The Use of Full-line Forcing Contracts in the Video Rental Industry∗

Digitalization of information goods substantially affects firms’ incentives to pursue bundling and other contractual arrangements, making bundling an important current policy issue. Realistic analyses of the use and implications of bundling require detailed data on both supply arrangements and consumer demand, including substitution between products. We analyze bundling in the video-rental industry, for which we observe extensive data on supply and demand. Our model captures key details of the market, which determine firms’ contractual choices, and sheds light on the implications of these decisions. The empirical approach provides a model for how to analyze bundling when detailed data are available. ∗We thank Lanier Benkard, Steve Berry, Richard Mortimer, Ariel Pakes, Mike Riordan, Mike Whinston and seminar participants at Carnegie Mellon University, Columbia University, the Cowles Summer Conference at Yale University, the Chicago-Northwestern IO and Marketing Conference, Duke University, Harvard University, MIT, New York University IO Day, Stanford GSB, Stanford Institute for Theoretical Economics Summer Workshop and the University of Wisconsin-Madison for helpful comments. We are grateful to the editor and three anonymous referees for their comments and suggestions. The data for this study were generously provided to us by Rentrak Corporation; Mortimer thanks Robert Barro for financial support through the Warburg funds. Any remaining errors are our own. †Department of Economics, Harvard University, Cambridge, MA 02138. Email: [email protected] ‡Department of Economics, Columbia University, New York, NY 10027. Email: [email protected] §Department of Economics, Harvard University, Cambridge, MA 02138. Email: [email protected]