Consumer Fit Search, Retailer Shelf Layout, and Channel Interaction

Abstract

This study examines the strategic implications of retailer shelf layout decisions in a market characterized by consumer fit uncertainty. A retailer can display competing products in the same location, allowing consumers to inspect various products all at once or in distant locations, which induces consumers to inspect one product first and then decide whether to incur the travel cost to inspect another product. We consider a model in which two competing manufacturers distribute two horizontally differentiated products through a common retailer. Our analysis shows when the two manufacturers offer products of the same fit probabilities, the retailer obtains a greater profit by displaying competing products in distant locations if the products' fit probabilities are not too high; otherwise, the retailer is better off displaying competing products in the same location. When manufacturers offer products of differentiated fit probabilities, a retailer is more likely to benefit from displaying competing products in distant locations with an increased fit difference between products. Finally, a retailer is more likely to benefit from displaying competing products in distant locations when facing less competition from other retailers.

The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2573740

Keywords: consumer fit search, shelf layout, distribution channel, retailing, game theory