Social Networks and Exchange: Self-confirming Dynamics in Hollywood

Studies have consistently found that social structure influences who transacts with whom, and that actors appear to benefit when exchange occurs embedded within these relations rather than in an unstructured market. Explanations for these results frequently point to their effectiveness in solving problems inherent in the trade of certain products and services, focusing on the ability of these social networks to provide access to private information regarding the quality of the goods or to allow participants to enforce the terms of the exchange agreement. In investigating these dynamics in the interaction between movie producers and distributors, this paper, however, suggests that a type of self-confirming prophecy can also produce such effects: Buyers frequently offer better terms of trade in transactions embedded within existing social relations, thereby contributing to the sellers’ success. In the motion picture industry, not only do distributors show a preference for carrying films involving key personnel with whom they have prior relations, but also they tend to favor these films when making decisions regarding their release – in determining opening dates and the amount of resources devoted to marketing. Empirical estimates of the performance of movies in the U.S. box office reveal that – when models fail to account for these key decisions – distributors appear to benefit from carrying movies affiliated with known parties, confirming their beliefs that they have private information regarding the quality of the talent involved. After controlling for marketing effort and seasonality, however, these effects disappear, suggesting that, rather than arbitraging price-quality inconsistencies, distributors produce these effects through their own efforts. Self-confirming Dynamics 3