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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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