A General Attraction Model and Sales-Based Linear Program for Network Revenue Management Under Customer Choice

Abstract

This paper addresses two concerns with the state of the art in network revenue management with dependent demands. The first concern is that the basic attraction model (BAM), of which the multinomial logit (MNL) model is a special case, tends to overestimate demand recapture in practice. The second concern is that the choice based deterministic linear program, currently in use to derive heuristics for the stochastic network revenue management problem, has an exponential number of variables. We introduce a generalized attraction model (GAM) that allows for partial demand dependencies ranging from the BAM to the independent demand model (IDM). We also provide an axiomatic justification for the GAM and a method to estimate its parameters. As a choice model, the GAM is of practical interest because of its flexibility to adjust productspecific recapture. Our second contribution is a new formulation called the Sales Based Linear Program (SBLP) that works for the GAM. This formulation avoids the exponential number of variables in the earlier choice-based network RM approaches, and is essentially the same size as the well known LP formulation for the IDM. The SBLP should be of interest to revenue managers because it makes choice-based network RM problems tractable to solve. In addition, the SBLP formulation yields new insights into the assortment problem that arises when capacities are infinite. Together these two contributions move forward the state of the art for network revenue management under customer choice and competition.

A strong Lagrangian relaxation for general discrete-choice network revenue management

“…3.1. If customer choice is according to the MNL model and the consideration sets are disjoint, then CDLP has an equivalent, compact sales based formulation that is described in Gallego et al [8]. Therefor, we solve CDLP as a compact linear program.…”

Dynamic Programming Decomposition for Choice-Based Revenue Management with Flexible Products

“…Chapter 3) and that these segments consider buying products from disjoint and overlapping consideration sets, respectively. Gallego et al (2015) reformulate the CDLP in respect of disjoint consideration sets; this reformulation avoids the exponential number of variables. Meissner et al (2013) and Strauss and Talluri (2015) investigate weaker, but more efficient, deterministic linear approximations than the CDLP.…”

Analysis of Discrete Choice Models: A Welfare-Based Framework

“…Before we end this section, we comment that there are other types of choice models in the literature in addition to those mentioned above, such as the Markov chain-based choice model (see Blanchet et al 2013), the two-stage choice model (see Jagabathula and Rusmevichientong 2013), the generalized attraction model (see Gallego et al 2014) and the non-parametric model (see Farias et al 2013). However, they are based on different ideas and are less related to our study.…”