Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Sunday, January 11, 2009

The Effects of Capacity on Sales Under Alternative Vertical Contracts

Posted by D. Daniel Sokol

Ioannis Ioannou (PhD student, Harvard Business School), Julie Holland Mortimer (Harvard - Economics), and Richard Mortimer (Analysis Group) explain the The Effects of Capacity on Sales Under Alternative Vertical Contracts.

ABSTRACT: Retailer capacity decisions can impact sales for a product by affecting, for example, availability and visibility. Using data from the U.S. video rental industry, we report empirical estimates of the effect of capacity on sales. New monitoring technologies facilitated new supply contracts in this industry, which lowered the upfront cost of capacity and required minimum capacity purchases, thus 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.

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