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The Effects of Revenue-Sharing Contracts on Welfare in Vertically-Separated Markets: Evidence from the Video Rental Industry

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Author Info
Julie Holland Mortimer
Abstract

In this study I analyze the implications of contractual innovation in vertically-separated industries, using the example of the video rental industry. Prior to 1998, video stores obtained inventory from movie distributors using simple linear pricing contracts. In 1998, revenue-sharing contracts, which include inventory restrictions, were widely adopted. I investigate the effect of using revenue-sharing contracts on firms' profits and consumer welfare, relative to linear pricing contracts. I analyze a new panel dataset of home video retailers that includes information on individual retailers' contract and inventory choices, weekly rentals and sales, and contract terms (prices and quantity restrictions) for 1,114 movie titles and 6,594 retailers in the U. S during each week of 1998 and 1999. A structural econometric model of firms' behavior is developed and estimated, and counterfactual experiments are performed. The results indicate that total upstream and downstream profits increase by three to six percent, and consumers benefit substantially when revenue-sharing contracts are adopted. I also examine the effects of the observed quantity restrictions. I find that these restrictions serve to increase profit for upstream firms and decrease profits for downstream firms, relative to revenue-sharing contracts without inventory restrictions.

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File URL: http://www.economics.harvard.edu/pub/hier/2002/HIER1964.pdf
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Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 1964.

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Date of creation: 2002
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Handle: RePEc:fth:harver:1964

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  1. Gil, Ricard, 2006. "Renegotiation, Learning and Relational Contracting," CEI Working Paper Series 2005-14, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  2. John Asker, 2004. "Diagnosing Foreclosure Due to Exclusive Dealing," Working Papers 04-36, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
  3. Sofia Villas-Boas & Rebecca Hellerstein, 2004. "Identification of Supply Models of Retailer and Manufacturer Oligopoly Pricing," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series 993, Department of Agricultural & Resource Economics, UC Berkeley. [Downloadable!]
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  4. David Waterman & Sung Ji & Laura Rochet, 2007. "Enforcement and Control of Piracy, Copying, and Sharing in the Movie Industry," Review of Industrial Organization, Springer, vol. 30(4), pages 255-289, June. [Downloadable!] (restricted)
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