Consumer Behavior And Firm Marketing Strategy Under Assortment Expansion

Qi Yu, University of Pennsylvania


This dissertation studies two types of assortment expansion strategies: category expansion and the launch of a new service. We first explore the impact of category expansion on customer demand and firm pricing strategy. We theoretically and empirically demonstrate the "dark side'' of category expansion: the price sensitivity of existing categories may increase. We develop a model of multi-category purchase with travel costs to capture customers' preference for one-stop shopping—the primary motivation for category expansion. We then apply the model to study the price sensitivity of grocery categories after liquor was introduced to private stores in the state of Washington due to a deregulation policy. Contrary to conventional wisdom, we find price sensitivity increases in categories low in demand and complementary to liquor. These changes, if ignored, would lead to a significant profit loss. Next, we study the pricing strategy of the newly introduced category post assortment expansion. Specifically, we examine how and why liquor prices change after privatization in the state of Washington. We propose five mechanisms and develop a framework to analyze their price effect using counterfactual simulations. Our results suggest that, contrary to the policymaker's expectation, competition does not lower liquor prices. Rather, liquor prices surge because of the high license fees. Finally, we examine the impact of a subscription program on customer purchases. We adopt a quasi-experimental method to identify individual-level treatment effects. We find the subscription program leads to a large increase in customer purchases. The effect of the subscription program is economically significant, persistent over time and heterogeneous across customers. Interestingly, the program’s economic benefits only explain a third of the effect size. Evidence suggests that customers commit a sunk cost fallacy in that they increase purchases to justify their subscription decisions.