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The Effects of Capacity on Sales under Alternative Vertical Contracts

45 Pages Posted: 25 Apr 2009  

Ioannis Ioannou

London Business School

Julie H. Mortimer

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

Richard Mortimer

Analysis Group, Inc.

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Date Written: January 26, 2009

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.

Keywords: capacity, vertical contracts

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

Ioannis Ioannou

London Business School ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom
02070008748 (Phone)

HOME PAGE: http://www.ioannou.us

Julie H. Mortimer (Contact Author)

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-3676 (Phone)

HOME PAGE: http://fmwww.bc.edu/ec/mortimer.php

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

Richard Mortimer

Analysis Group, Inc. ( email )

111 Huntington Avenue
10th floor
Boston, MA 02199

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