The effect of product variety in multiproduct retail pricing: the case of supermarkets

The search literature offers several explanations as to how a multiproduct retailer's offering of a larger variety may affect consumers' search behaviour and hence prices. Among them are (1) higher sales to be generated when lower prices discourage consumers' further search; and (2) more pricing power due to improved consumer expectations about consumer-product match valuations. The former concerns independent categories and derives a negative relationship while the latter concerns substitutes within categories and derives a positive relationship. To examine the effect of a retailer's variety offerings on the price levels using scanner data from the supermarket industry, we devise metrics of assortment width and depth, where the former measures variety in category (more independent) offerings and the latter, variety in brand (more substitutable) offerings within categories. We find that the effect of an additional offering to each dimension of assortment decreases in the other dimension, leading the effect of assortment width to be negative while the effect of the depth to be positive for the majority of the stores used in our analysis-a result that reconciles the theories that purport to draw opposite conclusions.