The Case of Blockbuster Online Rental System

Word-of-Mouth (WOM) has been recognized as one of the most influential resources of information transmission especially for the experience goods. It has been shown that a higher volume of WOM has a positive effect on increasing the demand for a certain product. In addition to the WOM-sales interdependence, there is also dependence between sales and inventory. It is a well-studied concept that sales are affected by the inventory. An inadequate inventory management may result with lost sales in two aspects: One is the loss of the demand (direct effect) because of unavailability of the product in the inventory, and the other one is the loss of the possible demand which would have been created through WOM (indirect effect). The sales-inventory dependence becomes more important when the seller cannot replenish its inventory after determining the initial stock level for a product. In this study, we consider an online DVD rental system. We make an empirical analysis of movie rental dynamics. Considering the WOM, we find that a larger initial capacity of a given movie title results in an increase in the number of rentals.