Now Playing: DVD Purchasing for a Multilocation Rental Firm

This paper studies the problem of purchasing and allocating copies of movies to multiple stores of a movie rental chain. A unique characteristic of this problem is the return process of rented movies. We formulate this problem for new movies as a newsvendor‐like problem with multiple rental opportunities for each copy. We provide demand and return forecasts at the store‐day level based on comparable movies. We estimate the parameters of various demand and return models using an iterative maximum‐likelihood estimation and Bayesian estimation via Markov chain Monte Carlo simulation. Test results on data from a large movie rental firm reveal systematic underbuying of movies purchased through revenue‐sharing contracts and overbuying of movies purchased through standard (nonrevenue‐sharing) ones. For the movies considered, our model estimates an increase in the average profit per title for new movies by 15.5% and 2.5% for revenue sharing and standard titles, respectively. We discuss the implications of revenue sharing on the profitability of the rental firm.