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Revenue Sharing and Vertical Control in the Video Rental Industry
Author(s) -
Da Jr. James D.,
Spier Kathryn E.
Publication year - 2001
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/1467-6451.00147
Subject(s) - renting , revenue , business , revenue sharing , competition (biology) , industrial organization , downstream (manufacturing) , revenue management , microeconomics , economics , finance , marketing , ecology , political science , law , biology
Revenue sharing contracts, in which retailers pay a royalty on sales to their suppliers, are now widely used in the video rental industry. We show that revenue sharing is valuable in vertically separated industries in which demand is either stochastic (unpredictable) or variable (e.g., systematically declining), downstream inventory is chosen before demand is realized and downstream firms engage in intrabrand competition. Unlike two‐part tariffs, revenue sharing achieves the first best outcome by softening retail price competition without distorting retailers’ inventory decisions. Our theories are also consistent with trends in prices and availability following retailers’ adoption of revenue sharing contracts.