MOVIES, MASS CONSUMERS, AND CRITICS: ECONOMICS

AND POLITICS OF A TWO-SIDED MARKET

BRIAN GOFF, DENNIS WILSON and DAVID ZIMMER∗

Most analyses of the film market treat it as a single entity where producers make films
based on average consumer interest while critics serve as forecasters or signalers of film
quality to these consumers. We describe the film market as two-sided—a mass market
(average consumer) side and a high quality/artistic (cineaste) side—that each influence
film maker production decisions and critical reviews as critics balance the preferences
of mass market consumers and their own more artistic inclination. Using 1,824 films
released during 2000–2014, we examine determinants of box office revenues and critical
reviews, while addressing the overlap between them. Our results indicate that consumers
and critics respond differently not only to film rating but also to film budgets, story
sources, genre, and political content. We then use the dichotomy between average and
high quality, artistic film consumers as a basis for understanding the normative views
of the film markets relative to other two-sided markets as well as the political economy
of film regulation. (JEL C30, D10, Z11)

I. INTRODUCTION revenues, but critics received it favorably with

Like all market goods and services, con-
sumers evaluate motion pictures and express
their views via expenditures. Within the motion
picture industry, professional film reviewers
(critics) also evaluate films, and these reviews
are a prominent feature of the film market place.
Sometimes the evaluations by these two groups
agree, as in the case of Avatar, which boasted
an 83% reviewer rating on Rotten Tomatoes
and generated $750 million at the box office.
Sometimes common consumers and critics do
not agree; critics panned Armageddon with a
41% rating on Rotten Tomatoes while consumers
spent a sizable $202 million. This outcome
is reversed with a film such as Fargo, which
generated only $24 million in U.S. box office
∗ The authors thank Tyler Cowen, Craig Depken, Art
DeVany, Bob Tollison, and participants in the WKU Eco-
nomics Workshop for comments on earlier versions.
Goff: Department of Economics, Gordon Ford College
of Business, Western Kentucky University, Bowling
Green, KY 42101. Phone 270-745-6401, Fax 270-745-
3190, E-mail brain.goff@wku.edu
Wilson: Department of Economics, Gordon Ford College
of Business, Western Kentucky University, Bowling
Green, KY 42101. Phone 270-745-2632, Fax 270-745-
3190, E-mail dennis.wilson@wku.edu
Zimmer: Department of Economics, Gordon Ford College
of Business, Western Kentucky University, Bowling
Green, KY 42101. Phone 270-745-6401, Fax 270-745-
3190, E-mail david.zimmer@wku.edu
a 94% score on Rotten Tomatoes and eight
Academy Award nominations.
Both market revenues and critical reviews
have received attention from empirical
researchers in economics and marketing. DeVany
and Walls provide several contributions (1997,
1999, 2002, 2004), along with Eliashberg,
Elberse, and Leenders (2006), Liu (2006), Elliott
and Simmons (2008), Weinstein (1998), Swami,
Eliashberg, and Weinberg (1999), Holbrook
(1999), and DeVany and Lee (2001).1 The
influences of critics and critics’ influences on
revenues have been investigated, but to a sig-
nificantly lesser extent. Eliashberg and Shugan
(1997) examine the role that critics play in
influencing commercial box office performance.
Their findings suggest critical reviews are gen-
erally a useful forecasting tool for long-term
revenue success. However, they conclude crit-
ical reviews are poor short-term indicators.
Ginsburgh and Weyers (1999) find that consumer
evaluations are more consistent over time than
1. Eliashberg (2005) and DeVany (2004) provide exten-
sive background to the film industry and literature about it.
ABBREVIATION
MLE: Maximum Likelihood

doi:10.1111/coep.12180
Contemporary Economic Policy (ISSN 1465-7287) © 2016 Western Economic Association International
2 CONTEMPORARY ECONOMIC POLICY
expert evaluations. Reinstein and Snyder (2005)
show a small impact of two well-known review-
ers, Siskel and Ebert, on consumers which is
larger for dramas and films with a fairly limited
screen release. These contributions treat critics
either as signalers to the general consumer mar-
ket with regard to film quality or as indicators
(forecasters) of market interest. However, there
is an important question regarding the direction
of causality—do reviewers influence revenues
or do revenues, and forecasts of them, influence
the reviews? Empirical studies typically have
ignored the causality question altogether and
focused on either revenues or reviews using
reduced form models. Some regression estimates
assume causality running from reviewers to
consumers and have conditioned film success
on critical reviews. These results, however,
are difficult to interpret given that both rev-
enues and reviewers are influenced not only by
unmeasured film traits but also by unobserved
differences between consumers’ and critics’
quality perceptions.2
Underlying many of the previous theoretical
and empirical methods is the idea that movie mar-
kets are single-dimensional, in that film makers
target a specific consumer group with the goal of
maximizing profits. In contrast, we propose that
movie markets are divided into more than one
consumer group. One side of the market is the
general movie going public, which represents the
primary source of box office revenues. The other
consumer group is the elite, artistic and movie
insider. The artistic side of the market has an
objective not easily captured by box office suc-
cess of a film. Thus, consumer-based revenues
and critical reviews may reflect different sides of
the consumer market. While some characteristics
of movies may influence both parts of the mar-
ket in the same direction, other film characteris-
tics may exert opposing influences on revenues
and reviewers.
Using a joint framework, which allows film
traits to have disparate impacts on different sides
of the film market, this paper investigates dispar-
ities between the mass market and artistic, elite
consumer groups, treating box office revenues
as indicative of mass market appeal, and critical
approval as indicative of success among the
high-end, artistic group. Our empirical results
2. Studies that have explored empirical strategies for
identifying the causal impact of reviews of box office perfor-
mance include Holbrook and Addis (2007), Hennig-Thurau,
Marchand, and Hiller (2012), and works cited therein.
demonstrate that consumers and critics respond
differently to certain film traits. In particular,
critics respond favorably to films rated “R,” but
rated-R films tend to perform worse at the box
office. Furthermore, while critics show an affinity
for documentaries and films with political slants,
documentaries and/or political content appear to
have no association with box office performance.
Critics show particular disdain for horror films,
but such movies do relatively well at the box
office. The results also indicate the complex
role of a film’s budget, with high-budget films
enjoying box office success, but generally little
respect from critics.
The two-sided nature of the market also
provides a useful structure with which to under-
stand the long-running political economy of
film regulation and censorship. Rather than
these long-running battles reflecting different
economic forces, we discuss how our approach
helps to integrate the politics into the fundamen-
tal economic structure of the market. We also
discuss how the normative implications for two-
sided markets are not appropriate benchmarks in
the case of artistic markets with two sides such
as film markets.
II. TWO SIDES: MASS CONSUMERS
AND ARTISTIC, ELITE CONSUMERS
We propose that film markets can be viewed as
a specific, and in some ways unusual, example of
a two-sided market. The literature on multi-sided
markets, although somewhat in flux, identifies
three basic conditions which define them3 : (1)
two (or more) sets of customers interact through
an intermediary (supplier); (2) some type of net-
work externality exists in that the decisions of
each set of customers affect the outcomes of the
other sets, often indirectly; (3) the externality is
not readily internalized by each customer set due
to high transaction costs of information.
The movie industry incorporates all three of
those conditions, albeit in previously unapplied
ways. There are two groups of customers: a
mass market group and an artistic, elite group.4
These two groups are served by and connected
through an intermediary supplier, namely film
3. Some of the key contributions that express and explain
these conditions include Evans (2003), Armstrong (2006),
Rochet and Tirole (2006), Rysman (2009), and Weyl (2010).
The last is the more general in nature.
4. The term “cineaste” is popularly used to describe indi-
viduals in this high-end, artistic market.
 GOFF, WILSON & ZIMMER: MOVIES, MASS CONSUMERS, AND CRITICS
producers. The mass market consumers com-
monly prefer films with large budgets, broad
family appeal, special effects, fast-paced action,
strong comedic elements, and related charac-
teristics. The more artistic consumers generally
prefer films with more character development,
more complex story lines, timely or controver-
sial subject matter or images, nuanced produc-
tion qualities, and related artistic characteristics.
Film critics not only play an important role as
the primary representative for the more artistic
side of the market but also share connections and
influences with the common consumer and the
industry producers.
Regarding the second requirement for multi-
sided markets, the decisions of each group of
consumers influence the other group, usually
indirectly. Notably, while film critics share per-
sonal preferences more consistent with those
of artistic, elite consumers, those same critics
also care about signals they send to the mass
of consumers. Critics provide reviews that fol-
low artistic favor, but those reviews are often
heard by the more common movie-going public.
Similarly, film producers draw utility from both
profits and acclaim from critics and artistic
consumers. By contrast, film producers’ desire
to satisfy one consumer group may sometimes
negatively affect the other group. For example,
from a simple profit maximizing, multi-product
perspective, Hollywood systematically makes
too many R-rated movies.5 However, R-ratings,
or at a minimum PG-13, is almost a necessity to
receive critical acclaim and acknowledgement
from award presenting organizations.
Finally, regarding the third requirement for
multi-sided markets, information regarding film
quality is “costly” in the sense that, regard-
less of the specific group to which a consumer
belongs, film quality can be, at best, only par-
tially observed prior to consuming the product
(i.e., viewing the film). And even after con-
suming the product, information regarding film
quality can be, at best, only partially conveyed to
other consumers, due to the subjective nature of
assessing artistic entertainment.
To be sure, any market with product
heterogeneity contains some elements of
multi-sidedness (Rysman 2009). Initiated by
Spence (1975), the literature on multi-sided
5. Sundarem and Williams (2005) show that G- and
PG-rated films between 2000 and 2003 generated return
on investment of 94 and 72% while R-rated films were
at 28%. Revenue figures for films from 1989–2003 show
similar differences.
3
markets has moved away from flagging some
markets as multi-sided and others as not. Rather,
recent research emphasizes the extent to which
specific markets demonstrate the three charac-
teristics defined above (Weyl 2010). So while
the ice cream industry may exhibit limited ele-
ments of multi-sidedness, the automobile market,
with vast heterogeneity in styles and consumer
preferences, may show a much larger extent of
multi-sidedness.
The bulk of economic analysis of film mar-
kets has treated critics merely as signalers to
consumers or forecasters of consumer interest.
Critics, in these frameworks, are exogenous to
other participants and do not act as intermedi-
aries. But recognizing that the movie industry
shows some extent of two-sidedness, this paper
investigates disparities between the two con-
sumer groups, with box office revenues and
critical success indicating success among the
two consumer groups. Clearly some disparities
between the two consumer groups must exist,
which, in turn, alters the incentives faced by
movie producers. For example, while financial
success clearly matters to Hollywood exec-
utives, film producers have utility functions
that also depend on critical acclaim and rep-
utation. The attention and prestige given to
events that focus on the critical acclaim for
movies, such as the Academy Awards, SAG
Awards, and Golden Globe Awards, further
highlight its unique role and importance in
this market.
III. EMPIRICAL MODEL OF REVENUES
AND REVIEWS
The two-sided structure calls for an empirical
approach that treats the two sides as separate, but
potentially over-lapping, statistical processes. We
treat box office revenues as a close approximation
for mass market consumer valuation, and we view
critical reviews as the salient measure of success
on the artistic side of the market.
Data are drawn from 1,824 U.S.-released
films released between 2000 and 2014 that made
in excess of $1 million dollars and for which all
data are available.6 We use a $1 million threshold
because films below that level generally have
limited releases, with consumers and reviewers
6. The 2009 data are for part of the year. Box office,
rating, screenplay source, genre category, and release date are
from Internet Movie Database available at http://www.imdb.
com/.
4 CONTEMPORARY ECONOMIC POLICY

often unaware of their existence.7 Market rev- TABLE 1

enues are U.S. box office receipts, converted in Descriptive Statistics for Continuous Variables
2014 dollars using the Consumer Price Index.8 (Dollar Figures Are Converted to 2014 Dollars
Critical reviews are given by the Rotten Toma- Using the Consumer Price Index)
toes’ “Tomatometer,” which aggregates critical
Standard
reviews of “top critics” into a number on the Mean Deviation
0–100 scale. To qualify as a “top critic,” Rotten
Box office revenues (in million $) 63.8 85.2
Tomatoes requires that the critic be published in Budget (in million $) 51.6 53.7
an outlet ranking in the top 10% of circulation, Rotten Tomatoes top critics (0–100) 49.6 28.5
employed as a film critic at a national broadcast
outlet for at least 5 years, or be employed at an Note: Data for films released 2000–2014 that earned at
editorial-based website with at least 1.5 million least $1 million in revenue.
monthly unique visitors for at least 3 years.
Rotten Tomatoes also reports a “Tomatometer”
corresponding to “all” critics, regardless of TABLE 2
stature. When compared to “top” critics, “all” Frequency Distributions for Categorical
critics appeared to be slightly more inclined to Variables (N = 1,824 films)
like rated-R films and movies with political slants
and somewhat less likely to enjoy action films. Percent
Otherwise, results were very similar to those Rating
reported below, which focus on “top” critics. R-rating 41.1
PG-rating 14.4
In addition, we utilize data on rating, screen- Screenplay source
play source, genre, release season, and political Book 23.7
content. We include dummies for films rated R Original 53.1
Genre
and films rated PG. We include two screenplay Documentary 1.5
source categories: book and original. Genre is Horror 7.5
subdivided into five categories: documentary, Romantic 10.1
horror, romantic, action, and western. Release Action 20.8
Western 0.7
season equals one for films opening during the Politics
slow movie-goer months of January or February PFS nominated 3.5
and zero otherwise. We also include a dummy Release season
January/February 12.7
for December release. (Adding other month December 4.5
dummies did not substantially alter the main Star power
conclusions.) To provide an arms-length mea- Star actor and/or director 3.3
sure of political content, we construct a binary
variable that equals one for films receiving award Note: Data for films released 2000–2014 that earned at
least $1 million in revenue. PFS, Political Film Society.
nominations from the Political Film Society.9
Finally, we add a dummy for the presence of
a “star” actor and/or director (defined as Jack
Nicholson, Meryl Streep, Dustin Hoffman, Tom average film earned a score of approximately 50
Hanks, Clint Eastwood, Steven Spielberg, and/or from top critics. Table 2 displays the frequency
Oliver Stone). distributions for the categorical variables. R-rated
Table 1 displays descriptive statistics for box films account for a large percentage, 41%, of
office revenues (converted to 2014 dollars), all films, while PG-rated films account for
budget (converted to 2014 dollars), and critical only 14%. Original screenplays are much more
reviews. The average film grossed $64 million in common than books as sources. Within genres,
the U.S. with a budget of $52 million, while the action films are the most frequent type, while
only 3.5% of all films in our sample received
7. While $1 million may be an arbitrary cutoff, there are an award nomination from the Political Film
very limited “top critic” reviews for movies that gross under Society. Nearly 13% of the films were released
this limit and may lead to data consistency issues with their during the slow January/February season and
inclusion.
8. Movies also produce revenues through video/DVD
approximately 3.3% of films have “star” actors
sales and merchandising. and/or directors. Pairwise correlations among
9. These data are available at http://www.polfilms.com/ the explanatory variables did not point to any
previous.html. obvious collinearity problems.
 GOFF, WILSON & ZIMMER: MOVIES, MASS CONSUMERS, AND CRITICS 5

TABLE 3
MLE Results
Reviews Log box office revenues
Coeff. St. Err. Coeff. St. Err.
Log (budget) −4.06** 0.60 0.74** 0.03
Rated R 6.87** 1.41 −0.28** 0.06
Rated PG 0.51 1.92 0.02 0.08
Book 6.77** 1.84 −0.09 0.08
Original −1.21 1.59 0.04 0.07
Documentary 10.08* 5.21 0.38* 0.22
Horror −19.65** 2.43 0.64** 0.10
Romantic −7.21** 2.12 0.02 0.09
Action −1.31 1.66 0.12* 0.07
Western −2.01 7.44 0.08 0.32
Politics 8.58** 3.45 −0.21 0.15
Star power 11.99** 3.58 0.39** 0.15
Jan/Feb release −13.05** 1.89 0.08 0.08
Dec release 3.97 3.04 0.01 0.13
Constant 118.78** 10.57 4.54** 0.45
σ (st. dev.) 26.55** 0.44 1.12** 0.02
ρ (correlation between unobservables) 0.21** 0.02

*p < .10; **p < .05.

Previous research, which has primarily
focused on the impact of critics, has regressed
box office performance on critical reviews
(Eliashberg and Shugan 1997; Elliott and Sim-
mons 2008). We avoid this approach for two
reasons. First, we are not concerned with the
impact of reviews on revenues, at least not
directly. Rather, we seek to determine which film
traits disparately affect critical reception and box
office performance. Second, we wish to account
for unmeasured (in our data) film-specific
attributes that affect both critics and consumers.
Such omitted variable issues would normally
introduce endogeneity bias into regressions of
revenues on reviews.
For these reasons, we require a model that
treats critics’ and consumers’ behaviors as joint,
rather than conditional, processes. To that end, we
estimate the joint distribution of critical reviews
and (logged) box office revenues by maximum
likelihood (MLE), treating the joint distribu-
tion of reviews and revenues as bivariate nor-
mal. Letting yi1 and yi2 denote, respectively,
film i’s critical review and (logged) box office
performance, the log likelihood function takes
the form
∑ (( ) ( ) )
ln ϕ2 yi1 − X′i β1 , yi2 − X′i β2 ; ρ
i
where Xi denotes a vector of observable movie
traits, β1 and β2 include estimable coefficients,
and ϕ2 represents the density of the bivariate
normal distribution with correlation ρ. We find
the values of (β1 , β2 , ρ) that maximize the log
likelihood function. (Using copula functions,
we experimented with alternative distributional
forms, both for the joint and marginal processes,
to explore whether skewness in box-office per-
formance impacted our main findings. Results
from those alternative estimators, not presented
in this paper, showed results similar to those
presented below.) This approach produces nearly
identical estimates compared to Zellner’s seem-
ingly unrelated regression model, but it allows a
recoverable correlation term, even when reviews
and revenues are specified as functions of the
same covariates. That correlation term is impor-
tant because, in results presented below, we seek
to calculate joint and conditional probabilities of
critical and financial success for certain kinds
of films.
Table 3 reports MLE estimates. The most
interesting results are those that produce dis-
parate effects on reviews and box office revenues.
Rated-R films seem more popular among critics
than with the movie-going public. Film critics
assign higher reviews to movies with R ratings;
an R rating is found to boost a film’s “grade” by
6.9 points on the 0–100 scale. On the other hand,
rated-R films earn approximately 28% less at
the box office compared to nonrated–R movies.
In contrast, critics show a particular distaste
6 CONTEMPORARY ECONOMIC POLICY
for horror films, docking such films nearly 20
points, but horror films are popular with movie
goers, earning 64% more at the box office
compared to their non-horror counterparts, all
else equal.
It is also noteworthy that certain movie
attributes appear to be important to film critics,
but not to the movie-going public. For example,
critics tend to give worse reviews to romance
movies and to films released during the slow
January/February period. But neither of those
attributes appears to significantly correlate with
box office performance. Additionally, critics
appear favorably inclined toward movies based
on books and politically slanted films, but
neither of those traits appears to affect box
office performance.
Perhaps the most interesting result concerns a
film’s budget. Higher-budget films tend to receive
less favorable critical reception, but budget pos-
itively correlates with box office performance.
Finally, the bottom row reveals a positive, and
precisely estimated, correlation term, indicating
that unmeasured traits that tend to garner higher
reviews also tend to correlate with better box
office performance. For example, perhaps the
presence of a particular actor or director tends to
endear the film to both fans and critics.
IV. PROBABILITIES OF CRITICAL AND FINANCIAL
SUCCESS
To distill the estimates into something more
intuitive, we calculate three probabilities based
on the MLE estimates:
• The probability that a movie will receive an
above average review
( ) ( )
Pr y1i > y1 = 1 − Φ y1 |X′i ̂ β1
• The probability that a movie will earn
above-median revenues
( )
( ) ′̂
Pr y2i > yM
2 = 1 − Φ y2 |Xi β2
M
where yM denotes the sample median of revenues.
2 mance. The final column shows estimates for
The notation Φ represents the cumulative distri-
bution function of the normal distribution.
• The probability that a movie will earn
above-median revenues, given that it receives an
above-average critical review
( )
Pr y2i > yM
2 |y1i > y1
( ( ) ( )
= 1 − Φ y1 |X′i ̂β1 − Φ yM ′̂
2 |Xi β2
( ( ) ( ) ))
+Φ2 Φ y1 |X′i ̂ β1 , Φ yM2 |X ′̂
i β2 ;̂
ρ
( ( ))
∕ 1 − Φ y1 |X′i ̂β1
The first two are marginal probabilities, while
the third is a conditional. The term Φ2 rep-
resents the bivariate normal cumulative distri-
bution function. Note that only the conditional
probability explicitly incorporates the correlation
between unobservables. Using guidance from our
data, we set the average review y1 = 50 and the
median revenue yM 2
= $38, 000, 000. The circum-
flex notation indicates the substitution of con-
verged estimates.
Table 4 presents these three probabilities for
several types of movies. The first column reports
estimates for an action movie, which, for pur-
poses of this discussion, we treat as the “base-
line” film. The probability of an above-average
critical review is 0.44, while the probability of an
above-median box office performance is 0.49. On
the other hand, given an above-average critical
response, the probability of above-median box
office performance increases to 0.57.
The next three columns modify certain traits of
the baseline movie. For example, if the baseline
movie has a “star” actor and/or director, the prob-
ability of a positive critical response increases to
0.62, and the probability of above-median box
office performance increases to 0.63. The prob-
ability of financial success given critical success
increases to 0.68. On the other hand, if the base-
line film is rated R, the probability of a posi-
tive critical response increases by 0.10, while the
probability of above-median box office perfor-
mance decreases by 0.10. Similarly, the proba-
bility of financial success given critical success
decreases by 0.12.
The next two columns show the effects of
book-derived scripts and political slants. The
directions and magnitudes are similar to the
effects of rated-R films; they boost critical
response while hindering box office perfor-
rated-R horror films, a category often lambasted
by critics. Indeed, such films are only 0.28 likely
to garner positive reviews. However, rated-R hor-
ror films are 0.58 likely to enjoy above-median
financial success. Moreover, the rare horror film
 GOFF, WILSON & ZIMMER: MOVIES, MASS CONSUMERS, AND CRITICS
TABLE 4
Predicted Probabilities of Above-Average Reviews and Above-Median Revenues for Movies with
Various Traits
Predicted probabilities of critical and financial success for movies with
Probability of above-average review 0.44
Probability of above-median revenues 0.49
Probability of above-median revenues 0.57
given above-average review
Movie traits
Original action • •
Star power
Original horror
Rated R
Based on book
Political slant
Note: All movies in this table have median budgets and are not released in January, February, or December.
that enjoys critical praise faces a 0.67 chance of
above-median financial success.
It should be noted that we interpret conditional
probabilities in Table 4 as measures of statisti-
cal association rather than causality. The nonlin-
ear functional forms of the MLE setup, to some
extent, serve as a source of identification. But we
prefer not to rely on this argument as a substi-
tute for more substantive identification strategies.
Nevertheless, even when interpreted through the
lens of statistical association, the estimates, con-
sistent with implications of our theoretic frame-
work, highlight the disparate influencers of movie
consumers and critics.
V. PUBLIC POLICY IMPLICATIONS
The motion picture industry has a long his-
torical interaction with social norms and public
policy, and the multi-sided market structure pro-
vides a useful lens with which to make sense of
past and current social and regulatory debates. In
the 1930s, the film industry imposed the Motion
Picture Production Code, or “Hays Code,” that
restricted content in films. Although it reflected
self-regulation by the industry rather than public
regulation, the Code emerged after a decade
or more of public pressure, as evidenced by
the introduction of film censorship bills in a
majority of states.10 Enforcement of the Code
eroded in the 1950s and 1960s as film makers
pushed at its boundaries in a series of small
10. Black (1996), Jeff and Simmons (2001), and Wittern-
Keller (2008) provide historical details to this era.
7
various traits
0.62 0.54 0.54 0.57 0.28
0.63 0.39 0.46 0.42 0.58
0.68 0.45 0.52 0.47 0.67
• • •
•
•
• •
•
•
increments.11 The ineffectual enforcement cou-
pled with growing social and political criticism
of artistic censorship prompted the industry to
develop the MPAA ratings system in 1968. The
expanding boundaries for PG films and further
public criticism led to revisions, including the
introduction of the PG-13 rating in the 1980s and
the NC-17 rating in the 1990s. During the Reagan
administration, the “Moral Majority” became
an outspoken group against sexual and profane
content in films. Several religious groups, includ-
ing Catholic priests and fundamentalist groups,
mounted campaigns against the 1988 film The
Last Temptation of Christ.12
Those ongoing political and social conflicts
are typically posed as a rent-seeking battle
between social conservatives and Hollywood
film producers. But while the rent-seeking label
may be useful, it is also superficial in that it fails
to address why film producers would steer the
ratio of films toward a relatively high percentage
of R-rated films relative to large money G and
PG films. Budget size and risk may matter, but
why not G and PG films with smaller budgets?
This confusion dissipates to some extent when
the market is viewed as having two consumer
groups—mass market and artistic, elite—with
film producers seeking to satisfy both sides of
11. See Joseph Burstyn, Inc. v. Wilson, 343 U.S. 495
(1952).
12. It should be noted that objections to film content
are not all from religious or political conservatives. Feminist
opposition arose to Dressed to Kill while gays and lesbians
criticized Basic Instinct. A detailed history of sources of
criticism to film and pressure for regulation is provided in
Lyons (1997).
8 CONTEMPORARY ECONOMIC POLICY
the market. Spence (1975) provides a seminal
model of producer decisions where both price and
quality are endogenously chosen. At the center
of Spence’s model is a distinction between aver-
age consumers and marginal consumers in which
producers base decisions on the response of the
marginal consumer, but social welfare is driven
by the average consumer. Where the marginal
consumer values a small change in quality more
than the average consumer, producers will over-
supply quality.
Applying this insight to film markets provides
a straightforward explanation of the observed
lobbying for and against particular kinds of con-
tent, as well as the relative supply of the two
kinds of films. Artistic, elite film consumers are
the marginal consumers while the mass mar-
ket consumers—those driving large box office
revenues—are the average consumers. Those
average consumers desire more G- and PG-rated
films, while marginal consumers attempt to pro-
tect artistic freedom and R-rated films.
In this political struggle, critics often take on
the role of agents and advocates for the artistic,
elite consumers, expressing outrage at “censor-
ship.” This follows our two-sided perspective
in that critics share the preferences of artistic
consumers. However, critics must balance these
preferences against the risk of alienating mass
market readers of their reviews. Likewise, film
producers sometimes act as agents for the artistic,
elite consumers, but they are conflicted in that
they also care about profits. As a result, they strike
a balance between making more artistic films and
trying to find ways to placate the mass market.
VI. CONCLUSION
The preceding analysis and discussion has
centered on three main points. First, film markets
can be viewed as having a two-sided structure
with mass market consumers and artistic, elite
consumers. Second, the two-sided nature causes
valuation by mass consumers as reflected in box
office revenues to diverge from valuation by crit-
ics as reflected in their reviews. It also causes film
makers to under-produce films with mass mar-
ket appeal such as G- and PG-rated films. Third,
the two-sided structure also explains the political
and social conflict over film regulation and con-
tent in which artistic consumers, abetted by film
makers and critics, stand on opposite sides with
advocates for more “family friendly” films.
The positive analysis of two-sided markets
extends back to Spence’s (1975) contribution,
drawing a distinction between marginal and aver-
age consumers. This distinction also generates
an influential normative policy benchmark; if the
marginal consumer’s utility function is identical
to the average consumer, the quality decisions of
private, unregulated producers over small qual-
ity changes match the social optimum. Other-
wise, a divergence of the value of quality for
the marginal and average consumer provides a
rationale for regulation. Based on this social wel-
fare approach, there are too many “high qual-
ity/artistic” R-rated films produced for marginal
film consumers and professional critics.13 Social
welfare could be increased with public policy
that forced film makers to produce more films
“for the masses” through some kind of regula-
tory mechanism.
Yet, in this regard, movie markets along
with other artistic markets provide an interest-
ing study in public choice both at large and
among economists. Ironically, while a regulation
rationale because of over- or under-supply of
quality relative to a social optimum might be
applied by some social critics to purchases of
high quality items such as granite countertops or
high-end appliances, few of these critics advo-
cate stronger “quality” regulation with regard to
artistic endeavors. Instead, in artistic settings,
quality regulation takes a pejorative connotation
of “censorship” and “homogeneity.” Yet, through
the marginal-average normative lens, much of
the specialized production in art could be viewed
as welfare diminishing from society’s viewpoint.
By the time of Spence’s piece, the social wel-
fare conclusions and the premises behind regu-
lation based on average consumer welfare had
already been called into question through a vari-
ety of widely cited sources. A common theme
in those contributions is the diminished weight
placed on the average consumer or agent. Apply-
ing that theme to our topic, films (or other artis-
tic endeavors) need not appeal to large masses in
order to increase social welfare.
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