Store product choice and consumer sorting

Oliveira, Henrique Roscoe de
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Some recent empirical findings about the retail sector, such as price dispersion and retail chains charging near uniform prices, could be explained as resulting from heterogeneous consumers sorting into different stores. In this study, we propose a model in which a retailer can lead consumers with different tastes to choose different stores by offering varied product assortments at each of them, and by doing so potentially obtain a higher profit relative to offering all products in only one store. We provide results showing that under some restrictions on consumer heterogeneity the retailer will never benefit from offering products in multiple stores. But we also show that small departures from these restrictions make it possible for the retailer to increase profits by using more than one store.

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