Working Paper: NBER ID: w14611
Authors: Ioannis Ioannou; Julie Holland Mortimer; Richard Mortimer
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; Sales; Vertical Contracts; Video Rental Industry
JEL Codes: L0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| larger capacity (E22) | rentals (R21) |
| additional unit of capacity (D24) | rentals under traditional linear pricing contracts (L97) |
| additional unit of capacity (D24) | rentals under sell-through pricing contracts (L14) |
| additional unit of capacity (D24) | rentals under revenue-sharing contracts (Z23) |
| capacity levels (D24) | rentals for revenue-sharing contracts (R33) |
| capacity on rentals (D25) | crosstitle effect (Y60) |