Product variety and distribution channel structure

Abstract

We consider how a manufacturer’s product variety decision is affected by its distribution strategy. While offering product variety will generally lead to higher demand, it also has negative implications on production costs and demand uncertainty. We investigate how the manufacturer’s optimal product variety decision differs when selling directly to customers (centralised scenario) as compared to selling through a retailer (decentralised scenario). We find that the retailer’s power and the impact of product variety on demand significantly affect the attractiveness of product variety and determine under which distribution strategy the manufacturer should provide a higher level of variety.