W e consider a retailer with limited inventory of identically priced, substitutable products. The retailer faces a market with multiple segments of customers that are heterogeneous with respect to their product preferences. Customers arrive sequentially, and the firm decides which subset of products to offer to each arriving customer depending on the customer's preferences, the inventory levels, and the remaining time in the season. We show that it is optimal to limit the choice set of some customers (even when the products are in stock), reserving products with low inventory levels for future customers who may have a stronger preference for those products. In certain settings, we prove that it is optimal to follow a threshold policy under which a product is offered to a customer segment if its inventory level is higher than a threshold value. The thresholds are decreasing in time and increasing in the inventory levels of other products. We introduce two heuristics derived by approximating the future marginal expected revenue by the marginal value of a newsvendor function that captures the substitution dynamics between products. We test the impact of assortment customization using data from a fashion retailer. We find that the potential revenue impact of assortment customization can be significant, especially when customer heterogeneity is high and when the products' inventory-to-demand ratios are asymmetric. Our findings suggest that assortment customization can be used as another lever for revenue maximization in addition to pricing.

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W e consider a firm that produces multiple variants of a product. Products are assembled using a combination of common and dedicated components. We characterize the optimal assortment and derive the optimal inventory levels for the common and dedicated components under various bill-of-material configurations. We investigate the effect of commonality on product variety and compare its benefits under different demand characteristics. Commonality always leads to increased profits, but its effect on the level of product variety depends on the type of commonality. If all common components are used for the production of the entire set of products, then the optimal variety level increases relative to the system with no commonality. However, if the common components are used by a subset of the final products, then the optimal variety level may decrease with commonality. We find that the effects of commonality on profit and variety level are stronger under a demand model in which product demands are more variable and exhibit pairwise negative correlation relative to a model with independent demands.

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In this study, as an alternative to the surplus utility, we propose a performance‐price‐ratio (PPR) utility and specialize the customer choice model with a PPR maximization criterion. With the PPR‐based choice model, we investigate a pricing game between retailers in a competitive market. Through transferring the decision variable from price to performance‐price ratio, the first‐order condition of the game becomes a linear equation system, which enables us to develop a closed‐form equilibrium solution. The solution reveals how product performance and price sensitivity affect equilibrium pricing, market share, and revenue. With the developed theoretical results, we carry out empirical studies with a rich data set obtained from the China TV market. At the individual product level and the brand level, we calibrate the PPR‐based choice model and the widely used surplus‐based model with a Bayesian information criteria‐based stepwise multivariate regression method. The regression results suggest that the PPR‐based model fits both the product‐level and brand‐level data better than the surplus‐based model. Through the stepwise selection of independent variables, we find that the leading features affecting a TV’s performance are 3D TV functionality and its screen size. Moreover, we explore how the market equilibrium evolves with the game decision sequence, market structure, and new product entry.

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