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Category Management and Coordination in Retail Assortment Planning in the Presence of Basket Shopping Consumers

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  • Gérard P. Cachon

    () (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

  • A. Gürhan Kök

    () (Fuqua School of Business, Duke University, Durham, North Carolina 27708)

Abstract

This paper studies the assortment planning problem with multiple merchandise categories and basket shopping consumers (i.e., consumers who desire to purchase from multiple categories). We present a duopoly model in which retailers choose prices and variety level in each category and consumers make their store choice between retail stores and a no-purchase alternative based on their utilities from each category. The common practice of category management (CM) is an example of a decentralized regime for controlling assortment because each category manager is responsible for maximizing his or her assigned category's profit. Alternatively, a retailer can make category decisions across the store with a centralized regime. We show that CM never finds the optimal solution and provides both less variety and higher prices than optimal. In a numerical study, we demonstrate that profit loss due to CM can be significant. Finally, we propose a decentralized regime that uses basket profits, a new metric, rather than accounting profits. Basket profits are easily evaluated using point-of-sale data, and the proposed method produces near-optimal solutions.

Suggested Citation

  • Gérard P. Cachon & A. Gürhan Kök, 2007. "Category Management and Coordination in Retail Assortment Planning in the Presence of Basket Shopping Consumers," Management Science, INFORMS, vol. 53(6), pages 934-951, June.
  • Handle: RePEc:inm:ormnsc:v:53:y:2007:i:6:p:934-951
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    File URL: http://dx.doi.org/10.1287/mnsc.1060.0661
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    References listed on IDEAS

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    Keywords

    game theory; assortment planning; optimization;

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