Category Management and Coordination in Retail Assortment Planning in the Presence of Basket Shopping Consumers

Gérard P. Cachon () and A. Gürhan Kök ()
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Gérard P. Cachon: The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104
A. Gürhan Kök: Fuqua School of Business, Duke University, Durham, North Carolina 27708

Management Science, 2007, vol. 53, issue 6, 934-951

Abstract: This paper studies the assortment planning problem with multiple merchandise categories and basket shopping consumers (i.e., consumers who desire to purchase from multiple categories). We present a duopoly model in which retailers choose prices and variety level in each category and consumers make their store choice between retail stores and a no-purchase alternative based on their utilities from each category. The common practice of category management (CM) is an example of a decentralized regime for controlling assortment because each category manager is responsible for maximizing his or her assigned category's profit. Alternatively, a retailer can make category decisions across the store with a centralized regime. We show that CM never finds the optimal solution and provides both less variety and higher prices than optimal. In a numerical study, we demonstrate that profit loss due to CM can be significant. Finally, we propose a decentralized regime that uses basket profits, a new metric, rather than accounting profits. Basket profits are easily evaluated using point-of-sale data, and the proposed method produces near-optimal solutions.

Keywords: game theory; assortment planning; optimization (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (46)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:53:y:2007:i:6:p:934-951

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