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The Effects of Capacity on Sales Under Alternative Vertical Contracts

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Author Info
Ioannis Ioannou
Julie Holland Mortimer
Richard Mortimer
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. 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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14611.

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Date of creation: Dec 2008
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Handle: RePEc:nbr:nberwo:14611

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L0 - Industrial Organization - - General

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  1. Raymond Deneckere & James Peck, 1995. "Competition Over Price and Service Rate When Demand is Stochastic: A Strategic Analysis," RAND Journal of Economics, The RAND Corporation, vol. 26(1), pages 148-162, Spring. [Downloadable!] (restricted)
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  2. Dana, James D, Jr, 2001. "Competition in Price and Availability When Availability is Unobservable," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 497-513, Autumn.
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  3. Julie Holland Mortimer, 2007. "Price Discrimination, Copyright Law, and Technological Innovation: Evidence From The Introduction of DVDs," The Quarterly Journal of Economics, MIT Press, vol. 122(3), pages 1307-1350, 08. [Downloadable!] (restricted)
  4. Urban, Timothy L., 1995. "Inventory models with the demand rate dependent on stock and shortage levels," International Journal of Production Economics, Elsevier, vol. 40(1), pages 21-28, June. [Downloadable!] (restricted)
  5. Urban, Timothy L., 2005. "Inventory models with inventory-level-dependent demand: A comprehensive review and unifying theory," European Journal of Operational Research, Elsevier, vol. 162(3), pages 792-804, May. [Downloadable!] (restricted)
  6. Julie H. Mortimer, 2008. "Vertical Contracts in the Video Rental Industry," Review of Economic Studies, Blackwell Publishing, vol. 75(1), pages 165-199, 01. [Downloadable!] (restricted)
  7. Carlton, Dennis W, 1978. "Market Behavior with Demand Uncertainty and Price Inflexibility," American Economic Review, American Economic Association, vol. 68(4), pages 571-87, September. [Downloadable!] (restricted)
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