Assortment Optimization Under the Multinomial Logit Model with Utility-Based Rank Cutoffs

Abstract

Augmenting the Modeling Power of the Multinomial Logit Model Using choice models to capture customer choice behavior has steadily become the common practice in revenue management. Discrete choice models allow one to capture the fact that customers substitute among the offered products, so if a particular product is not offered, then a portion of the customers interested in this product will substitute into a suitable available alternative. The multinomial logit model is one of the most commonly used choice models to capture customer choice in practice. This choice model is based on the utility maximization framework. A customer associates random utilities with the products, as well as the no-purchase option, in which case, the customer purchases the product with the largest utility, as long as its utility exceeds that of the no-purchase option. In “Assortment Optimization under the Multinomial Logit Model with Utility-Based Rank Cutoffs,“ Bai, Feldman, Topaloglu, and Wagner augment the modeling flexibility of the multinomial logit model, where a customer also leaves without a purchase if she cannot find one of her top few choices. They develop algorithms to find revenue-maximizing assortments.