Product Differentiation, Store Differentiation, and Assortment Depth

This paper considers the relationship between product differentiation, store differentiation, and the equilibrium depth of the product assortment. We find an inverted U-shaped relationship between product differentiation and assortment depth, with the depth of the assortment rising at first and then falling with the degree of product differentiation. For product categories that consist of relatively nondifferentiatied variants, a positive relationship arises between assortment depth and category sales, whereas a negative relationship emerges between assortment depth and sales in categories with more differentiated variants. Both the extent and manner in which store differentiation changes has important implications for assortment depth. If retailer market power is augmented following the closure of rival retailers, product assortments become deeper; however, if retailers gain market power by investing in store attributes that facilitate customer loyalty, product assortments become shallower.