Assortment Optimization under a Single Transition Model

TL;DR

This paper studies an assortment optimization problem under a Markov chain choice model with single transition, providing complexity results, special case algorithms, and a mixed integer programming approach, demonstrating improved revenue outcomes.

Contribution

It introduces a novel single transition Markov chain choice model for assortment optimization, analyzes its complexity, and develops efficient algorithms and formulations for practical solutions.

Findings

NP-Hardness of the general problem.

Polynomial algorithms for special cases.

Significant revenue improvements with proposed methods.

Abstract

In this paper, we consider a Markov chain choice model with single transition. In this model, customers arrive at each product with a certain probability. If the arrived product is unavailable, then the seller can recommend a subset of available products to the customer and the customer will purchase one of the recommended products or choose not to purchase with certain transition probabilities. The distinguishing features of the model are that the seller can control which products to recommend depending on the arrived product and that each customer either purchases a product or leaves the market after one transition. We study the assortment optimization problem under this model. Particularly, we show that this problem is generally NP-Hard even if each product could only transit to at most two products. Despite the complexity of the problem, we provide polynomial time algorithms for several special cases, such as when the transition probabilities are homogeneous with respect to the starting point, or when each product can only transit to one other product. We also provide a tight performance bound for revenue-ordered assortments. In addition, we propose a compact mixed integer program formulation that can solve this problem of large size. Through extensive numerical experiments, we show that the proposed algorithms can solve the problem efficiently and the obtained assortments could significantly improve the revenue of the seller than under the Markov chain choice model.