THE EFFECTS OF CAPACITY ON SALES UNDER ALTERNATIVE VERTICAL CONTRACTS* |
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| Authors: | IOANNIS IOANNOU JULIE HOLLAND MORTIMER RICHARD MORTIMER |
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| Institution: | 1. SIM Area, London Business School, London, U.K.e‐mail: iioannou@london.edu;2. Department of Economics, Harvard University, Cambridge, Massachusetts, U.S.A. and NBER.e‐mail: mortimer@fas.harvard.edu;3. Analysis Group, Inc., Boston, Massachusetts, U.S.A.e‐mail: rmortimer@analysisgroup.com |
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| Abstract: | 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. |
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