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Modeling DVD Preorder and Sales: An Optimal Stopping Approach

The Wharton School of the University of Pennsylvania, Philadelphia, Pennsylvania 19104
The Wharton School of the University of Pennsylvania, Philadelphia, Pennsylvania 19104
The Wharton School of the University of Pennsylvania, Philadelphia, Pennsylvania 19104
kchui{at}wharton.upenn.edu
eliashberg{at}wharton.upenn.edu
edgeorge{at}wharton.upenn.edu

When a DVD title is announced prior to actual distribution, consumers can often preorder the title and receive it as soon as it is released. Alternatively, once a title becomes available (i.e., formally released), consumers can obtain it upon purchase with minimal delay. We propose an individual-level behavioral model that captures the aggregate preorder/postrelease sales of motion picture DVDs. Our model is based on an optimal stopping framework. Starting with the utility function of a forward-looking consumer, and allowing for consumer heterogeneity, we derive the aggregate preorder/postrelease sales distribution. Even under a parsimonious specification for the heterogeneity distribution, our model recovers the typically observed temporal pattern of DVD preorder and sales, a pattern which exhibits an exponentially increasing number of preorder units before the release, peaks at release, and drops exponentially afterward. Using data provided by a major Internet DVD retailer, we demonstrate a number of important managerial implications stemming from our model. We investigate the role of preorder timing through a policy experiment, estimate residual sales, and forecast post-release sales based only on preorder information. We show that our model has substantially better predictive validity than benchmark models.

Key Words: optimal stopping; timing model; online retailing; motion picture
History: Received: March 3, 2007;