Vol. 27, No. 4, July–August 2008, pp. 627–641 issn 0732-2399  eissn 1526-548X  08  2704  0627 inf orms ® doi 10.1287/mksc.1070.0315 ©2008 INFORMS How Complex Do Movie Channel Contracts Need to Be? Sumit Raut Tata Consultancy Services, Mumbai 400096, India, sumit.raut@tcs.com Sanjeev Swami Department of Management, Dayalbagh Educational Institute, Dayalbagh, Agra 282110, India, sswami1853@gmail.com Eunkyu Lee Whitman School of Management, Syracuse University, Syracuse, New York 13244, elee06@syr.edu Charles B. Weinberg Sauder School of Business, University of British Columbia, Vancouver, British Columbia V6T 1Z2, Canada, charles.weinberg@sauder.ubc.ca T he motion picture industry is characterized by a dynamic market environment, limited shelf space and product category management, and consequently, complex channel contracts specifying the split of box office revenue between distributors and exhibitors. Although such a contracting practice creates a considerable administrative effort and channel conflict, it is not clear whether such complexity is necessary for superior channel performance. This study investigates this question by analyzing the impact of movie contract structure on movie scheduling and channel member profitability. We develop and analyze a game-theoretic model using the genetic algorithm approach and a decision support system, SilverScreener, to capture strategic behaviors of channelmembersinacomplexmarketenvironment.Wefindthatsimplertwo-parttariffor50/50splitcontracts perform as well as the current contracts. Thus, the complexity of the market environment need not be reflected inthecomplexityofthechannelcontracts.Channelcontractstructurehassignificantimpactonchannelmember profitability and the exhibitor’s movie-scheduling behavior. In particular, our results indicate that the flat rate contract structure represents an attractive alternative to the current practice for distributors. Key words : channel contracts; movie industry; game theory History : This paper was received April 10, 2006, and was with the authors 11 months for 1 revision; processed by Koen Pauwels. Published online in Articles in Advance March 31, 2008. 1. Introduction Designing optimal contracts between manufacturers and retailers is one of the most critical factors affect- ing channel coordination and the relative profit share of each channel member. An extensive theoretical lit- erature has investigated this issue (e.g., Jeuland and Shugan 1983; Moorthy 1988, 2005; Chu and Desai 1995;IngeneandParry1995;Purohit1997;Villas-Boas 1998; Li 2005; Chuan and Chen 2005), typically tak- ing the approach of a static game-theoretic analysis within the context of one or a few products being marketed through established retail outlets. Conse- quently, despite their valuable contributions, these studies have largely ignored three important charac- teristicsofthemarketingenvironment—dynamics, lim- ited shelf space, and product category management. In such a market environment, existing products expe- rience demand decay over time, and new products are frequently introduced to replace old ones. Con- strained by limited shelf space, retail managers, then, must optimally decide when to carry which products tomaximizethetotalprofitsgeneratedfromtheprod- uct category over a period of time. In this paper, we investigatetheimpactofchannelcontractsonchannel coordination and individual channel member perfor- mance in such a complex real-world setting. An example of such a complex market environ- ment is found in the motion picture industry. First, it is dynamic. Lehmann and Weinberg (2000) show that the weekly box office revenue for a movie typ- ically follows an exponential decay over time, with the demand being the highest in the first week after mass market release and then decreasing noticeably each week (27% per week, on average, in their sam- ple). Second, the market is characterized by frequent new product introductions. For example, in the five weeks of October 2005, 22 new movies, starting with the widely promoted The Greatest Game Ever Played and concluding with The Legend of Zorro, vied for the limitednumberofscreensinamonththatisnoteven 627 INFORMS holds copyright to this article and distributed this copy as a courtesy to the author(s). Additional information, including rights and permission policies, is available at http://journals.informs.org/.