Influencing Competition Through Shelf Design

Extensive research has established a strong influence of product display on demand. In this domain, managers have many tools at their disposal to influence the demand through the product display, like assortment,shelf-space or allocating profitable products to highly attractive shelf locations. In this research, we focus on the influence of the product arrangement on competition among products within the display. Intuitively,products located next to each other are compared more often than when they are placed far apart. We introduce a model that allows product competition effects mediated by their relative position in the display. This model naturally produces an increased competition on products located closer together, inducing demand correlations based on products proximity with their competitors in the shelf, and not only their relative characteristics. We fit this model to experimental data from physical retail stores and in online product displays.The proposed model shows this effect to be significant; moreover, this model outperforms traditional models in fit and prediction power, and shows that ignoring the shelf-implied competition generates a bias in the price sensitivity, affecting price and promotion strategies. The proposed model was used to evaluate different shelf displays, and to evaluate and select displays with higher profitability, by exploiting the influence on competition among products to shift demand to higher profitability products. Finally, from the model,we generate recommendations for retail managers to construct better shelf designs;testing these suggestions on our fitted model on retail store data, we achieve a 3% increase in profits over current shelf designs.