Administration 

In the normal case the categories from the category table are used. You have to set

$TYPO3_CONF_VARS['EXTCONF']['tt_products']['pageAsCategory'] = 0;

to be able to use them. Otherwise the pages will be taken for categories and the category will be used as the subcategory ( = 1) of a page or not used at all but replaced by the page ( = 2). The only advantage of the latter is that you simply place the records on a page without the need to assign a category. This has historical reasons when no category tree had been available and because the back end page tree has the better user guidance.