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On the Relationship Between Inventory Costs and Variety Benefits in Retail Assortments

  • Garrett van Ryzin

    (Graduate School of Business, Columbia University, Uris Hall, 3022 Broadway, New York, New York 10027)

  • Siddharth Mahajan

    (The Fuqua School of Business, Duke University, Box 90120, Durham, North Carolina 27708-0120)

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    Consider a category of product variants distinguished by some attribute such as color or flavor. A retailer must construct an assortment for the category, i.e., select a subset variants to stock and determine purchase quantities for each offered variant. We analyze this problem using a multinomial logit model to describe the consumer choice process and a newsboy model to represent the retailer's inventory cost. We show that the optimal assortment has a simple structure and provide insights on how various factors affect the optimal level of assortment variety. We also develop a formal definition of the level of fashion in a category using the theory of majorization and examine its implications for category profits.

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    File URL: http://dx.doi.org/10.1287/mnsc.45.11.1496
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    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 45 (1999)
    Issue (Month): 11 (November)
    Pages: 1496-1509

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    Handle: RePEc:inm:ormnsc:v:45:y:1999:i:11:p:1496-1509
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    1. Pashigian, B Peter, 1988. "Demand Uncertainty and Sales: A Study of Fashion and Markdown Pricin g," American Economic Review, American Economic Association, vol. 78(5), pages 936-53, December.
    2. Lazear, Edward P, 1986. "Retail Pricing and Clearance Sales," American Economic Review, American Economic Association, vol. 76(1), pages 14-32, March.
    3. Peter M. Guadagni & John D. C. Little, 1983. "A Logit Model of Brand Choice Calibrated on Scanner Data," Marketing Science, INFORMS, vol. 2(3), pages 203-238.
    4. Marvel, Howard P & Peck, James, 1995. "Demand Uncertainty and Returns Policies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(3), pages 691-714, August.
    5. de Groote, Xavier, 1994. "Flexibility and marketing/manufacturing coordination," International Journal of Production Economics, Elsevier, vol. 36(2), pages 153-167, September.
    6. T. M. Whitin, 1955. "Inventory Control and Price Theory," Management Science, INFORMS, vol. 2(1), pages 61-68, October.
    7. Paul E. Green & Abba M. Krieger, 1985. "Models and Heuristics for Product Line Selection," Marketing Science, INFORMS, vol. 4(1), pages 1-19.
    8. Kelvin Lancaster, 1990. "The Economics of Product Variety: A Survey," Marketing Science, INFORMS, vol. 9(3), pages 189-206.
    9. Sunder Kekre & Kannan Srinivasan, 1990. "Broader Product Line: A Necessity to Achieve Success?," Management Science, INFORMS, vol. 36(10), pages 1216-1232, October.
    10. John Paul MacDuffie & Kannan Sethuraman & Marshall L. Fisher, 1996. "Product Variety and Manufacturing Performance: Evidence from the International Automotive Assembly Plant Study," Management Science, INFORMS, vol. 42(3), pages 350-369, March.
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