Signaling Low Margin Through Assortment

Dmitri Kuksov () and Yuanfang Lin ()
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Dmitri Kuksov: Naveen Jindal School of Business, University of Texas at Dallas, Richardson, Texas 75080
Yuanfang Lin: School of Business and Hospitality, Conestoga College, Kitchener, Ontario N2G 4M4, Canada

Management Science, 2017, vol. 63, issue 4, 1166-1183

Abstract: Oftentimes, close competitors carry partially overlapping assortments in seeming contradiction to the principle of maximum differentiation. One of the justifications of such practice is that an overlapping assortment with competitive prices on the common products may prevent further consumer search and therefore could be useful even when profits from the overlapping products do not justify the costs of carrying them. In this paper, we examine the validity of this intuition and show that such strategy may indeed be optimal when consumers are uncertain about prices they might find elsewhere and face shopping costs for discovery of all prices. Specifically, we show that the (larger) assortment with product overlap may signal a “competitive” price of the relatively unique product and prevent further consumer search for a lower price on it. An implication of this finding is that a consumer may rationally behave as if she likes a larger assortment even if the assortment is enlarged by adding products the consumer has no interest in. Furthermore, we show that the optimal pricing strategy may include pricing of common products or products with known costs at a loss, which provides a novel explanation of loss-leader pricing.

Keywords: game theory; retail assortment; consumer uncertainty; signaling; competitive strategy; shopping costs (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:63:y:2017:i:4:p:1166-1183

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