Market dominance or product cost advantage: Retail power impacts on assortment decisions

Large retailers like Walmart are known to reduce their assortment in certain product categories, often believed to be a result of their market dominance and pricing power. In this study, we investigate the possibility and implications of this phenomenon under two substantial forms of retail power: market dominance represented by market price leadership and product cost advantage, and two forms of competition: simultaneous-move and dominant-fringe models. Our results show that assortment decisions of power retailers are highly connected to their pricing power in the market, which suggests that pricing and assortment decisions are two different sides of the same coin for power retailers in a competitive market. On the other hand, product cost advantage plays a secondary role compared to the pricing leadership. For instance, in the simultaneous-move competition where the power retailer’s pricing supremacy is limited, he uses his product cost advantage to increase the product varieties and his overall profitability. However, in the dominant-fringe model where he has significant pricing power, he may decrease his assortment to benefit from the resulting cost savings. We also find that a larger market share in all scenarios amplifies the retailer’s control over the market and can lead to his assortment reduction. Moreover, we study the assortment effects of product characteristics such as the degree of substitutability and the popularity distribution of products. The main contribution of this research is to explain the phenomenon of retail assortment reduction by illustrating how power retailers exert their price leadership and/or cost advantages over suppliers and their competitors. Our findings have enriched the current literature on retail power and retail assortment planning.