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Assortment Planning with Nested Preferences: Dynamic Programming with Distributions as States?

24 Pages Posted: 1 Apr 2015  

Danny Segev

University of Haifa - Department of Statistics

Date Written: March 30, 2015

Abstract

The main contribution of this paper is to develop new techniques in approximate dynamic programming, along with the notions of rounded distributions and inventory filtering, to devise a quasi-PTAS for the capacitated assortment planning problem, originally studied by Goyal, Levi, and Segev (2009). Motivated by real-life applications, their nested preference lists model stands as one of very few settings, where near-optimal assortments and inventory levels can be computed efficiently. However, these findings crucially depend on certain distributional assumptions, leaving the general problem wide open in terms of approximability prior to this work.

In addition to proposing the first rigorous approach for handling the nested preference lists model in its utmost generality, from a technical perspective, we augment the existing literature on dynamic programming with a number of promising ideas. These are novel algorithmic tools for efficiently keeping approximate distributions as part of the state description, while losing very little information and while accumulating only small approximation errors throughout the overall computation. From a conceptual perspective, at the cost of losing an eps-factor in optimality, we show how to dramatically improve on the truly exponential nature of standard dynamic programs, which seem essential for the purpose of computing optimal inventory levels.

Keywords: Assortment planning, inventory management, dynamic programming, approximation scheme, rounded distributions

Suggested Citation

Segev, Danny, Assortment Planning with Nested Preferences: Dynamic Programming with Distributions as States? (March 30, 2015). Available at SSRN: https://ssrn.com/abstract=2587440 or http://dx.doi.org/10.2139/ssrn.2587440

Danny Segev (Contact Author)

University of Haifa - Department of Statistics ( email )

Haifa 31905
Israel

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