Category management, product assortment, and consumer welfare
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Category management, product assortment, and consumer welfare Shailendra Gajanan & Suman Basuroy & Srinath Beldona
Received: 19 January 2006 / Accepted: 15 February 2007 / Published online: 8 March 2007 # Springer Science + Business Media, LLC 2007
Abstract In this article, we endogenize product assortment decisions under a category management (CM) framework in a channel setup. We find that (1) product assortment is polarized more under CM than under a non-CM regime; (2) the price of a high-end (low-end) product in an assortment increases (decreases) under CM than under a non-CM regime; and (3) a high-quality manufacturer makes more profit than a low-quality manufacturer. In our model, the manufacturer’s choice of quality and its polarization is driven by the existence and the decisions of the retailer (CM or non-CM). Finally, we have an interesting result on consumer welfare. We find that the total consumer welfare, as measured by consumer surplus, worsens under CM only when there is sufficient heterogeneity in consumers’ tastes. Keywords Category management . Product assortment . Variety . Consumer surplus . Channel Category management (CM) refers to a distributor/supplier process of managing individual product categories as strategic business units. During the 1990s, retailers emphasized the adoption of CM in their attempt to improve performance in an increasingly complex, competitive environment (ACNielsen, 2004; Desrochers et al. 2003). Today, nearly every major US retailer has adopted CM in some form. For example, an ACNielsen (2004) study revealed that, in general, 89% of the manufacturers and 98% of the retailers agree that CM is the most critical issue S. Gajanan University of Pittsburgh at Bradford, 300 Campus Drive, Bradford, PA 16701, USA e-mail: [email protected] S. Basuroy (*) Florida Atlantic University, SR 222, 5353 Parkside Drive, Jupiter, Florida 33458, USA e-mail: [email protected] S. Beldona University of Dallas, 1845 East Northgate Drive, Irving, TX 75062, USA e-mail: [email protected]
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they face. In practicing CM, managers execute a variety of activities, such as shelf management, assortment planning, category business planning, and promotional planning. Among these activities, product assortment is one of the most important. When asked which activities they included as part of their CM process in 2003, 91% of manufacturers and 96% of retailers reported product assortment activity (ACNielsen, 2004). Today, manufacturers directly help retailers with product quality choices and CM, taking consumers’ preferences into account. Consider the following report by the MIT Data Center about Wal-Mart’s experience regarding product assortment practice under CM: “Wal-Mart is experimenting with CM—asking the market leaders in certain consumer goods to actually plan the category for them by making recommendations as to the assortment strategy Wal-Mart should adopt for their products.... What Wal-Mart is hoping is that through CM, the suppliers will mak
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