45 Pages Posted: 25 Apr 2009
Date Written: January 26, 2009
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.
Keywords: capacity, vertical contracts
Suggested Citation: Suggested Citation
Ioannou, Ioannis and Mortimer, Julie H. and Mortimer, Richard, The Effects of Capacity on Sales under Alternative Vertical Contracts (January 26, 2009). Harvard Institute of Economic Research Discussion Paper No. 2173. Available at SSRN: https://ssrn.com/abstract=1394477 or http://dx.doi.org/10.2139/ssrn.1394477