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. ,,,,,,, ,,,,