Understanding Retail Assortments In Competitive Markets

Assortment planning, where a retailer decides which products to place on their store shelves, is one of the most fundamental decisions in retailing. Retail assortments are important drivers in consumers’ shopping decisions. With the ever increasing number of products available to retailers, category managers face a complex decision to select the “right” assortment for their categories. These assortment decisions are impacted by local consumer preferences, competition and costs. Under these conditions, a retailer’s optimization problem is mathematically daunting and empirically challenging. In this paper we address the analytical and empirical challenges of modeling retailers’ assortment decisions. The analytical model shows that the optimal retail assortment can be described by ranking products based on a combination of demand and cost parameters. The advantage of this representation is that it can be used to study retail categories with a large number of available products. In the empirical study, we use these analytical results to model supermarket assortment decisions across 10 categories and 34 local markets. Our estimates suggest that the differences in assortment decisions across categories are driven by the size of products in the category and whether or not they require refrigeration. We show that competition between retail stores can result in an increase in assortment size and a decrease in retail prices. Using the empirical estimates, we can advise retailers on the optimal assortment and prices with a change in category size. We estimate that the optimal assortment with a 25% reduction in category size results in only a 3% reduction in category profits. Understanding retailer assortment decisions is also important for manufacturers to increase distribution for their products. We find wholesale price discounts can increase a manufacturer’s distribution, particularly with retailers who have large allocated spaces for a category. We show that the introduction of manufacturer tying contracts can have a large negative impact on retailers’ profits and small manufacturers’ distribution.