Ensemble Method for Censored Demand Prediction

TL;DR

This paper develops and compares ensemble machine learning models for censored demand prediction, demonstrating improved accuracy and bias correction when accounting for sales censorship in economic applications.

Contribution

Introduces ensemble models that incorporate censored quantile regression to improve demand prediction accuracy and bias correction over traditional methods.

Findings

Models with censorship accounting outperform those without in predictive accuracy.

Censored models provide bias-corrected estimates of demand sensitivity.

Ensemble methods effectively combine multiple regressors and classifiers for demand forecasting.

Abstract

Many economic applications including optimal pricing and inventory management requires prediction of demand based on sales data and estimation of sales reaction to a price change. There is a wide range of econometric approaches which are used to correct a bias in estimates of demand parameters on censored sales data. These approaches can also be applied to various classes of machine learning models to reduce the prediction error of sales volume. In this study we construct two ensemble models for demand prediction with and without accounting for demand censorship. Accounting for sales censorship is based on the idea of censored quantile regression method where the model estimation is splitted on two separate parts: a) prediction of zero sales by classification model; and b) prediction of non-zero sales by regression model. Models with and without accounting for censorship are based on the predictions aggregations of Least squares, Ridge and Lasso regressions and Random Forest model. Having estimated the predictive properties of both models, we empirically test the best predictive power of the model that takes into account the censored nature of demand. We also show that machine learning method with censorship accounting provide bias corrected estimates of demand sensitivity for price change similar to econometric models.