*We thank James Dana, Guido Imbens, Lawrence Katz and Phillip Leslie for helpful discussions on an earlier version of this paper; we also thank Thomas Hubbard and two anonymous referees for helpful comments and suggestions. The data for this study were generously provided by Rentrak Corporation, and we thank Robert Liuag, Ellen Dannenberg and Amir Yazdani for their help in collecting the data. Julie Mortimer thanks Robert Barro for financial support through the Warburg funds. Any errors are our own.
THE EFFECTS OF CAPACITY ON SALES UNDER ALTERNATIVE VERTICAL CONTRACTS*
Article first published online: 23 MAR 2011
© 2011 The Authors. The Journal of Industrial Economics © 2011 Blackwell Publishing Ltd and the Editorial Board of The Journal of Industrial Economics
The Journal of Industrial Economics
Volume 59, Issue 1, pages 117–154, March 2011
How to Cite
IOANNOU, I., MORTIMER, J. H. and MORTIMER, R. (2011), THE EFFECTS OF CAPACITY ON SALES UNDER ALTERNATIVE VERTICAL CONTRACTS. The Journal of Industrial Economics, 59: 117–154. doi: 10.1111/j.1467-6451.2011.00448.x
- Issue published online: 23 MAR 2011
- Article first published online: 23 MAR 2011
Retailer capacity decisions can impact sales for products by affecting, for example, availability and visibility. Using data from the U.S. video rental industry, we report estimates of the effect of capacity on sales under alternative vertical contracts. New monitoring technologies facilitated new supply contracts in this industry, reducing upfront costs of capacity but requiring minimum capacity purchases, strongly impacting stocking decisions. We find that larger capacity (more tapes) for a given title can substantially increase rentals of that title; and that alternative vertical contractual forms for distributing tapes from studios to retailers strongly impacts the relationship between capacity and rentals.