Online Assortment and Market Segmentation under Bertrand Competition with Set-Dependent Revenues

TL;DR

This paper studies an online assortment problem with strategic sellers under a Bertrand competition model, proposing algorithms for homogeneous buyers and market segmentation, while analyzing the complexity for heterogeneous buyers.

Contribution

It introduces a constant competitive algorithm for online assortment with homogeneous buyers and analyzes market segmentation under Bertrand competition, addressing externalities and equilibrium existence.

Findings

Developed a constant competitive algorithm for homogeneous buyers.

Proved the non-existence of a constant competitive algorithm for heterogeneous buyers.

Provided an $O( ext{ln } m)$-approximation for market segmentation.

Abstract

We consider an online assortment problem with $[n]:=\{1,2,\ldots,n\}$ sellers, each holding exactly one item $i\in[n]$ with initial inventory $c_i\in \mathbb{Z}_+$, and a sequence of homogeneous buyers arriving over a finite time horizon $t=1,2,\ldots,m$. There is an online platform whose goal is to offer a subset $S_t\subseteq [n]$ of sellers to the arriving buyer at time $t$ to maximize the expected revenue derived over the entire horizon while respecting the inventory constraints. Given an assortment $S_t$ at time $t$, it is assumed that the buyer will select an item from $S_t$ based on the well-known multinomial logit model, a well-justified choice model from the economic literature. In this model, the revenue obtained from selling an item $i$ at a given time $t$ critically depends on the assortment $S_t$ offered at that time and is given by the Nash equilibrium of a Bertrand game among the sellers in $S_t$. This imposes a strong dependence/externality among the offered assortments, sellers' revenues, and inventory levels. Despite that challenge, we devise a constant competitive algorithm for the online assortment problem with homogeneous buyers. We also show that the online assortment problem with heterogeneous buyers does not admit a constant competitive algorithm. To compensate for that issue, we then consider the assortment problem under an offline setting with heterogeneous buyers. Under a mild market consistency assumption, we show that the generalized Bertrand game admits a pure Nash equilibrium over general buyer-seller bipartite graphs. Finally, we develop an $O(\ln m)$-approximation algorithm for optimal market segmentation of the generalized Bertrand game which allows the platform to derive higher revenues by partitioning the market into smaller pools.