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How Did the Department of Justice Get It so Wrong? Philadelphia 1935–1936: The Stanley Warner Chain, Competitive Practices and Consumer Welfare

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Towards a Comparative Economic History of Cinema, 1930–1970

Part of the book series: Frontiers in Economic History ((FEH))

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Abstract

From their pursuit of the Motion Picture Industry, the Department of Justice had a poor concept of the economics peculiar to the film industry outlined in the previous chapter. They failed to appreciate that scheduling a film’s distribution (how many screens? how much time?) necessarily occurs before its popularity is known, requiring that the distribution and exhibition relationship must necessarily exhibit substantial post-contractual flexibility if the market works efficiently. Philadelphia was an exhibition stronghold for Warner Bros. In our investigation of the programming of its cinemas in the mid-1930s and the box-office returns that accrued, we find no evidence of monopoly practice in the first run. That is to say that as exhibitors Warner Bros. screened major attractions produced by other studios as a matter of standard practice. As a rule, films were screened for as long as a threshold number of customers bought tickets.

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Notes

  1. 1.

    Five studios—MGM, Paramount, RKO, Twentieth Century Fox (prior to 1935, Fox) and Warner Bros. were fully vertically integrated with substantial production, distribution and exhibition operations. Columbia, Universal and United Artists were partially vertically integrated—they did not run large cinema chains (Gomery, 2005).

  2. 2.

    Our source for film releases is Internet Movie Data Base (IMDB); see Hanssen (2020) and Hanssen and Raskovich (forthcoming) for a discussion of the IMDB’s pros and cons. The HHI is a widely used measure of industry concentration calculated by summing the squared market shares of the competitors in a market. Including the largest 50 producers (the typical antitrust approach) the 1938 HHI is only 648. Using box-office data from national first-run cinemas, published weekly in the trade paper Variety, Sedgwick and Pokorny (2005) calculated the HHI to be 1260 for the middle years of the decade. According to the USDOJ’s horizontal merger guidelines a market with an HHI of less than 1500 is considered to be ‘competitive’ while markets in which the HHI is between 1,500 and 2,500 points are ‘moderately concentrated’, and markets in which the HHI is in excess of 2,500 points are ‘highly concentrated’. See https://www.justice.gov/atr/horizontal-merger-guidelines-08192010#5c.

  3. 3.

    Huettig (1985, p. 6).

  4. 4.

    Conant (1960) Table 1, from Department of Commerce Publications.

  5. 5.

    Historical Statistics of the United States, Series H 878–893. Personal Consumption Expenditures.

  6. 6.

    In re Famous Players-Lasky Corp., 11 F.T.C. 187 (1927), the Federal Trade Commission attacked famous Player Lasky’s (shortly to be renamed Paramount) use of block booking. The case was decided against the industry, but given the devastating effects of the Great Depression, was never enforced. In 1938, The USDOJ launched the case that culminated in United States v. Paramount Pictures, 334 U.S. 131, 140 (1948); the eight ‘major’ producer-distributors were charged with conspiring to limit competition through various vertical practices (including block booking).

  7. 7.

    Sedgwick (2002).

  8. 8.

    A run was a designation that determined the order in which cinemas received new releases: first run first, second run second and so forth. A large city might have as many as a dozen run classifications, with the largest most central cinemas receiving the films first and smallest cinemas in smallest neighbourhoods receiving the films last. The ‘clearance’ was the period between runs; for example, two weeks might have to pass following the end of a first run before a second-run cinema could begin its showings. The ‘zone’ was the geographic area for which each run was defined. See, for example Huettig (1985) for a description.

  9. 9.

    Hanssen (2000).

  10. 10.

    Kenney and Klein (1983).

  11. 11.

    De Vany and Eckert (1991).

  12. 12.

    Sedgwick and Pokorny (2005).

  13. 13.

    Hanssen (2010).

  14. 14.

    Gil (2015).

  15. 15.

    Hanssen and Raskovich (2020).

  16. 16.

    The document is available at https://www.justice.gov/atr/page/file/1302816/download. The USDOJ’s stated intention is ‘to terminate the Decrees effective immediately, except for a two-year sunset period on the Decree’s provision’s banning block booking and circuit dealing’ (page 1).

  17. 17.

    For example, the U.S. District Court, the appeal of whose judgement would bring abaout the definitive 1948 Supreme Court decision, stated in its written opinion that ‘It is argued that the steps we have proposed would involve an interference with commercial practices that are generally acceptable and a hazardous attempt on the part of judges – unfamiliar with the details of the business – to remodel its delicate adjustments which have hitherto provided the public with what is a new and great art’. But the court then followed immediately with, “But we see nothing ruinous about the remedies proposed” (U.S. v. Paramount Pictures, Inc., 66 F. Supp. 323, 357 S.D.N.Y. 1946). Because they did not understand the nature of the challenges facing the film industry, how could they possibly know what might be ruinous?

  18. 18.

    Hearing before a Subcommittee of the Committee on Interstate and Foreign Commerce, House of Representatives (1936).

  19. 19.

    Sedgwick and Pokorny (2012).

  20. 20.

    Jurca and Sedgwick (2014). Many thanks to Cathy Jurca for scrutinising the dataset.

  21. 21.

    Film Daily Yearbook (1936, p. 835).

  22. 22.

    The cinema’s located in Philadelphia and part of the Warner Bros. Circuit are derived from the Motion Picture Herald (1935–1936, p. 1003). The number of operating cinemas in Philadelphia are listed in Film Daily Yearbook (1936, pp. 942–943) and include three cinemas in Germantown.

  23. 23.

    Gomery (1992).

  24. 24.

    Sedgwick and Pokorny (2005).

  25. 25.

    Admission prices for the Stanley are taken from Variety, 4 December 1935: 10. Average prices are taken from ‘Pertinent Statistics’, Motion Picture Almanac, 1936–1937, p. 6. The Film Daily Yearbook (1936, p. 39) puts the average admission price higher at 25 cents for 1935. See Jurca and Sedgwick (2014) for a general discussion of the sample set of cinemas. The cinema characteristics depicted in Table 1 of this work are restricted to the central 33 weeks and not the period extension which informs the discussion here, leading to some differences in the statistics presented.

  26. 26.

    The Weekly Capitulation sheets found in the Warner Bros. Archive lists these cinemas under the corporate identities of the Stanley Company of America, Lindy Amusement Company and Warner Bros. Theatres.

  27. 27.

    Jurca and Sedgwick (2014).

  28. 28.

    Handel (1950, pp. 100, 153). See Sedgwick and Pokorny (2012) for a discussion of Handel’s contribution. For a general discussion of the risk environment that characterised the film business, see Pokorny and Sedgwick (2012).

  29. 29.

    In 1935 Fox studios became rebranded as 20th Century Fox, following the takeover of 20th Century films (Gomery, 2005).

  30. 30.

    Orbach and Einav (2007).

  31. 31.

    Arsel and Bean (2013).

  32. 32.

    This aspect of the discussion is influenced by De Vany and Walls (1996).

  33. 33.

    As the population of 326 films is an even number, the 163rd (Public Menace—Columbia) has been taken to represent the median.

  34. 34.

    Such was the short-lived life of even the most popular films, distributors were able to schedule major releases so as to avoid direct head-to-head competition, with major releases premiered between September and March.

  35. 35.

    Divisions in the audiences based upon age, class, culture, ethnicity, gender, location and other factors likely account for differences in the taste for films as they move through the hierarchy of cinemas.

  36. 36.

    Greenwald (1950) Table VI-2; and Variety, 2 October 1935, p. 7: ‘Write off pix in 15 Mos. Cream Income in 39 weeks.’

  37. 37.

    Fine and Leonard (1993) theorise vertical linkages in the supply chain, mediated dynamically by one another in what they term a ‘system of provision’.

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Hanssen, F.A., Sedgwick, J. (2022). How Did the Department of Justice Get It so Wrong? Philadelphia 1935–1936: The Stanley Warner Chain, Competitive Practices and Consumer Welfare. In: Sedgwick, J. (eds) Towards a Comparative Economic History of Cinema, 1930–1970. Frontiers in Economic History . Springer, Cham. https://doi.org/10.1007/978-3-031-05770-0_3

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