The Dark Side of Category Expansion: Will (and Which) Existing Ones 'Pay the Price'?

41 Pages Posted: 4 May 2021 Last revised: 7 Sep 2021

See all articles by Qi Yu

Qi Yu

Singapore Management University; University of Pennsylvania - Marketing Department

Ron Berman

University of Pennsylvania - The Wharton School

Eric Bradlow

University of Pennsylvania - Marketing Department

Date Written: April 30, 2021

Abstract

Many retailers that manage product assortments believe that “more is better”. We challenge this conventional wisdom by demonstrating that a retailer may face more price-sensitive demand for existing categories after a category expansion. While introducing a new category to a store may increase the demand for the existing ones, this increase sometimes suggests a movement towards the steeper part of the demand curve and an increase in price sensitivity. We build a model of multi-category purchases with transportation costs and generate a series of theoretical predictions of the changes in price sensitivity after category expansion. We then estimate the model parameters in a natural experiment setting, where a set of Washington retailers’ assortments are exogenously affected by the state’s privatization of liquor sales in 2012. Consistent with the theoretical predictions, the increase in price sensitivity is considerable in two out of the six existing categories. Counterfactual simulations suggest that retailers could have a profit loss as high as 2.2% if the changes in price sensitivity were ignored. This suggests that retailers who don't re-estimate and re-optimize their marketing mix may “pay a price” after category expansion.

Keywords: category expansion, price sensitivity, one-stop shopping, multi-category demand, hierarchical Bayesian methods

Suggested Citation

Yu, Qi and Berman, Ron and Bradlow, Eric, The Dark Side of Category Expansion: Will (and Which) Existing Ones 'Pay the Price'? (April 30, 2021). Available at SSRN: https://ssrn.com/abstract=3837014 or http://dx.doi.org/10.2139/ssrn.3837014

Qi Yu (Contact Author)

Singapore Management University ( email )

Li Ka Shing Library
70 Stamford Road
Singapore 178901, 178899
Singapore

University of Pennsylvania - Marketing Department ( email )

700 Jon M. Huntsman Hall
3730 Walnut Street
Philadelphia, PA 19104-6340
United States

Ron Berman

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Eric Bradlow

University of Pennsylvania - Marketing Department ( email )

700 Jon M. Huntsman Hall
3730 Walnut Street
Philadelphia, PA 19104-6340
United States
215-898-8255 (Phone)

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