Department of Economics

Government Intervention to Prevent Bankruptcy: the Effect of Blind-Bidding Laws on Movie Theaters

Department of Economics
University of Delaware
Working Paper #2012-03

Government Intervention to Prevent Bankruptcy: the Effect of Blind-Bidding Laws on Movie Theaters

James G. Mulligan and Daniel J. Wedzielewski

ABSTRACT

In the 1970s motion picture studios increased their use of blind bidding and non-refundable guarantees in an attempt to reduce the risks associated with producing a small number of large budget films.  However, theater owners claimed that blind bidding and guarantees shifted risk to them and increased the likelihood of bankruptcy, since they were required to bid for the right to exhibit a movie without seeing it first.  In response to the lobbying of theater owners, twenty-four states passed laws between 1978 and 1984 that banned blind bidding, while seven states also banned non-refundable guarantees.  This paper provides the first empirical analysis of the conflicting claims made by theater owners and movie studios about the impact of these laws on the survival rates of independent theaters, admission prices, and delays in the release of movies.  We find that the laws were not only ineffective in keeping theater owners at risk of bankruptcy from exiting the market; they may have been even detrimental to those theater owners converting theaters to multiplexes at that time.

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