Packaging deals in the entertainment industry: a bargaining approach

ABSTRACT

Creation of a television or movie project requires the bundling of inputs – writers, actors, directors – into a coherent package that can be produced and distributed. Traditionally this bundling was done by studios, which then negotiated compensation deals with input suppliers via their agents. However, large talent agencies have increasingly engaged in the practice of “packaging,” which involves creating vehicles for their clients and selling the bundled projects to studios. The union for screenwriters has challenged this activity as constituting an unfair business practice, arguing that it creates a conflict of interest on the part of agencies. This paper evaluates this claim in a bargaining framework with transaction-specific investments and a possible holdup problem.

Acknowledgments

I acknowledge the insightful comments of two reviewers and the editor (Jan Becker).

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ The key case was U.S. v. Paramount Pictures, Inc., 334 U.S. 131 (1948). Hanssen (2010) analyzes the efficiency of vertical integration in the production and distribution of Hollywood films in the context of the breakup of the Studio System. Basinger (2007) provides a general history of the Studio System, with a particular focus on the development of movie stars according to what she calls the “Star Machine.”

² The classic citations are Goldberg (1976, 1985), Williamson (1975, 1985), Klein et al. (1978), and Hart and Moore (1988). See also Bolton and Dewatripont (2005, p. 560–578), who provide a survey of the literature on this topic; and Chisholm (1993) and Gil (2007), who examine this issue specifically within the context of the motion picture industry.

³ More generally, x represents the non-salvageable portion of any initial investments. See Chisholm (1993) for a related analysis of non-salvageable investments, and the associated holdup problem, in the context of motion picture production.

⁴ The treatment of expected revenue from a project as a parameter obviously abstracts from the complex dynamics that determine the financial success or failure of a movie or television project. On this point, see De Vany and Walls (1996), who model the discovery and transmission of information about a motion picture. They specifically show that it can lead to information cascades and bandwagon effects, one consequence of which is the creation of “superstars” (Rosen, 1981).

⁵ The use of ordinary Nash bargaining assumes that clients and the studio negotiate on equal footing. This is partially justified by the fact that clients are represented by agents, whose principal role is to offset the unequal market power of the studios versus individual input suppliers. The impact that unequal bargaining would have will be noted at various points below. (In particular, see notes 6, 7, 8, 9, and 10.)

⁶ In the case where the studio has a bargaining advantage over clients and their agents, the return per client in (6) would become smaller, approaching c in the limit, and the profit of the studio would correspondingly rise. Further, as the studio’s share of the surplus increases, it would become more willing to invest x, and in the limit it would do so efficiently (i.e., (9) would coincide with (2)). In this way, a greater bargaining advantage by the studio acts to mitigate the holdup problem, but of course this happens at the expense of input suppliers.

⁷ It seems reasonable to assume equal bargaining power in the case of bargaining between the studio and the packaging agent.

⁸ This allocative advantage of packaging over traditional agency relies on the assumption of equal bargaining strength between the studio and clients (via their agents) under traditional agency. As we noted, however, if the studio is able to capture a large portion of the surplus under traditional agency, the advantage of packaging is lessened.

⁹ The caveat in footnote 5 above regarding bargaining between the studio and clients under traditional agency applies here as well.

¹⁰ It seems possible that the agency will have a bargaining advantage here, especially an agency that is large enough to engage in packaging. Such an advantage will push w_i toward c. As argued above, the more surplus the agency is able to capture, the closer its decision regarding the spending of xwill approach the efficient one.

¹¹ In that scenario, we implicitly assumed that θ = 0, so (34) could never hold.