Assortment optimisation under a general discrete choice model: A tight analysis of revenue-ordered assortments

TL;DR

This paper analyzes the effectiveness of revenue-ordered assortments in assortment optimization under a general discrete choice model with regularity, providing tight bounds and connecting to pricing problems like envy-free pricing.

Contribution

It offers tight approximation guarantees for revenue-ordered assortments under regularity, extending previous results and linking assortment optimization to pricing problems.

Findings

Bounds are tight and improve previous results.

Revenue-ordered assortments perform well under regularity.

Connections established between assortment optimization and pricing problems.

Abstract

The assortment problem in revenue management is the problem of deciding which subset of products to offer to consumers in order to maximise revenue. A simple and natural strategy is to select the best assortment out of all those that are constructed by fixing a threshold revenue $\pi$ and then choosing all products with revenue at least $\pi$. This is known as the revenue-ordered assortments strategy. In this paper we study the approximation guarantees provided by revenue-ordered assortments when customers are rational in the following sense: the probability of selecting a specific product from the set being offered cannot increase if the set is enlarged. This rationality assumption, known as regularity, is satisfied by almost all discrete choice models considered in the revenue management and choice theory literature, and in particular by random utility models. The bounds we obtain are tight and improve on recent results in that direction, such as for the Mixed Multinomial Logit model by Rusmevichientong et al. (2014). An appealing feature of our analysis is its simplicity, as it relies only on the regularity condition. We also draw a connection between assortment optimisation and two pricing problems called unit demand envy-free pricing and Stackelberg minimum spanning tree: These problems can be restated as assortment problems under discrete choice models satisfying the regularity condition, and moreover revenue-ordered assortments correspond then to the well-studied uniform pricing heuristic. When specialised to that setting, the general bounds we establish for revenue-ordered assortments match and unify the best known results on uniform pricing.