On the Relationship Between Inventory Costs and Variety Benefits in Retail Assortments

• DOI: 10.1287/mnsc.45.11.1496
• Publication Date: 2008-11-08T14:58:02Z
• Authors: Garrett van Ryzin; Siddharth Mahajan
• Keywords: variety, inventory, retailing, consumer choice, assortment, optimization, newsboy, fashion, majorization, multinomial logit; 0211 other engineering and technologies; 02 engineering and technology

Consider a category of product variants distinguished by some attribute such as color or flavor. A retailer must construct an assortment for the category, i.e., select a subset variants to stock and determine purchase quantities for each offered variant. We analyze this problem using a multinomial logit model to describe the consumer choice process and a newsboy model to represent the retailer's inventory cost. We show that the optimal assortment has a simple structure and provide insights on how various factors affect the optimal level of assortment variety. We also develop a formal definition of the level of fashion in a category using the theory of majorization and examine its implications for category profits.