Why Outlet Stores Exist: Averting Cannibalization in Product Line Extensions

Outlet stores offer attractive prices at locations far from central shopping districts. They form a large and growing component of many firms’ retailing strategies, particularly in the fashion industry. I use a structural demand model to show that consumers are segmented according to their sensitivity to travel distance and taste for product newness. I then develop a supply model to predict product development responses to changes in store locations. Through policy simulations, I discover that the firm uses outlet stores to serve lower‐value consumers who self‐select by traveling to outlet stores from central shopping districts. The firm sells older, less desirable merchandise through outlet stores to prevent cannibalization of regular store revenues by means of exploiting the positive correlation between consumers’ travel sensitivity and taste for new products. I find that the rate of new product introduction in regular stores would fall by 16% if outlet stores were closed down, while variable profits would decline by 23%. These results imply that the existence of outlet stores may enable firms to improve quality in their regular channels, thus counteracting brand dilution effects. Data are available at https://doi.org/10.1287/mksc.2017.1031.