Zukor's tactics led to a backlash by resistant exhibitors and ultimately to a merger movement that created a vertically integrated industry controlled by a handful of companies at the end of the 1920s—Paramount; Warner Bros.; Loew's, Inc. (MGM); Twentieth Century Fox; and RKO. During the golden age of Hollywood, distribution adhered to the run-clearance-zone system. The country was divided into thirty markets, each of which was subdivided into zones that designated theatrical runs. Theaters first showing newly released pictures were designated first-run. Located in the large metropolitan areas and owned mainly by the circuits affiliated with the majors, these theaters seated thousands, commanded the highest ticket prices, and accounted for nearly 50 percent of all admissions. Second-run houses were typically located in the neighborhoods and charged lower ticket prices. Later-run houses were located in outlying communities and charged still less. Over a course of time, a feature played every area of the country from metropolis to village. This merchandising pattern for movies was similar to that of other consumer goods: first, the exclusive shops; next, the general department store; and finally, the close-out sales.

Spawned during the Great Depression as a two-for-one form of price cutting to attract customers, double features required the majors to produce two types of features, class A and class B. Class A films contained stars, had high production values, and were based on best-selling novels and plays; class B movies were, at best, inexpensive genre films that were considered filler by the companies. To recoup the higher costs of its quality product, companies rented such films on a percentage-of-the-gross basis, while the cheapies were sold at a flat fee. The former practice enabled the majors to benefit from surges at the box office, while the latter allowed them to cover their costs and operate their studios at full capacity.

The trade practices of the industry—run-clearance-zoning, block booking, admission price discrimination—were used by the majors to wrest the greatest possible profits from the market and to keep independent exhibitors in a subordinate position. The US Justice Department, as a result, instituted an antitrust case against the majors in 1938. Ten years later, the Paramount case, as it was called, reached the Supreme Court. In a landmark decision, the court held that the Big Five (Loew's Inc. [MGM], Paramount, RKO, Twentieth Century Fox, and Warner Bros.) conspired to monopolize exhibition. Trade practices such as block booking, whereby the majors rented their pictures to independent exhibitors in groups on an all-or-nothing basis, unfair clearances and runs that prolonged the time subsequent-run theaters had to wait to receive new films, and preferential arrangements among members of the Big Five were declared illegal restraints of trade. To break the monopoly in exhibition, the Supreme Court mandated that the Big Five divorce their theater chains from their production and distribution branches.

Although the majors concentrated their production efforts on the big picture, demand for low-budget films remained strong until the advent of television in the 1950s, especially in small towns. During the 1930s and 1940s, the industry defined exploitation films as those films that dealt with social problems in a sensational way, such as Warner Bros'. I Am a Fugitive from a Chain Gang (1932), which exposed the sordid conditions in a Georgia prison and the same studio's Black Fury (1935), which dramatized labor and industrial unrest in the coal mines of Pennsylvania. After television came in, exploitation films became associated with low-budget science fiction, horror, rock 'n' roll, and drag racing films designed to appeal to teenagers and the drive-in trade. The distribution of these films was handled by independent producers and small studios outside mainstream Hollywood, such as Edward Small (1891–1977), Columbia's "Jungle Sam" Katzman (1901–1973), Allied Artists (formerly Monogram), and American International Pictures.

Although the Paramount decision restructured the industry, it by no means reduced the importance of the big companies. By allowing the majors to retain their distribution arms, the court, wittingly or not, gave them the means to retain control of the market. The reason, simply stated, is that decreasing demand for motion picture entertainment during the 1950s foreclosed the distribution market to newcomers. Distribution presents high barriers to entry. To operate efficiently, a distributor requires a worldwide sales force and capital to finance twenty to thirty pictures a year. Since the market absorbed fewer and fewer films during this period, it could support only a limited number of distributors—about the same as existed at the time of the Paramount case.

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