The effect of price and assortment of local products on store performance: An agent-based modelling approach

Abstract

Retail distribution is essential for the growth of markets for local food. While online direct-to-consumer and local food hubs are becoming more sophisticated, the largest market for local foods remains the traditional intermediation (retailing) sector. We develop an agent-based model to simulate the expansion, growth and profitability of retailers offering local foods across a landscape populated by consumers and competing retailers. We design a series of experiments to examine how changes in prices and assortment that include local and non-local options in the fresh produce category impact store market share and profitability. We validate the model, and conduct our experiments, using household fresh produce expenditures data from a retail food-delivery business in the Mid-Atlantic region of the US. We find that retailers offering a larger assortment of local foods are able to sustain higher basket-average retail prices and exhibit higher long-run profits in comparison to retailers that do not carry local options. These results underscore the importance of local foods in a food retailer's price and assortment strategy. The key implication is that retailers need to be conscious not only of the breadth but also of the quality of their assortment in their pricing strategies.