Assortment Optimization

A fundamental question in revenue management involves deciding which fares to offer in response to a request from an origin to a destination. The solution depends on available capacity, the time of departure, and how consumers make choices. This problem needs to be solved in real time as travel requests arrive. The assortment optimization problem is crucial in other RM applications such as hotels and car rentals, and is becoming more important in retailing and e-commerce. The fundamental tradeoff in assortment optimization is that broad assortments result in demand cannibalization and spoilage, while narrow assortments result in disappointed consumers that may walk away without purchasing. The formulation can be interpreted broadly to include more strategic decisions such as the location of stores within a city. The profitability of an assortment can be best captured through a choice model that provides sale probabilities as a function of the set of products contained in the assortment. In this chapter, we formulate and solve assortment optimization problems for many of the choice models presented in the previous chapter.