On the Relationship Between Inventory Costs and Variety Benefits in Retail Assortments

Management Science · 1999 · Volume 45 · Issue 11

Abstract

Consider a category of product variants distinguished by some attribute such as color or flavor. A retailer must construct an assortment for the category, i.e., select a subset variants to stock and determine purchase quantities for each offered variant. We analyze this problem using a multinomial logit model to describe the consumer choice process and a newsboy model to represent the retailer's inventory cost. We show that the optimal assortment has a simple structure and provide insights on how various factors affect the optimal level of assortment variety. We also develop a formal definition of the level of fashion in a category using the theory of majorization and examine its implications for category profits.

Keywords

variety, inventory, retailing, consumer choice, assortment, optimization, newsboy, fashion, majorization, multinomial logit

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