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Strategic Assortment Reduction by a Dominant Retailer

Marshall School of Business, University of Southern California, Los Angeles, California 90089
Katz Graduate School of Business, University of Pittsburgh, Pittsburgh, Pennsylvania 15260
Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213
dukes{at}marshall.usc.edu
tgeylani{at}katz.pitt.edu
kannans{at}andrew.cmu.edu

In certain product categories, large discount retailers are known to offer shallower assortments than traditional retailers. In this paper, we investigate the competitive incentives for such assortment decisions and the implications for manufacturers' distribution strategies. Our results show that if one retailer has the channel power to determine its assortment first, then it can strategically reduce its assortment by carrying only the popular variety while simultaneously inducing the rival retailer to carry both the specialty and popular varieties. The rival retailer then bears higher assortment costs, which leads to relaxed price competition for the commonly carried popular variety. We also show that when the manufacturer has relative channel power, it chooses alternatively to distribute both product varieties through both retailers. Our analysis suggests, therefore, that when a retailer becomes dominant in the distribution channel, it facilitates retail segmentation into discount shops, carrying limited product lines, and specialty shops carrying wider assortments. We also illustrate how retailer power leading to strategic assortment reduction can lead to lower consumer surplus.

Key Words: channels of distribution; channel power; assortment; retailing
History: Received: December 14, 2006; accepted: March 6, 2008.