The Story of Underdogs: An Empirical Analysis of Profit Margins Within the American Film Industry

Abstract

The American film industry has been seeing gradual decline in domestic box office revenues for the past five years with academic and film industry professionals claiming that the film industry will ‘implode’ within the near future. Smaller production studios will be acquired in the cut-throat industry while only the few top production studios will remain. This thesis is based off the premise that profit margin is just as good of an indicator of a film’s success as film revenues are. In this thesis, I explore the relationship between film profit margins and film production budget, with a variety of other categorical and binary variables. I will demonstrate through various empirical models that smaller production budgets can be just as, or more successful than larger production budgets, in terms of profit margins. In turn, this will demonstrate that small and medium production studios, that do not have the financial capital necessary for big production budget movies, can still stay within the industry by using smaller production budgets. In addition, by formulating a specific film production method that uses a variety of different categorical and binary variables, they will be able to achieve higher profit margins.