Modelling category demand in retail chains

Abstract

This paper is concerned with analysis of retail-chain data on the demand of frequently bought product categories. It is intended to extend the domain of demand analysis to chain-wide data that directly concern retail managers and researchers. The proposed model explores specific structural hypotheses for chain demand and provides a comprehensive framework that admits store heterogeneity, periodic sales variation, chain-wide sales shocks, and sales dynamics. The approach is illustrated in a case study using scanner data from 10 product categories and yields empirical, quantitative insights into the structure of category demand in retail chains. The model determines category elasticities with clear implications for the effectiveness of pricing policy at the retail level and provides a useful tool for applied demand analysis in the modern retail environment.

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