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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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  • 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.

Suggested Citation

  • Julie Holland Mortimer, 2002. "The Effects of Revenue-Sharing Contracts on Welfare in Vertically-Separated Markets: Evidence from the Video Rental Industry," Harvard Institute of Economic Research Working Papers 1964, Harvard - Institute of Economic Research.
  • Handle: RePEc:fth:harver:1964
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    Cited by:

    1. Sofia Berto Villas-Boas, 2007. "Vertical Relationships between Manufacturers and Retailers: Inference with Limited Data," Review of Economic Studies, Oxford University Press, pages 625-652.
    2. Villas-Boas, Sofia & Hellerstein, Rebecca, 2006. "Identification of supply models of retailer and manufacturer oligopoly pricing," Economics Letters, Elsevier, pages 132-140.
    3. Zhang, Wei-Guo & Fu, Junhui & Li, Hongyi & Xu, Weijun, 2012. "Coordination of supply chain with a revenue-sharing contract under demand disruptions when retailers compete," International Journal of Production Economics, Elsevier, vol. 138(1), pages 68-75.
    4. Jiang, Li, 2012. "The implications of postponement on contract design and channel performance," European Journal of Operational Research, Elsevier, vol. 216(2), pages 356-366.
    5. 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.
    6. repec:eee:energy:v:126:y:2017:i:c:p:733-745 is not listed on IDEAS
    7. Khouja, Moutaz & Rajagopalan, Hari K. & Sharer, Elizabeth, 2010. "Coordination and incentives in a supplier-retailer rental information goods supply chain," International Journal of Production Economics, Elsevier, vol. 123(2), pages 279-289, February.
    8. David Waterman & Sung Ji & Laura Rochet, 2007. "Enforcement and Control of Piracy, Copying, and Sharing in the Movie Industry," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 30(4), pages 255-289, June.

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