by "The Da Vinci Code," "Over the Hedge" from DreamWorks and then Fox's "X-Men 3." The July 4 melee begins with "Superman Returns" and ends with "Pirates of the Caribbean II." And so it goes all summer. ...
... Some high-profile casualties inevitably will result from this combat -- the production chiefs fully understand this. Given the extraordinary costs ($150 million and up) of summer blockbusters, they know that a major flameout will impinge on the bottom line of their parent companies. ... So here's the paradox of summer '06: While the studios fully acknowledge they're making too many films -- and too many expensive films -- the number of these movies going head-to-head this summer will reach record proportions. Though everyone concedes costs have gone through the roof, the roof will be raised once again.
Are the studio heads behaving like rational economic actors? As I pondered that question, I was reminded of a famous economics experiment in which a $20 bill is auctioned:
Suppose that anyone who bids at the auction of our $20 bill must pay the amount of the bid whether he wins or not. Someone will open the bidding low at $.50 in hopes of getting a real bargain. Someone else will top the bid with a $1 bid. Bidding will usually proceed up to about $10 and then pause. The second bidder must now decide whether to lose his $8 or $9 bid, or continue. If he continues, the bidding will usually advance up to $20 and then pause again. The second high bidder now realizes that he is not going to gain anything on this auction, but has the potential for a substantial loss, so he has a strong temptation to up his bid beyond $20. Here is how Frank and Cook describe this game:
"One might be tempted to think that any intelligent, well-informed person would know better than to become involved in an auction whose incentives so strongly favor costly escalation. But many of the subjects in these auctions have been experienced business professionals; many others have had formal training in the theory of games and strategic interaction. For example, psychologist Max Bazerman reports that during the past ten years he has earned more than $17,000 by auctioning $20 bills to his MBA students at Northwestern University.... In the course of almost two hundred of his actions, the top two bids never totaled less than $39, and in one instance totaled $407."
Though you may be tempted to think that such auctions never happen, they may in fact describe a common phenomenon in situations where there is only one winner, which happens frequently in rent-seeking situations. For example, consider the competition for an Olympic gold medal in figure skating. The winner (and perhaps the runner-up) will earn considerable money in endorsements, whereas the rewards to those finishing out of the medals will be much less. One bids for this medal by investing time and money for practice, and that time is lost both for winners and losers. It can easily happen that the total value of the money and time for all those who compete, including all those who never make it onto an Olympic team, far exceed the value of winning.
The ex ante rational thing to do, of course, would be not to participate in such an auction. Of course, studio heads are gambling with other people's money, but, as Variety explains, "heads will roll" among those who lose, so they still ought to have an incentive to behave rationally.
So why don't studio heads just admit that their business model is busted and try some other approach? My guess is herd behavior. Here's what I wrote about herd behavior in my article Mandatory Disclosure: A Behavioral Analysis, 68 University of Cincinnati Law Review 1023 (2000):
Why do lemmings leap off that cliff in Norway? What explains fads like Beanie Babies and Pokémon? …
Herd behavior occurs when a decision maker imitates the actions of others, while ignoring his own information and judgment with regard to the merits of the underlying decision. Various explanations for herd behavior have been offered, some of which are more easily squared with rational choice theory than others. For example, following the crowd may have a reputational pay-off even if the chosen course of action fails. Because even a good agent can make decisions resulting in a bad outcome, the market evaluates the agent by looking at both the outcome and the action before forming a judgment about the agent. If a bad outcome occurs, but the action was consistent with approved conventional wisdom, the hit to the manager’s reputation from an adverse outcome is reduced. As Keynes famously remarked, “it is better to fail conventionally than to succeed unconventionally.” …
There is lots of evidence that smart, seemingly rational decisionmakers are prone to herd behavior. I have shown elsewhere, for example, that the popularity of participatory management among corporate managers owes much to herd behavior. My conclusion is confirmed by various studies, including one by Lawler and Mohrman that reported: “In a number of cases we studied, the CEO of the company had seen a TV program or read a magazine article praising [quality] circles and decided to give them a try.”
There is also evidence of herding behavior in capital markets. Several studies have found evidence of herding among institutional investors. Chevalier and Ellison, for example, found that young mutual fund managers tend to herd into popular market sectors and conventionally weighted portfolios. Other recent work shows that globalization of securities markets increases the volatility of cross-border capital flows by strengthening the incentives of institutional investors to herd. Klausner and Kahan contend that herding by lawyers explains the persistence of suboptimal provisions in bond indentures.
Presumably the studio heads are following Keynes advice: They know they'll likely lose their jobs if their summer blockbuster flops, but they also figure that failing conventionally will result in a softer landing.
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