The impact of product variety on consumer demand and firm performance

Hong, Sungtak (2016) The impact of product variety on consumer demand and firm performance. Doctoral thesis, University of London: London Business School.

Abstract

This dissertation work is an empirical examination of the inter-related decisions made by manufacturers, retailers and consumers with respect to product variety in competitive market contexts. The first chapter investigates grocers' assortment of goods from multiple product categories in a common retail space. Within such "target" space, shoppers are exposed to a selection of product categories that are not necessarily correlated in consumption a priori. Using a model of multicategory purchase incidence, I show that consumers are less likely to purchase from a category of a given assortment when it is presented with another independent category assortment of greater variety. Results from analyzing IRI field data and an online experiment provide strong evidence that this effect is driven by the display proximity. Further, results from an eye-tracking study point to the consumers' allocation of limited attention to category assortments as an explanation for the finding. The second chapter documents a multi-product firm's use of product variety in its strategic interactions with potential entrant firms in a context of the post-deregulation Korean soju market. This market, previously composed of independent geographic markets, each with a protected incumbent producer, became open to nation-wide competition as a result of market deregulation in the early 1990's. I build an econometric model that accounts for causal structures surrounding the incumbent firms' product variety and the number of firms in the market and find that product proliferation and dominant market leadership of the incumbent firm served as significant barriers to entry. The third chapter presents descriptive evidence of the effect of commodity taxation on product variety and market structure. By studying the Korean alcoholic beverage market which was affected by a tax reform, I show a negative relationship between the tax rate and product variety offered by individual firms. Simple regressions also reveal that a tax hike could result in higher market concentration. The results are consistent with theoretical predictions.