Online assortment and market segmentation under Bertrand competition with set-dependent revenues

DOI10.1137/21M1400134MaRDI QIDQ5084101zbMATH OpenOpenAlexFDO

Authors S. Rasoul Etesami

Publication date 23 June 2022

Published in SIAM Journal on Discrete Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2003.07695

zbMATH Keywords

inventory managementrevenue managementpure Nash equilibriummultinomial logit modelBertrand gameonline assortmentoptimal market segmentation

Mathematics Subject Classification ID

Applications of game theory (91A80) Inventory, storage, reservoirs (90B05) Special types of economic markets (including Cournot, Bertrand) (91B54)

Abstract: We consider an online assortment problem with $[n]:=1,2,ldots,n$ sellers, each holding exactly one item $iin[n]$ with initial inventory $c_{i}inmathbb{Z}_{+}$, and a sequence of homogeneous buyers arriving over a finite time horizon $t=1,2,ldots,m$. There is an online platform whose goal is to offer a subset $S_{t}subseteq[n]$ of sellers to the arriving buyer at time $t$ to maximize the expected revenue derived over the entire horizon while respecting the inventory constraints. Given an assortment $S_t$ at time $t$, it is assumed that the buyer will select an item from $S_t$ based on the well-known multinomial logit model, a well-justified choice model from the economic literature. In this model, the revenue obtained from selling an item $i$ at a given time $t$ critically depends on the assortment $S_t$ offered at that time and is given by the Nash equilibrium of a Bertrand game among the sellers in $S_t$. This imposes a strong dependence/externality among the offered assortments, sellers' revenues, and inventory levels. Despite that challenge, we devise a constant competitive algorithm for the online assortment problem with homogeneous buyers. We also show that the online assortment problem with heterogeneous buyers does not admit a constant competitive algorithm. To compensate for that issue, we then consider the assortment problem under an offline setting with heterogeneous buyers. Under a mild market consistency assumption, we show that the generalized Bertrand game admits a pure Nash equilibrium over general buyer-seller bipartite graphs. Finally, we develop an $O(lnm)$-approximation algorithm for optimal market segmentation of the generalized Bertrand game which allows the platform to derive higher revenues by partitioning the market into smaller pools.

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