Optimal policy for dynamic assortment planning under multinomial logit models

Xi Chen, Yining Wang, Yuan Zhou

Research output: Contribution to journalArticlepeer-review

Abstract

We study the dynamic assortment planning problem, where for each arriving customer, the seller offers an assortment of substitutable products and the customer makes the purchase among offered products according to an uncapacitated multinomial logit (MNL) model. Because all the utility parameters of the MNL model are unknown, the seller needs to simultaneously learn customers’ choice behavior and make dynamic decisions on assortments based on the current knowledge. The goal of the seller is to maximize the expected revenue, or, equivalently, to minimize the expected regret. Although dynamic assortment planning problem has received an increasing attention in revenue management, most existing policies require the estimation of mean utility for each product and the final regret usually involves the number of products N. The optimal regret of the dynamic assortment planning problem under the most basic and popular choice model—the MNL model—is still open. By carefully analyzing a revenue potential function, we develop a trisection-based policy combined with adaptive confidence bound construction, which - achieves an item-independent regret bound of O(√T), where T is the length of selling horizon. We further establish the matching lower bound result to show the optimality of our policy. There are two major advantages of the proposed policy. First, the regret of all our policies has no dependence on N. Second, our policies are almost assumption-free: there is no assumption on mean utility nor any “separability” condition on the expected revenues for different assortments. We also extend our trisection search algorithm to capacitated MNL models and obtain the optimal regret O- ( NT) (up to logrithmic factors) without any assumption on the mean utility parameters of items.

Original languageEnglish (US)
Pages (from-to)1639-1657
Number of pages19
JournalMathematics of Operations Research
Volume46
Issue number4
DOIs
StatePublished - Nov 2021

Keywords

  • Dynamic assortment optimization
  • Multinomial logit choice model
  • Regret analysis
  • Trisection algorithm

ASJC Scopus subject areas

  • Mathematics(all)
  • Computer Science Applications
  • Management Science and Operations Research

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