Retailers’ product location problem with consumer search

Abstract

With few exceptions, today’s retailers sell products across multiple categories. One strategic consideration of such retailers is product location, which determines how easy or difficult different categories are for customers to access. For example, grocery or department stores determine which products will be located closer to the entrance of the store versus at the back of it, while online retailers decide which products to feature on the homepage, and which will require scrolling or keyword search to get to. In this paper, we study how a retailer should optimally locate products within a store, when the locations chosen affect consumer search costs. We show that the retailer has an incentive to prioritize products with lower utility, contrasting with prior work. The intuition for our result is that the consumer may be willing to search less preferred products only at the lower cost, while the more preferred products will be searched even at higher search costs. This strategy benefits the retailer by increasing the number of products the consumer searches and thus, the ones she may buy. Our finding is robust to several extensions: (i) a retailer determining not only product locations, but also prices, (ii) independent (e.g. categories), as well as substitute products, and (iii) a focal retailer that faces competition. From a managerial perspective, we show that allocating products in the store without taking into account how this affects consumer search costs, might mean consumers overlook products they would otherwise purchase.