A Markovian Approach for Cross-Category Complementarity in Choice Modeling

TL;DR

This paper introduces a Markovian multi-purchase choice model that captures cross-category complementarity, improving revenue optimization and predictive accuracy in retail settings with multiple product categories.

Contribution

It proposes a novel Markovian approach for modeling cross-category complementarity within a RUM framework, along with algorithms for estimation and assortment optimization.

Findings

Model improves predictive accuracy and revenue in datasets with complementarity.

Introduces an empirical metric to quantify cross-category complementarity.

Reveals market structures like brand loyalty across categories.

Abstract

While single-purchase choice models have been widely studied in assortment optimization, customers in modern retail and e-commerce environments often purchase multiple items across distinct product categories, exhibiting both substitution and complementarity. We consider the cross-category assortment optimization problem where retailers jointly determine assortments across categories to maximize expected revenue. Most prior work on the topic either overlooks complementarity or proposes models that lead to intractable optimization problems, despite being based on the multinomial logit (MNL) choice model. We propose a sequential multi-purchase choice model for cross-category choice that incorporates complementarity through a Markovian transition structure across categories, while allowing general Random Utility Maximization (RUM)-based choice models to capture the within-category substitution. We develop an Expectation-Maximization algorithm for estimation, and a polynomial-time algorithm for unconstrained assortment optimization that yields the optimal solution when the within-category substitution follows a Markov chain choice model. Furthermore, we introduce an empirical metric to quantify complementarity strength across product categories and conduct extensive numerical experiments on both synthetic data and a large-scale transaction-level dataset from a major US grocery store. Our model yields improvements in predictive accuracy, model fit, and expected revenue in setting with complementarity, and it reveals intuitive market structures such as brand-loyal cross-category purchasing. Overall, we believe that our model provides a theoretically-grounded and practical framework for modeling complementarity and making better cross-category assortment decisions.