Large Firms in Retail Markets: Multiple Products for Heterogeneous Consumers
49 Pages Posted: 5 Nov 2019 Last revised: 28 Sep 2020
Date Written: September 27, 2020
We study the ability of firms of various sizes to cater to the taste of consumers who differ in their geographic location, store choice, and type or purchase history. Using data on purchases at the household-barcode level from Nielsen, we find that heterogeneity across consumer segments accounts for 39% of the variation in product appeal, which is a key determinant of firm size. Using a model with heterogeneous consumers, we find that consumer heterogeneity increases markups and profits, and such a positive effect is more pronounced for large firms. Furthermore, we find a link between firm size heterogeneity and the strategies firms follow in the presence of heterogeneous consumer segments. While smaller firms cater to the taste of few segments, typically the largest ones, larger firms exploit their wider scope to target a larger number of segments, both large and niche. Our quantitative model rationalizes the difference in strategies with the presence of segment-specific market costs.
Keywords: Firm heterogeneity; multi-product firm; consumer heterogeneity; scanner data
JEL Classification: D12, L11, L25, O51
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