The Effects of Capacity on Sales under Alternative Vertical Contracts
London Business School
Julie H. Mortimer
Boston College; National Bureau of Economic Research (NBER); Harvard University - Department of Economics
Analysis Group, Inc.
January 26, 2009
Harvard Institute of Economic Research Discussion Paper No. 2173
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.
Number of Pages in PDF File: 45
Keywords: capacity, vertical contracts
Date posted: April 25, 2009