Making Sense of These Million-Dollar Babies: Rationale behind Superstar Profit Participation Contracts

• Published in: Marketing science (Providence, R.I.) R.I.), 2006-11, Vol.25 (6), p.678-680
• Main Author: Wei, Liyuan
• Format: Article
• Language: English
• Subjects: Actors; Artists' contracts; Bargaining; Business studies; Capital costs; Compensation; contact theory; Contract management; Contracts; Costs; Distribution; Film industry; Financial risk; Fixed costs; Invited Commentary; Leisure industry; Marketing; Motion picture directors & producers; Motion picture industry; Motion picture production; Motion pictures; Movies; Production costs; Production increases; profit participation; Profit sharing plans; Profitability; Profits; Project evaluation; Research trends; Risk sharing; Sunk costs; talent compensation contracts; Theory
• ISSN: 0732-2399; 1526-548X
• DOI: 10.1287/mksc.1050.0187

The article by Eliashberg et al (2006) provides a comprehensive review of current research on the motion picture industry, with a special focus on managerially relevant issues on the supply side. In this commentary, the author discusses the contractual issues in the movie industry from both the actors' and the distributors' perspectives in light of what people know from contract theory. The movie industry is characterized by "symmetric ignorance" that neither the studios nor the production team have better information on the success probability of a movie production. Such relationships also have a great deal in common with seller-buyer relationships in other industries with demand uncertainty, making it possible to test predictions from existing contract theories using data from the film industry. The superstars' willingness and ability to sign profit-sharing contracts with distributors might be a good starting point because it touches on the important issues of risk attitude, bargaining positions, and more.