Revenue Sharing and Vertical Control in the Video Rental Industry
- Topics:
- Entertainment
- Tags:
- Finance,
- Industry,
- Kellogg School Of Management,
- Operational Accounting,
- Retail,
- Retail Company,
- Revenue,
- Video
- Source:
- Kellogg School of Management
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Overview: Revenue sharing contracts, in which retailers pay a royalty on sales to their suppliers, are now widely used in the video rental industry. It can be seen that revenue sharing is valuable in vertically separated industries in which demand is either 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. This paper argues that revenue sharing is a valuable instrument in vertically separated industries when there is intrabrand competition among the downstream firms, demand is stochastic or variable, and downstream inventory is chosen before demand is realized. In these environments, the upstream firm would like to simultaneously soften downstream competition and encourage inventory holding.
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Format: PDF | Size: 267KB | Date: Apr 2001 | Pages: 36
