Variety: Consumer Choice and Optimal Diversity

Consumers choose from among the varieties of two brands and an outside good using order statistics. We analytically derive demand functions conditional on their valuations of the varieties being distributed independently uniform. Based on this theory, we estimate a threeparameter empirical version of the model for the soft-drink market. These estimates are used to determine the effects of changes in the number of varieties on demand curves and consumer welfare. We use our estimates to compare the profit-maximizing number of varieties within a grocery store to the socially optimal number and find that consumer surplus and welfare would increase with more variety.