Tractable consideration set structures for assortment optimization and network revenue management

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Title: Tractable consideration set structures for assortment optimization and network revenue management
Authors: Strauss, AK
Talluri, K
Item Type: Journal Article
Abstract: Discrete-choice models are widely used to model consumer purchase behavior in assortment optimization and revenue management. In many applications, each customer segment is associated with a consideration set that represents the set of products that customers in this segment consider for purchase. The firm has to make a decision on what assortment to offer at each point in time without the ability to identify the customer's segment. A linear program called the Choice-based Deterministic Linear Program (CDLP) has been proposed to determine these offer sets. Unfortunately, its size grows exponentially in the number of products and it is NP-hard to solve when the consideration sets of the segments overlap. The Segment-based Deterministic Concave Program with some additional consistency equalities (SDCP+) is an approximation of CDLP that provides an upper bound on CDLP's optimal objective value. SDCP+ can be solved in a fraction of the time required to solve CDLP and often achieves the same optimal objective value. This raises the question under what conditions can one guarantee equivalence of CDLP and SDCP+. In this study, we obtain a structural result to this end, namely that if the segment consideration sets overlap with a certain tree structure or if they are fully nested, CDLP can be equivalently replaced with SDCP+. We give a number of examples from the literature where this tree structure arises naturally in modeling customer behavior.
Issue Date: 1-Mar-2017
Date of Acceptance: 1-Dec-2016
ISSN: 1059-1478
Publisher: Wiley
Start Page: 1359
End Page: 1368
Journal / Book Title: Production and Operations Management
Volume: 26
Issue: 7
Copyright Statement: © 2017 Production and Operations Management Society. This is the accepted version of the following article, which has been published in final form at
Keywords: 1503 Business And Management
Operations Research
Publication Status: Published
Appears in Collections:Imperial College Business School

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