Demand Dynamics in the “Rental-by-Mail” Business Model

We develop an integrated model for consumption and purchase decisions in the Rental-by-Mail (RBM) business model, which features closed loop delivery and quota-based subscription pricing. The model captures two distinct types of consumer dynamics: short-term dynamics in consumption decisions, and long-term dynamics in purchase decisions. Applying this model to a unique panel data provided by an RBM firm, we find that consumers trade off immediate and future consumption opportunities, accounting for the nontrivial turnaround time entailed by mail delivery. Furthermore, consumers trade off a higher payment and a larger set of consumption opportunities. The Bayesian estimation framework uncovers substantial heterogeneity in consumer preferences, such as price sensitivities and switching costs. We further conduct counterfactual analyses to investigate how consumers react to alternative product design and speed of delivery (or turnaround time) and the implications for firm profitability. Investigating the case of digital delivery, we find that firm profitability can be significantly reduced.