DVD Rental Companies Forecast How Long Customers Will Retain Movies by Balancing Highbrow v. Lowbrow

HANOVER, MD, June 12, 2009 – Comparing the characteristics of ‘highbrow’ and ‘lowbrow’ films, online DVD rental services like Netflix can project the length of time that customers will rent films, according to the Management Insights feature in the current issue of Management Science, the flagship journal of the Institute for Operations Research and the Management Sciences (INFORMS®).

Management Insights, a regular feature of the journal, is a digest of important research in business, management, operations research, and management science. It appears in every issue of the monthly journal.

“Highbrow Films Gather Dust: Time-Inconsistent Preferences and Online DVD Rentals” is by Katherine L. Milkman and Max H. Bazerman of Harvard Business School and Todd Rogers of the Analyst Institute.

The paper provides evidence from a study of online DVD rentals that when a choice is made for the future, in comparison to the present, customers find goods with more should characteristics (what they refer to as highbrow films) relatively more attractive than goods with more want characteristics (lowbrow films). The authors’ results suggest that rental companies may be able to forecast how long customers will borrow different types of items based on the extent to which those items are shoulds versus wants.

The authors predict and find that should DVDs, such as documentaries, are held significantly longer than want DVDs, such as action films by the individual customer. Similarly, they predict and find that people are more likely to rent DVDs in one order and return them in the reverse order when should DVDs are rented before want DVDs. A 1.3% increase in the probability of a reversal in preferences (from a baseline rate of 12%) ensues if the first of two sequentially rented movies has more should and fewer want characteristics than the second film.

They find that as the same customers gain more experience with online DVD rentals, the extent to which they hold should films longer than want films decreases.

Similar implications follow for online and catalogue retailers that offer different shipment options and hope to forecast demand for goods that may be ordered either for immediate delivery or for delayed delivery — products classified as wants will likely be more attractive for immediate delivery.

The current issue of Management Insights is available here. The full papers associated with the Insights are available to Management Science subscribers. Individual papers can be purchased at http://institutions.informs.org. Additional issues of Management Insights can be accessed at http://www.informs.org/site/ManSci/index.php?c=11&kat=Management+Insights.

The other Insights in the current issue are:

• On the Mobility, Skills, and the Michigan Non-Compete Experiment by Matt Marx, Deborah Strumsky, Lee Fleming
• Employment Horizon and the Choice of Performance Measures:Empirical Evidence from Annual Bonus Plans of Loss-Making Entities by Michal Matìjka, Kenneth A. Merchant, Wim A. Van der Stede
• Formal Contracts in the Presence of Relational Enforcement Mechanisms:Evidence from Technology Development Projects by Michael D. Ryall, Rachelle C. Sampson
• Optimal Entry Timing in Markets with Social Influence by Yogesh V. Joshi, David J. Reibstein, Z. John Zhang
• Electronic and Physical Market Channels: A Multiyear Investigation in a Market for Products of Uncertain Quality by Eric Overby, Sandy Jap
• Pioneering Plus a Broad Product Line Strategy: Higher Profits or Deeper Losses? By William Boulding, Markus Christen

• The Name-Your-Own-Price Channel in the Travel Industry:An Analytical Exploration by Tuo Wang, Esther Gal-Or, Rabikar Chatterjee
• When Is Price Discrimination Profitable? by Eric T. Anderson, James D. Dana, Jr.
• Jackknife Estimator for Tracking Error Variance of Optimal Portfolios by Gopal K. Basak, Ravi Jagannathan, Tongshu Ma
• Barter Markets for Conjoint Analysis by Min Ding, Young-Hoon Park, Eric T. Bradlow
• Hindsight Bias, Risk Perception, and Investment Performance by Bruno Biais, Martin Weber
• An Extension of the Internal Rate of Return to Stochastic Cash Flows by Gordon Hazen
• Forecast Accuracy Uncertainty and Momentum by Bing Han, Dong Hong, Mitch Warachka
• Strategic Resource Dynamics of Manufacturing Firms by Shekhar Jayanthi, Aleda V. Roth, Mehmet M. Kristal, Lauren Carter-Roth Venu

INFORMS journals are strongly cited in Journal Citation Reports, an industry source. In the JCR subject category “operations research and management science,” Management Science ranked in the top 10 along with two other INFORMS journals.

The special MBA issue published by BusinessWeek includes Management Science and three other INFORMS journals in its list of 20 top academic journals that are used to evaluate business school programs. Financial Times includes Management Science and four other INFORMS journals in its list of academic journals used to evaluate MBA programs.

About INFORMS

The Institute for Operations Research and the Management Sciences (INFORMS^®) is an international scientific society with 10,000 members, including Nobel Prize laureates, dedicated to applying scientific methods to help improve decision-making, management, and operations. Members of INFORMS work in business, government, and academia. They are represented in fields as diverse as airlines, health care, law enforcement, the military, financial engineering, and telecommunications. The INFORMS website is www.informs.org. More information about operations research is at www.scienceofbetter.org.

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