Optimal algorithms for assortment selection under ranking-based consumer choice models
June 5, 2013
Honhon, D.B.L.P., Jonnalagedda, S. & Pan, X.A.
- Appeared In: Manufacturing and Service Operations Management
- Volume: 14, 2012
- Issue: 2
- Pages: 279 – 289
A retailer's product selection decisions are largely driven by her assumptions on how consumers make choices. We use a ranking-based consumer choice model to represent consumer preferences: every customer has a ranking of the potential products in the category and purchases his highest ranked product (if any) oered in the assortment. We consider four practically motivated special cases of this model, namely the one-way substitution, the locational choice, the outtree, and the intree preference models, and study the retailer's product selection problem when products have dierent price and cost parameters. We assume that the retailer incurs a xed carrying cost per product oered, a goodwill penalty for each customer who does not
purchase his rst choice and a lost sale penalty for each customer who does not nd an acceptable product to buy. For the rst three models, we obtain ecient solution methods that simplify to either a shortest path method or a dynamic program. For the fourth model, we construct an eective algorithm and show numerically that, in practice, it is much faster than enumeration. We also obtain valuable insights on the structure of the optimal assortment.