Retail Assortment and Price Competition When Consumers Are Uncertain About Product Tastes

Abstract

For many products, consumers may need to physically experience them in order to assess their own valuations. We consider how such uncertainty can affect the equilibrium pricing and assortment choices among competing retailers. Specifically, we consider a market that consists of two retailers with identical cost structures and two products with symmetric underlying demand. We characterize the pricing equilibria for each possible set of assortments based on how consumers optimally search for products in response to observed prices and assortments, and show how the structure of a retailer's inter-temporal pricing pattern (EDLP or HLP) should depend upon his own as well as his rival's assortment and the search costs. In addition, we provide conditions under which the retailers carry asymmetric assortment breadths in equilibrium.

Keywords: assortment competition, mixed strategy pricing equilibrium, consumer search, product fit uncertainty, consumer loyalty