Integrated Bundling and Pricing of Unique Items

TL;DR

This paper develops a novel approach for strategic bundling and pricing of unique, non-replenishable items to maximize retailer revenue, incorporating choice models and providing algorithms with strong theoretical guarantees.

Contribution

It introduces tractable revenue bounds and efficient algorithms for bundling and pricing, specifically tailored for unique items and choice models like the multinomial logit.

Findings

Asymptotically optimal revenue bounds under the multinomial logit model.

Proposed algorithms outperform static and fluid approximations.

Numerical experiments show significant cost and efficiency improvements in logistics.

Abstract

Retailers have significant potential to improve recommendations through strategic bundling and pricing. By taking into account different types of customers and their purchasing decisions, retailers can better accommodate customer preferences and increase revenues while reducing unsold items. We consider a retailer seeking to maximize its expected revenue by selling unique and non-replenishable items over a finite horizon. The retailer may offer each item individually or as part of a bundle. Our approach provides tractable bounds on expected revenue that are tailored to unique items and suitable for a rich class of choice models. We leverage these bounds to propose a bundling algorithm that efficiently selects bundles in a column-generation fashion. Under the multinomial logit model, our bounds are asymptotically optimal as the expected number of arrivals $\lambda$ grows, yielding a performance bound in $O(1/\lambda)$. In contrast, we show that both the static and fluid approximations are not asymptotically optimal. Moreover, we propose a greedy algorithm that allows for tractable dynamic bundling. We show through numerical experiments that third-party logistics providers (3PL) in particular can benefit from improved load recommendations and pricing decisions. By not only minimizing shipping costs, but also reducing empty miles and suggesting options that better match carrier preferences, our methodology benefits digital brokerage platforms while contributing to the transportation industry's sustainability efforts. In a Texas Triangle simulation powered by Uber Freight data, dynamic bundling and pricing reduces costs by 6%, empty miles by 25%, and more than halves the number of unmatched loads over dynamic pricing alone.