The Effects of Capacity on Sales Under Alternative Vertical Contracts

45 Pages Posted: 29 Dec 2008 Last revised: 29 May 2009

See all articles by Ioannis Ioannou

Ioannis Ioannou

London Business School - Department of Strategic & International Management

Julie H. Mortimer

Boston College; National Bureau of Economic Research (NBER); Harvard University - Department of Economics

Richard Mortimer

Analysis Group, Inc.

Multiple version iconThere are 3 versions of this paper

Date Written: December 2008

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.

Suggested Citation

Ioannou, Ioannis and Mortimer, Julie H. and Mortimer, Richard, The Effects of Capacity on Sales Under Alternative Vertical Contracts (December 2008). NBER Working Paper No. w14611. Available at SSRN: https://ssrn.com/abstract=1320856

Ioannis Ioannou (Contact Author)

London Business School - Department of Strategic & International Management ( email )

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Julie H. Mortimer

Boston College ( email )

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National Bureau of Economic Research (NBER) ( email )

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Harvard University - Department of Economics ( email )

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Richard Mortimer

Analysis Group, Inc. ( email )

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Boston, MA 02199

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