ECONOMICS OF THE STAR SYSTEM

In the era of vertical integration, the star system affected all three branches of the industry. A star's popularity and drawing power created a ready-made market for his or her pictures, which reduced the risks of production financing. Because a star provided an insurance policy of sorts and a production value, as well as a prestigious trademark for a studio, the star system became the prime means of stabilizing the motion-picture business. At the production level, the screenplay, sets, costumes, lighting, and makeup of a picture were designed to enhance a star's screen persona, which is to say, the image of a star that found favor with the public. At the distribution level, a star's name and image dominated advertising and publicity and determined the rental price for the picture. And at the exhibition level, the costs of a star's salary and promotions were passed on to moviegoers, who validated the system by plunking down a few coins at the box office.

In economic terms, stars created the market value of motion pictures. To understand how this worked, we must remember three things. First, affiliated theater chains were located in different regions of the country, so that to reach a national audience the majors had to exhibit one another's pictures. Second, the majors rented their pictures to exhibitors a season in advance of production. And third, the majors used a differential pricing policy: flat fees for B pictures and percentage-of-the-gross terms for A pictures. No set price could be charged for the top-grade product because the market for this type of picture was difficult to ascertain. Charging a percentage was riskier than charging a flat fee, but in so doing, a distributor could reap the rewards of a box-office surge.

How did the majors determine the rental price for a picture, which is to say, the percentage terms for a new picture? They used star power -- the ability of screen personalities to attract large and faithful followings. In practice, a distributor simply pointed to the past box-office performance of a star to justify the rental terms for his or her forthcoming pictures. An economist might say the distributor used star differentiation to stabilize the demand curve for class-A product.

Star differentiation did more than stabilize rentals; it also permitted the distributor to raise prices. Demand elasticity explains the phenomenon. "Demand elasticity measures the sensitivity of demand in relationship to quantity and change in price. Theoretically, if demand can be fixed by product differentiation, it then becomes less sensitive to increases in price." Thus, if a new picture contained a star with a proven box-office record, an exhibitor would likely be willing to pay a higher rental for it, feeling certain that the risk was worth it.

The majors buttressed this method of pricing by instituting elaborate and costly publicity campaigns that revolved almost exclusively around stars. Because these campaigns were designed to peak simultaneously with the release of a new picture, as will be discussed later, they funneled audiences into first-run houses. Owned almost exclusively by the Big Five, these flagship theaters charged the highest ticket prices and generated 50 percent of the domestic rentals. Elaborate publicity campaigns served an added function; a successful launching of a new release helped establish its market value in the subsequent-run playoff.

from Tino Balio, Grand Design: Hollywood as a Modern Business Enterprise, 1930-1939 (University of California Press, 1993), p. 144-45