The Stability of MNL-Based Demand under Dynamic Customer Substitution and its Algorithmic Implications

53 Pages Posted: 31 Dec 2019

See all articles by Ali Aouad

Ali Aouad

London Business School

Danny Segev

Tel Aviv University - School of Mathematical Sciences

Date Written: December 4, 2019

Abstract

We study the dynamic assortment planning problem under the widely-utilized Multinomial Logit choice model (MNL). In this single-period assortment optimization and inventory management problem, the retailer jointly decides on an assortment, i.e., a subset of products to be offered, as well as on the inventory levels of these products, aiming to maximize the expected revenue subject to a capacity constraint on the total number of units stocked. The demand process is formed by a stochastic stream of arriving customers, who dynamically substitute between products according to the MNL model. This modeling approach has motivated a growing line of research on joint assortment and inventory optimization, initiated by the seminal papers of Bassok et al. (1999) and Mahajan and van Ryzin (2001). The currently best-known provably-good approximation in the dynamic setting considered, recently devised by Aouad et al. (2018b), leads to an expected revenue of at least 0.139 times the optimum under increasing-failure rate demand distributions, far from being satisfactory in practical revenue management applications.

In this paper, we establish novel stochastic inequalities showing that, for any given inventory levels, the expected demand of each offered product is "stable" under basic algorithmic operations, such as scaling the MNL preference weights and shifting inventory across certain products. By exploiting this newly-gained understanding, we devise the first approximation scheme for dynamic assortment planning under the MNL model, allowing one to efficiently compute inventory levels that approach the optimal expected revenue within any degree of accuracy. Our approximation scheme is employed in extensive computational experiments to concurrently measure the performance of various algorithmic practices proposed in earlier literature. These experiments provide further insights regarding the value of dynamic substitution models, in comparison to simple inventory models that overlook stock-out effects, and shed light on their real-life deployability.

Keywords: Dynamic substitution, Multinomial Logit choice model, inventory management, probabilistic couplings

Suggested Citation

Aouad, Ali and Segev, Danny, The Stability of MNL-Based Demand under Dynamic Customer Substitution and its Algorithmic Implications (December 4, 2019). Available at SSRN: https://ssrn.com/abstract=3498325 or http://dx.doi.org/10.2139/ssrn.3498325

Ali Aouad

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Danny Segev (Contact Author)

Tel Aviv University - School of Mathematical Sciences ( email )

Tel Aviv 69978
Israel

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