The Effects of Revenue-Sharing Contracts on Welfare in Vertically-Separated Markets: Evidence from the Video Rental Industry

65 Pages Posted: 22 Oct 2002

See all articles by Julie H. Mortimer

Julie H. Mortimer

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

Date Written: August 2002

Abstract

In this study I analyze the implications of contractual innovation in vertically-separated industries, using the example of the video rental industry. Prior to 1998, video stores obtained inventory from movie distributors using simple linear pricing contracts. In 1998, revenue-sharing contracts, which include inventory restrictions, were widely adopted. I investigate the effect of using revenue-sharing contracts on firms' profits and consumer welfare, relative to linear pricing contracts. I analyze a new panel dataset of home video retailers that includes information on individual retailers' contract and inventory choices, weekly rentals and sales, and contract terms (prices and quantity restrictions) for 1,114 movie titles and 6,594 retailers in the U.S during each week of 1998 and 1999. A structural econometric model of firms' behavior is developed and estimated, and counterfactual experiments are performed. The results indicate that total upstream and downstream profits increase by three to six percent, and consumers benefit substantially when revenue-sharing contracts are adopted. I also examine the effects of the observed quantity restrictions. I find that these restrictions serve to increase profits for upstream firms and decrease profits for downstream firms, relative to revenue-sharing contracts without inventory restrictions.

Suggested Citation

Mortimer, Julie H., The Effects of Revenue-Sharing Contracts on Welfare in Vertically-Separated Markets: Evidence from the Video Rental Industry (August 2002). Available at SSRN: https://ssrn.com/abstract=336244 or http://dx.doi.org/10.2139/ssrn.336244

Julie H. Mortimer (Contact Author)

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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