The Effect of Probabilistic Selling on the Optimal Product Mix

Journal of Retailing, Forthcoming

Posted: 23 Jan 2015

See all articles by Scott Fay

Scott Fay

Syracuse University

Jinhong Xie

University of Florida - Warrington College of Business Administration

Cong Feng

University of Mississippi - School of Business Administration

Date Written: November 1, 2014

Abstract

Determination of the merchandise assortment is an important decision for retailers since the composition and depth of the product mix greatly impact both unit sales and costs. This paper considers how Probabilistic Selling (PS), an emerging marketing strategy, impacts the type and number of products a retailer should carry. We find that adopting PS can alter the optimal number of products (i.e., encourage the retailer to offer more or fewer products), depending on demand- and supply-side factors. Furthermore, introducing probabilistic goods sometimes increases the optimal degree of product differentiation and sometimes reduces it. Specifically, less differentiated products are warranted if there are either few or many consumers with extreme tastes, but more differentiation is needed otherwise. Our analysis reveals that PS can serve either as a substitute to new product introduction (because it enables a retailer to serve a diverse market at a lower cost) or as a complement to new product introduction (since, under PS, a new product enables a retailer to offer additional probabilistic goods that utilize this new product as one of its components). In sum, our results indicate that a retailer must adjust its merchandise assortment appropriately in order to fully benefit from probabilistic selling.

Keywords: probabilistic selling, opaque goods, product differentiation, product line, price discrimination, new product development

JEL Classification: M31, L81

Suggested Citation

Fay, Scott and Xie, Jinhong and Feng, Cong, The Effect of Probabilistic Selling on the Optimal Product Mix (November 1, 2014). Journal of Retailing, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2553440

Scott Fay (Contact Author)

Syracuse University ( email )

900 S. Crouse Avenue
Syracuse, NY 13244-2130
United States
315-443-3456 (Phone)

HOME PAGE: http://whitman.syr.edu/Directory/ShowInfo.aspx?id=360

Jinhong Xie

University of Florida - Warrington College of Business Administration ( email )

209 Bryan Hall Campus Box 117155
Gainesville, FL 32611-7166
United States
352-392-0161 Ext. 1233 (Phone)
352-846-0457 (Fax)

HOME PAGE: http://bear.cba.ufl.edu/xie/Xie_DirectoryProfile.htm

Cong Feng

University of Mississippi - School of Business Administration ( email )

PO Box 3986
Oxford, MS 38677
United States

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