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A randomized concave programming method for choice network revenue management

Models incorporating more realistic models of customer behavior, as customers choosing from an offer set, have recently become popular in assortment optimization and revenue management. The dynamic program for these models is intractable and approximated by a deterministic linear program called the CDLP which has an exponential number of columns. However, when the segment consideration sets overlap, the CDLP is difficult to solve. Column generation has been proposed but finding an entering column has been shown to be NP-hard. In this paper we propose a new approach called SDCP to solving CDLP based on segments and their consideration sets. SDCP is a relaxation of CDLP and hence forms a looser upper bound on the dynamic program but coincides with CDLP for the case of non-overlapping segments. If the number of elements in a consideration set for a segment is not very large (SDCP) can be applied to any discrete-choice model of consumer behavior. We tighten the SDCP bound by (i) simulations, called the randomized concave programming (RCP) method, and (ii) by adding cuts to a recent compact formulation of the problem for a latent multinomial-choice model of demand (SBLP+). This latter approach turns out to be very effective, essentially obtaining CDLP value, and excellent revenue performance in simulations, even for overlapping segments. By formulating the problem as a separation problem, we give insight into why CDLP is easy for the MNL with non-overlapping considerations sets and why generalizations of MNL pose difficulties. We perform numerical simulations to determine the revenue performance of all the methods on reference data sets in the literature.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1215.

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Date of creation: Apr 2010
Date of revision: Oct 2011
Handle: RePEc:upf:upfgen:1215
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