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The Effects of Capacity on Sales Under Alternative Vertical Contracts

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  • 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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  • Ioannis Ioannou & Julie Holland Mortimer & Richard Mortimer, 2008. "The Effects of Capacity on Sales Under Alternative Vertical Contracts," NBER Working Papers 14611, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:14611
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    Cited by:

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    2. Harish Krishnan & Ralph A. Winter, 2010. "Inventory Dynamics and Supply Chain Coordination," Management Science, INFORMS, vol. 56(1), pages 141-147, January.
    3. Jordi McKenzie, 2023. "The economics of movies (revisited): A survey of recent literature," Journal of Economic Surveys, Wiley Blackwell, vol. 37(2), pages 480-525, April.
    4. Robert P. Rooderkerk & Harald J. van Heerde & Tammo H. A. Bijmolt, 2013. "Optimizing Retail Assortments," Marketing Science, INFORMS, vol. 32(5), pages 699-715, September.

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