Optimizing product lines and assortments

How should manufacturers and retailers optimize the sets of products they offer? Increasing product proliferation forces firms to solve these complex optimization problems ever more frequently. While the existing literature has made some headway in solving these problems, the three essays in this dissertation advance current knowledge on several important dimensions. The first essay augments the standard product line design problem by incorporating insights from behavioral decision making to account for the influence of context effects on consumer choices. The second essay develops a parsimonious yet flexible sales model and an efficient approach to optimize the retail assortment optimization problem based on store-level scanner data. The third essay studies the influence of parameter uncertainty on the optimal assortment composition. By integrating techniques and insights from consumer behavior, marketing, statistics, and operations research, the three essays in this dissertation address the product line and assortment optimization problems that are of central importance to marketing.

Optimizing product lines and assortments

How should manufacturers and retailers optimize the sets of products they offer? Increasing product proliferation forces firms to solve these complex optimization problems ever more frequently. While the existing literature has made some headway in solving these problems, the three essays in this dissertation advance current knowledge on several important dimensions. The first essay augments the standard product line design problem by incorporating insights from behavioral decision making to account for the influence of context effects on consumer choices. The second essay develops a parsimonious yet flexible sales model and an efficient approach to optimize the retail assortment optimization problem based on store-level scanner data. The third essay studies the influence of parameter uncertainty on the optimal assortment composition. By integrating techniques and insights from consumer behavior, marketing, statistics, and operations research, the three essays in this dissertation address the product line and assortment optimization problems that are of central importance to marketing

Incorporating context effects into a choice model

The behavioral literature provides ample evidence that consumer preferences are partly driven by the context provided by the set of alternatives. Three important context effects are the compromise, attraction, and similarity effects. Because these context effects affect choices in a systematic and predictable way, it should be possible to incorporate them in a choice model. However, the literature does not offer such a choice model. This study fills this gap by proposing a discrete-choice model that decomposes a product’s utility into a context free partworth utility and a context-dependent component capturing all three context effects. Model estimation results on choice-based conjoint data involving digital cameras provide convincing statistical evidence for context effects. The estimated context effects are consistent with the predictions from the behavioral literature, and accounting for context effects leads to better predictions both in and out of sample. To illustrate the benefit from incorporating context effects in a choice model, the authors discuss how firms could utilize the context sensitivity of consumers to design more profitable product lines

Optimizing retail assortments

__Abstract__ \n \nRetailers face the problem of finding the assortment that maximizes category profit. This is a challenging task because the number of potential assortments is very large when there are many stock-keeping units (SKUs) to choose from. Moreover, SKU sales can be cannibalized by other SKUs in the assortment, and the more similar SKUs are, the more this happens. This paper develops an implementable and scalable assortment optimization method that allows for theory-based substitution patterns and optimizes real-life, large-scale assortments at the store level. We achieve this by adopting an attribute-based approach to capture preferences, substitution patterns, and cross-marketing mix effects. To solve the optimization problem, we propose new very large neighborhood search heuristics. We apply our methodology to store-level scanner data on liquid laundry detergent. The optimal assortments are expected to enhance retailer profit considerably (37.3%), and this profit increases even more (to 43.7%) when SKU prices are optimized simultaneously

Empirical models of manufacturer-retailer interaction:A review and agenda for future research

The nature of the interaction between manufacturers and retailers has received a great deal of empirical attention in the last 15 years. One major line of empirical research examines the balance of power between them and ranges from reduced form models quantifying aggregate profit and other related trends for manufacturers and retailers to structural models that test alternative forms of manufacturer-retailer pricing interaction. A second line of research addresses the sources of leverage for each party, e.g., trade promotions and their pass-through, customer information from loyalty programs, manufacturer advertising, productassortment in general, and private label assortment in particular. The purpose of this article is to synthesize what has been learnt about the nature of the interaction between manufacturers and retailers and the effectiveness of each party’s sources of leverage and to highlight gaps in our knowledge that future research should attempt to fill

Empirical models of manufacturer-retailer interaction: A review and agenda for future research

The nature of the interaction between manufacturers and retailers has received a great deal of empirical attention in the last 15 years. One major line of empirical research examines the balance of power between them and ranges from reduced form models quantifying aggregate profit and other related trends for manufacturers and retailers to structural models that test alternative forms of manufacturer-retailer pricing interaction. A second line of research addresses the sources of leverage for each party, e.g., trade promotions and their pass-through, customer information from loyalty programs, manufacturer advertising, productassortment in general, and private label assortment in particular. The purpose of this article is to synthesize what has been learnt about the nature of the interaction between manufacturers and retailers and the effectiveness of each party’s sources of leverage and to highlight gaps in our knowledge that future research should attempt to fill