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How Complex Do Movie Channel Contracts Need to Be?

Tata Consultancy Services, Mumbai 400096, India
Department of Management, Dayalbagh Educational Institute, Dayalbagh, Agra 282110, India
Whitman School of Management, Syracuse University, Syracuse, New York 13244
Sauder School of Business, University of British Columbia, Vancouver, British Columbia, Canada V6T 1Z2
sumit.raut{at}tcs.com
sswami1853{at}gmail.com
elee06{at}syr.edu
charles.weinberg{at}sauder.ubc.ca

The motion picture industry is characterized by a dynamic market environment, limited shelf space and product category management, and consequently, complex channel contracts specifying the split of box office revenue between distributors and exhibitors. Although such a contracting practice creates a considerable administrative effort and channel conflict, it is not clear whether such complexity is necessary for superior channel performance. This study investigates this question by analyzing the impact of movie contract structure on movie scheduling and channel member profitability. We develop and analyze a game-theoretic model using the genetic algorithm approach and a decision support system, SilverScreener, to capture strategic behaviors of channel members in a complex market environment. We find that simpler two-part tariff or 50/50 split contracts perform as well as the current contracts. Thus, the complexity of the market environment need not be reflected in the complexity of the channel contracts. Channel contract structure has significant impact on channel member profitability and the exhibitor's movie-scheduling behavior. In particular, our results indicate that the flat rate contract structure represents an attractive alternative to the current practice for distributors.

Key Words: channel contracts; movie industry; game theory
History: Received: April 10, 2006;