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Operations Management and Econometrics

Assortment choices of competing retailers with uninformed consumers

Haoying Sun, Ph.D. Candidate, Department of Information Risk and Operations Management McCombs School of Business, The University of Texas at Austin

24th Jun 2011  11:00 am - Room 498, Merewether Building (H04)

For many products, some (uninformed) consumers may need to experience the touch and feel in order to determine their valuation. In addition, consumers differ in their costs of searching for the ideal product. Under such circumstances, we show that heterogeneous product assortment breadth among two competing retailers can emerge as an equilibrium. Specifically, we consider a market with two products and two retailers, and show the conditions under which there exists an equilibrium in which one retailer carries a full line and the other sells one product only, even though the demand structure for the two products is symmetric and the cost structures of the two retailers are the same. Under this equilibrium, the full line retailer expands the market demand by attracting the uninformed consumers with large search costs and the single product retailer pass on the savings on carrying costs to the informed consumers by setting a lower price. Therefore, the two retailers soften the competition between them and achieve higher profits.
This is a joint work with Steve Gilbert.