A paper co-authored by Haoying Sun and Steve Gilbert (University of Texas, Austin) titled “Retail Price Competition with Product Fit Uncertainty and Assortment Selection” is accepted for publication at Production and Operations Management.
In this paper, Sun and Gilbert study how the equilibrium pricing among competing retailers depends upon assortments when consumers must search for product fit information and are heterogeneous in their shopping behaviors.
Specifically, a market that consists of two retailers and two possible products is considered. A consumer is either loyal to one of the retailers or is a shopper who follows a rational, dynamic search process based on the prices and available assortment.
The authors show, among other things, that when the retailers carry non-overlapping assortments, as search cost increases, the equilibrium pricing strategy shifts from a low price with no discounting to a high price with deep discounting.
Furthermore, the authors find that when a full line retailer competes with a limited line retailer, a strategy of discounting only the common product can dominate the strategy of discounting both products together. This is not the case when the retailer's competitor also carries the full product line.
