Product Assortment and Price Elasticity

Marketing Department; Faculty Advisers: Ron Berman and Eric Bradlow

Assortment planning is a central task for retailers. With consumer’s preferences diverging, one observation is that the average number of SKUs a retailer offers is increasing, especially when the retailer moves online. However, past research provides mixed evidence on whether a larger assortment is beneficial. Some empirical research finds support for the conventional belief that a larger assortment will lead to increased sales (Kalyanam et al. 2007; Briesch et al. 2009). Others find a larger assortment to be less desirable due to the increased expectations and higher evaluation costs (Iyengar and Lepper, 2000; Kuksov and Villas-Boas, 2010).

In this project, we propose that assortment expansion has an additional effect on demand – it can lead to differential response of consumers to price changes. We first show analytically that the introduction of complement products can lead to more elastic demand. We then test the predictions within the context of a fast-growing online retailer, where we can exploit variations in the size of product assortment over time. The findings from this project can assist retailers in assortment planning and revenue management.