Rising Stars, Rising Returns: How Hollywood Came to Dominate the International Film Industry

By Hannah van der Ham

Around the year 1870, Hollywood was nothing but a small agricultural community. Only a few decades later, it became the most recognizable film industry in the world. Why this happened to Hollywood, and not any other nearby village or town, can be explained by path dependence.

As Pierson explains, path dependence is a process involving positive feedback, where the outcome depends on the sequence in which events unfold. The resulting path is self-reinforcing for four different reasons.

First of all, events have large unpredictability. Around the beginning of the 20th century, a few motion-picture companies had moved towards Los Angeles. By chance,  one of these companies produced a movie in Hollywood simply because it had the right settings that were needed for the particular movie. The movie, called In Old California, became a success, which resulted in more motion-picture companies moving to Hollywood. Consequently, Hollywood kept growing.

Secondly, inflexibility discourages switching from a path. The large set-up costs of the film studios and motion-picture companies provide a disincentive of rebuilding all that in a different place. The larger Hollywood becomes, the more costly this would be.

Moreover, due to nonergodicity, small events will matter, especially those in the beginning.  Because of a ban on movie theatres in Hollywood by the time In Old California was released, the movie was instead shown in Los Angeles. This allowed more people to see it and thus attracting more film makers to Hollywood. Also, if In Old California would have received a bad rating, no film makers might have moved to Hollywood and the industry would not have emerged there. However, one bad Hollywood movie now does not have a similar effect, as Hollywood is already “locked in”.

Lastly, the outcome that gets established may lead to inefficiency. Hollywood might not be the most optimal place for film making.  However, with every new movie that is produced in Hollywood, the returns increase and the possibility to move away from this path becomes more costly.