Abstract

I study how retailers strategically use product assortment to respond to local market conditions when prices are set at a national level. When firms cannot increase the price of a product that is particularly popular in a local market, they can instead replace the product with a more expensive substitute. The profitability of these assortment substitutions depends on the degree of market competition. Extensive store-level data and a structural equilibrium model of store competition allow me to disentangle the market power effect on assortment choice from other market forces, such as local preferences and logistics. The counterfactual analysis points to retailers' incentives to exercise local market power when consumers have limited choice by providing fewer and more expensive products. Simulations show that a uniform assortment would benefit consumers but would be costly for firms. Therefore, I consider alternative policies that could reduce assortment inequality in concentrated markets and improve total welfare, such as reducing travel costs for consumers and subsidizing retailers in remote areas.