Large Firms in Retail Markets: Multiple Products for Heterogeneous Consumers

Abstract

We study the ability of firms of various sizes to cater to the tastes of different consumer niches. In the presence of consumer niches with heterogeneous tastes, firm performance depends on the appeal of each product in each niche. The selection of products to cater to the taste of one or many niches allows firms to influence their product appeal. Using data on purchases at the household-barcode level from Nielsen, we cluster consumers into niches according to their consumption purchases within the product category of toothpaste. We model product appeal as a demand shifter, which we decompose into a common component and a niche specific component that captures the taste of the niche for a given product. Our main finding is that large firms exploit their greater scope to cater to the tastes of several niches. Furthermore, large firms have mainstream products that are highly valued across niches. In contrast, small firms exploit the taste heterogeneity of niches by offering highly personalized products focused for a few profitable niches.