Estimating Substitution and Basket Effects in Retail Stores: Implications for Assortment Planning

41 Pages Posted: 2 Dec 2016

See all articles by Vidya Mani

Vidya Mani

Pennsylvania State University

Douglas J. Thomas

University of Virginia - Darden School of Business

Saurabh Bansal

Pennsylvania State University - Smeal College of Business

Date Written: November 30, 2016

Abstract

Many retailers are reducing store footprint and downsizing their assortments accordingly to improve store productivity. Some of the revenue for items removed from the assortment may be recouped by substitution, but also some of the revenue for items kept in the assortment may be lost due to basket abandonment. For a practical setting where baskets may contain any subset of items from thousands of products, estimating both substitution and basket effects is a challenge. To address this we develop a demand model that incorporates a multinomial logit (MNL) model to estimate substitution within a subcategory and a parsimonious model to estimate basket retention. Using transaction and product availability data from 8 stores of an office supplies retail chain that were dramatically downsized from large- to small-format stores, we show that inclusion of the basket retention effect in assortment selection for the small stores can significantly improve profits at these stores.

Keywords: Assortment Planning, Substitution and Basket Effects, Multinomial Logit Model

Suggested Citation

Mani, Vidya and Thomas, Douglas J. and Bansal, Saurabh, Estimating Substitution and Basket Effects in Retail Stores: Implications for Assortment Planning (November 30, 2016). Available at SSRN: https://ssrn.com/abstract=2878215 or http://dx.doi.org/10.2139/ssrn.2878215

Vidya Mani (Contact Author)

Pennsylvania State University ( email )

University Park, PA
United States

Douglas J. Thomas

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Saurabh Bansal

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802
United States

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