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Effects of capacity on sales under alternative supply contracts

Journal

Journal of Industrial Economics

Subject

Strategy and Entrepreneurship

Publishing details

Journal of Industrial Economics 2011 Vol 59:1 p 117-117

Authors / Editors

Ioannou I;Mortimer J H;Mortimer R

Biographies

Ioannis Ioannou

Publication Year

2011

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.

Available on ECCH

No


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