The Role of Component Commonality in Product Assortment Decisions

We consider a firm that produces multiple variants of a product. Products are assembled using a combination of common and dedicated components. We characterize the optimal assortment and derive the optimal inventory levels for the common and dedicated components under various bill-of-material configurations. We investigate the effect of commonality on product variety and compare its benefits under different demand characteristics. Commonality always leads to increased profits, but its effect on the level of product variety depends on the type of commonality. If all common components are used for the production of the entire set of products, then the optimal variety level increases relative to the system with no commonality. However, if the common components are used by a subset of the final products, then the optimal variety level may decrease with commonality. We find that the effects of commonality on profit and variety level are stronger under a demand model in which product demands are more variable and exhibit pairwise negative correlation relative to a model with independent demands.