Managing Product Variety and Collocation in a Competitive Environment: An Empirical Investigation of Consumer Electronics Retailing

Product variety is an important strategic tool that firms can use to attract customers and respond to competition. This study focuses on the retail industry and investigates how stores manage their product variety, contingent on the presence of competition and their actual distance from rivals. Using a unique data set that contains all Best Buy and Circuit City stores in the United States, the authors find that a store's product variety (i.e., number of stock-keeping units) increases if a rival store exists in its market but, in the presence of such competition, decreases when the rival store is collocated (within one mile of the focal store). Moreover, collocated rival stores tend to differentiate themselves by overlapping less in product range than do noncollocated rivals. This smaller and more differentiated product variety may be because of coordinated interactions between collocated stores. In summary, this paper presents evidence of both coordination and competition in retailers' use of product variety.