The Effects of Capacity on Sales Under Alternative Vertical Contracts
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. New monitoring technologies facilitated new supply contracts in this industry, which lowered the upfront costs of capacity and required minimum capacity purchases, strongly impacting stocking decisions. Under the traditional supply contract, capacity costs $44 per tape (avg) and the marginal tape produces 10.4 to 18.0 additional rentals. Under the new contract, capacity costs $7 per tape (avg) and the marginal tape produces 0 to 4.9 additional rentals.
We thank James Dana, Guido Imbens and Phillip Leslie for helpful discussions on an earlier version of this paper. 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. Any remaining errors are our own. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Ioannis Ioannou & Julie Holland Mortimer & Richard Mortimer, 2011. "The Effects Of Capacity On Sales Under Alternative Vertical Contracts," Journal of Industrial Economics, Wiley Blackwell, vol. 59(1), pages 117-154, 03. citation courtesy of