Pricing, Variety, and Inventory Decisions Under Nested Logit Consumer Choice PDF Download
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Author: Sari Rida Kalakesh
Publisher:
ISBN:
Category :
Languages : en
Pages : 76
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Book Description
Retail represents the second largest industry in the United States with nearly $ 4 trillion in annual revenues and a large capital tied-up in retail inventories. However, the Marketing and Economics literature typically study pricing and var iety (assortment) decisions while ignoring inventory costs. This project incorpo rates the important effects of inventory on pricing and variety decisions for a retailer's product line composed of substitutable items. The retailer's custome rs make their buying decisions for items in the product line based on a random u tility function. A popular model for consumer utility (choice) in this situation is the Multinomial Logit Choice (MNL) model. However, MNL suffers from the inde pendence from irrelevant alternative (IIA) property, which basically implies tha t items in the product line are broadly similar. A remedy to this limitation is to adopt a Nested Multinomial Logit (NMNL) choice model, an enhancement of the M NL, which has received little attention in the retail literature. In this project, we study pricing, variety and inventory decisions under NMNL co nsumer choice and within a single-period newsvendor-type inventory setting. We d erive a close-form expression for the retailers expected profit function of pric es, assortment, and inventory levels. We then numerically analyze the structure of a retailer's optimal assortment, prices and inventory levels. To enhance our understanding of the problem, we develop models of different flavors involving d eciding on two out of three basic pricing, variety and inventory decisions befor e considering all three decisions jointly. Specifically, we start by analyzing p ricing and variety decisions while assuming ample supply (i.e., infinite invento ry levels). We then study a second situation where prices are exogenously fixed and the retailer decides on variety and inventory levels. We finally study a thi rd, and perhaps most important, situation where the retailer jointly decides on pricing, variety and inventory. We observe that the optimal prices, assortment and inventory levels have simple structure in all three situations. This sugges ts that "good" practical solutions for the complex problem of joint pricing, var iety and inventory decisions within the realistic setting we consider could be o btained with ease.
Author: Sari Rida Kalakesh
Publisher:
ISBN:
Category :
Languages : en
Pages : 76
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Book Description
Retail represents the second largest industry in the United States with nearly $ 4 trillion in annual revenues and a large capital tied-up in retail inventories. However, the Marketing and Economics literature typically study pricing and var iety (assortment) decisions while ignoring inventory costs. This project incorpo rates the important effects of inventory on pricing and variety decisions for a retailer's product line composed of substitutable items. The retailer's custome rs make their buying decisions for items in the product line based on a random u tility function. A popular model for consumer utility (choice) in this situation is the Multinomial Logit Choice (MNL) model. However, MNL suffers from the inde pendence from irrelevant alternative (IIA) property, which basically implies tha t items in the product line are broadly similar. A remedy to this limitation is to adopt a Nested Multinomial Logit (NMNL) choice model, an enhancement of the M NL, which has received little attention in the retail literature. In this project, we study pricing, variety and inventory decisions under NMNL co nsumer choice and within a single-period newsvendor-type inventory setting. We d erive a close-form expression for the retailers expected profit function of pric es, assortment, and inventory levels. We then numerically analyze the structure of a retailer's optimal assortment, prices and inventory levels. To enhance our understanding of the problem, we develop models of different flavors involving d eciding on two out of three basic pricing, variety and inventory decisions befor e considering all three decisions jointly. Specifically, we start by analyzing p ricing and variety decisions while assuming ample supply (i.e., infinite invento ry levels). We then study a second situation where prices are exogenously fixed and the retailer decides on variety and inventory levels. We finally study a thi rd, and perhaps most important, situation where the retailer jointly decides on pricing, variety and inventory. We observe that the optimal prices, assortment and inventory levels have simple structure in all three situations. This sugges ts that "good" practical solutions for the complex problem of joint pricing, var iety and inventory decisions within the realistic setting we consider could be o btained with ease.
Author: Karl G. Kempf
Publisher: Springer Science & Business Media
ISBN: 1441964851
Category : Business & Economics
Languages : en
Pages : 652
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Book Description
In two volumes, Planning Production and Inventories in the Extended Enterprise: A State of the Art Handbook examines production planning across the extended enterprise against a backdrop of important gaps between theory and practice. The early chapters describe the multifaceted nature of production planning problems and reveal many of the core complexities. The middle chapters describe recent research on theoretical techniques to manage these complexities. Accounts of production planning system currently in use in various industries are included in the later chapters. Throughout the two volumes there are suggestions on promising directions for future work focused on closing the gaps.
Author: Kenneth Train
Publisher: Cambridge University Press
ISBN: 0521766559
Category : Business & Economics
Languages : en
Pages : 399
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Book Description
This book describes the new generation of discrete choice methods, focusing on the many advances that are made possible by simulation. Researchers use these statistical methods to examine the choices that consumers, households, firms, and other agents make. Each of the major models is covered: logit, generalized extreme value, or GEV (including nested and cross-nested logits), probit, and mixed logit, plus a variety of specifications that build on these basics. Simulation-assisted estimation procedures are investigated and compared, including maximum stimulated likelihood, method of simulated moments, and method of simulated scores. Procedures for drawing from densities are described, including variance reduction techniques such as anithetics and Halton draws. Recent advances in Bayesian procedures are explored, including the use of the Metropolis-Hastings algorithm and its variant Gibbs sampling. The second edition adds chapters on endogeneity and expectation-maximization (EM) algorithms. No other book incorporates all these fields, which have arisen in the past 25 years. The procedures are applicable in many fields, including energy, transportation, environmental studies, health, labor, and marketing.
Author: Ruxian Wang
Publisher:
ISBN:
Category :
Languages : en
Pages : 41
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Book Description
Problem Definition: Reference prices arise as price expectations against which consumers evaluate products in their purchase scenarios. We investigate what will happen when prospect theory (e.g., reference prices) meets consumer choice models from the perspectives of both the consumers and the firm.Academic/Practical Relevance: Consumers see multiple relevant products on a particular purchase occasion, and often compare their prices to form the willingness to pay when considering whether to purchase a particular product. Reference prices, which are not included in many choice models, may impact consumer choice behavior, so we incorporate reference prices into consumer choice models and investigate the operations management problems.Methodology: We take the widely used multi-nomial logit model as a showcase to examine the effects of reference prices through analytical and empirical study. We consider the optimization problems on assortment planning and pricing under consumer choice models with a variety of reference prices, including the lowest price and the assortment variety.Results: Our empirical study on a real data set demonstrates that incorporating reference prices into choice models can significantly improve goodness-of-fit and prediction accuracy of consumer choice behavior. Furthermore, we characterize the optimal policies for the assortment planning and pricing problems under the consumer choice models with various reference prices. In particular for the pricing problems under the reference prices defined by either the lowest price or assortment variety, we show that the optimal pricing policy has the following structure: products can be grouped into several categories based on their costs; the products in the same category charge either the same profit markup or the same price.Managerial Implications: In practice, reference prices should be taken into account in model estimation and operations management. Ignoring reference prices may lead to substantial losses.
Author: Narendra Agrawal
Publisher: Springer
ISBN: 1489975624
Category : Business & Economics
Languages : en
Pages : 454
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Book Description
This new edition focuses on three crucial areas of retail supply chain management: (1) empirical studies of retail supply chain practices, (2) assortment and inventory planning and (3) integrating price optimization into retail supply chain decisions. The book has been fully updated, expanding on the distinguishing features of the original, while offering three new chapters on recent topics which reflect areas of great interest and relevance to the academic and professional communities alike - inventory management in the presence of data inaccuracies, retail workforce management, and fast fashion retail strategies. The innovations, lessons for practice, and new technological solutions for managing retail supply chains are important not just in retailing, but offer crucial insights and strategies for the ultimate effective management of supply chains in other industries as well. The retail industry has emerged as a fascinating choice for researchers in the field of supply chain management. It presents a vast array of stimulating challenges that have long provided the context of much of the research in the area of operations research and inventory management. However, in recent years, advances in computing capabilities and information technologies, hyper-competition in the retail industry, emergence of multiple retail formats and distribution channels, an ever increasing trend towards a globally dispersed retail network, and a better understanding of the importance of collaboration in the extended supply chain have led to a surge in academic research on topics in retail supply chain management. Many supply chain innovations (e.g., vendor managed inventory) were first conceived and successfully validated in this industry, and have since been adopted in others. Conversely, many retailers have been quick to adopt cutting edge practices that first originated in other industries. Retail Supply Chain Management: Quantitative Models and Empirical Studies, 2nd Ed. is an attempt to summarize the state of the art in this research, as well as offer a perspective on what new applications may lie ahead.
Author: Lei Guan
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
{Problem Definition:} This paper considers the operational management problems under a newly proposed choice model that captures the effect of focality. The offered assortment is separated into the focal set and the non-focal set under this new model due to the bias of focality, which is identified by the focal sets and an assortment-dependent focal parameter. A prospective consumer is more likely to choose a product from the focal set, while she may still choose one from the non-focal set for a variety of reasons such as previous purchase experience or brand loyalty. This focal multinomial logit model generalizes the famous multinomial logit model and several well-studied consideration-set choice models. In addition, it has the capability to describe and explain a variety of irrational choice behaviors often observed in practice, such as the context effect, halo effect, and choice overload. {Methodology/results:} In this paper, we primarily focus on the threshold focal set and various focal parameter settings, including the constant, cardinality, and linear focal multinomial logit models, as well as a broader model that satisfies certain regularity conditions and subsumes the above models. We analyze the computational complexity and propose polynomial-time exact or approximation algorithms to solve the assortment optimization problems under different focal parameters. We then characterize the optimal strategy for the joint price and assortment optimization problem. Additionally, we develop a mixed integer conic programming reformulation method that converges to a global optimal estimator for the model calibration problem. {Managerial Implications:} We use these methods to conduct numerical experiments on both synthetic and real data sets. The results demonstrate the efficiency of our proposed algorithms, the predictive power, and the increase in revenue for the focal multinomial logit model. Our extensive analysis implies that in practice retailers may take into account the effect of focality in consumer purchase behavior because it could increase the accuracy of demand estimation and therefore improve operational performance.
Author: Guillermo Gallego
Publisher: Springer
ISBN: 1493996061
Category : Business & Economics
Languages : en
Pages : 336
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Book Description
“There is no strategic investment that has a higher return than investing in good pricing, and the text by Gallego and Topaloghu provides the best technical treatment of pricing strategy and tactics available.” Preston McAfee, the J. Stanley Johnson Professor, California Institute of Technology and Chief Economist and Corp VP, Microsoft. “The book by Gallego and Topaloglu provides a fresh, up-to-date and in depth treatment of revenue management and pricing. It fills an important gap as it covers not only traditional revenue management topics also new and important topics such as revenue management under customer choice as well as pricing under competition and online learning. The book can be used for different audiences that range from advanced undergraduate students to masters and PhD students. It provides an in-depth treatment covering recent state of the art topics in an interesting and innovative way. I highly recommend it." Professor Georgia Perakis, the William F. Pounds Professor of Operations Research and Operations Management at the Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts. “This book is an important and timely addition to the pricing analytics literature by two authors who have made major contributions to the field. It covers traditional revenue management as well as assortment optimization and dynamic pricing. The comprehensive treatment of choice models in each application is particularly welcome. It is mathematically rigorous but accessible to students at the advanced undergraduate or graduate levels with a rich set of exercises at the end of each chapter. This book is highly recommended for Masters or PhD level courses on the topic and is a necessity for researchers with an interest in the field.” Robert L. Phillips, Director of Pricing Research at Amazon “At last, a serious and comprehensive treatment of modern revenue management and assortment optimization integrated with choice modeling. In this book, Gallego and Topaloglu provide the underlying model derivations together with a wide range of applications and examples; all of these facets will better equip students for handling real-world problems. For mathematically inclined researchers and practitioners, it will doubtless prove to be thought-provoking and an invaluable reference.” Richard Ratliff, Research Scientist at Sabre “This book, written by two of the leading researchers in the area, brings together in one place most of the recent research on revenue management and pricing analytics. New industries (ride sharing, cloud computing, restaurants) and new developments in the airline and hotel industries make this book very timely and relevant, and will serve as a critical reference for researchers.” Professor Kalyan Talluri, the Munjal Chair in Global Business and Operations, Imperial College, London, UK.
Author: Philipp Wilhelm Keller
Publisher:
ISBN:
Category :
Languages : en
Pages : 204
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Book Description
We consider a retailer offering an assortment of differentiated substitutable products to price-sensitive customers. Prices are chosen to maximize profit, subject to inventory/ capacity constraints, as well as more general constraints. The profit is not even a quasi-concave function of the prices under the basic multinomial logit (MNL) demand model. Linear constraints can induce a non-convex feasible region. Nevertheless, we show how to efficiently solve the pricing problem under three important, more general families of demand models. Generalized attraction (GA) models broaden the range of nonlinear responses to changes in price. We propose a reformulation of the pricing problem over demands (instead of prices) which is convex. We show that the constrained problem under MNL models can be solved in a polynomial number of Newton iterations. In experiments, our reformulation is solved in seconds rather than days by commercial software. For nested-logit (NL) demand models, we show that the profit is concave in the demands (market shares) when all the price-sensitivity parameters are sufficiently close. The closed-form expressions for the Hessian of the profit that we derive can be used with general-purpose nonlinear solvers. For the special (unconstrained) case already considered in the literature, we devise an algorithm that requires no assumptions on the problem parameters. The class of generalized extreme value (GEV) models includes the NL as well as the cross-nested logit (CNL) model. There is generally no closed form expression for the profit in terms of the demands. We nevertheless how the gradient and Hessian can be computed for use with general-purpose solvers. We show that the objective of a transformed problem is nearly concave when all the price sensitivities are close. For the unconstrained case, we develop a simple and surprisingly efficient first-order method. Our experiments suggest that it always finds a global optimum, for any model parameters. We apply the method to mixed logit (MMNL) models, by showing that they can be approximated with CNL models. With an appropriate sequence of parameter scalings, we conjecture that the solution found is also globally optimal.
Author: Asim Ansari
Publisher:
ISBN:
Category :
Languages : en
Pages : 14
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Book Description
Author: Omar Besbes
Publisher:
ISBN:
Category :
Languages : en
Pages : 36
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Book Description
The role of assortment planning and pricing in shaping sales and profits of retailers is well documented and studied in monopolistic settings. However, such a role remains relatively unexplored in competitive environments. In this paper, we study equilibrium behavior of competing retailers in two settings: i.) when prices are exogenously fixed, and retailers compete in assortments only; and ii.) when retailers compete jointly in assortment and prices. For this, we model consumer choice using a multinomial Logit, and assume that each retailer selects products from a predefined set, and faces a display constraint. We show that when the sets of products available to retailers do not overlap, there always exists one equilibrium that pareto-dominates all others, and that such an outcome can be reached through an iterative process of best responses. A direct corollary of our results is that competition leads a firm to offer a broader set of products compared to when it is operating as a monopolist, and to broader offerings in the market compared to a centralized planner. When some products are available to all retailers, i.e., assortments might overlap, we show that display constraints drive equilibrium existence properties.
