In the years immediately after the take-off of cinema, European film companies produced the great majority of the films shown in Europe. In some years, they also supplied most of the films shown in the US. Innovations such as the newsreel and the feature film had their origins in Europe, but realised their largest profits on the American market. After the First World War, however, the situation was the reverse: the emerging Hollywood studios now supplied the majority of films shown in Europe. Only a few European films were distributed in the US. This situation has lasted until the present day. Never since have European film producers or distributors managed to obtain a lasting presence in the US.

In the space of just a few years, the European film industry experienced a remarkable transformation from economic dominance to insignificance. This chapter will examine what may have caused this collective downfall of the European film companies during such a brief period. It will draw on industrial organisation theory, most notably the work of John Sutton on sunk cost, technology and market structure.