Prof. Guillermo Gallego
The Chinese University of Hong Kong-Shenzhen
Talk:
The Limits of Personalization in Assortment Optimization
Abstract:
To study the limits of personalization, we introduce the notion of a clairvoyant firm that can read the mind of consumers and sell them the highest revenue product that they are willing to buy. We show how to compute the expected revenue of the clairvoyant firm for a class of rational discrete choice models, and develop prophet-type inequalities that provide performance guarantees for the expected revenue of the traditional assortment optimization firm (a TAOP firm) relative to the clairvoyant firm, and therefore to any effort to personalize assortments. In particular, we show that the expected revenue of the clairvoyant firm cannot exceed twice the expected revenue of the TAOP for the RCS model, the MNL, the GAM and the Nested-Logit Model. On the other hand, there are random utility models for which personalized assortments can earn up to $n$ times more than a TAOP firm, where $n$ is the number of products. Our numerical studies indicate that when the mean utilities of the products are heterogeneous among consumer types, and the variance of the utilities is small, firms can gain substantial benefits from personalized assortments. We support these observations, and others, with theoretical findings. While the consumers’ surplus can potentially be larger under personalized assortments, clairvoyant firms with pricing power can extract all surplus, and earn arbitrarily more than traditional firms that optimize over prices but do not personalize them. For the price-aware MNL, however, a clairvoyant firm can earn at most $\exp(1)$ more than a traditional firm.
Biography :
Prof. Gallego's research interests are Dynamic Pricing and Revenue Optimization, Supply Chain Management, Electronic Commerce, and Inventory Theory. He has published influential papers in the leading journals of his field where he has also occupied a variety of editorial positions. His work has been supported by numerous industrial and government grants. In addition to theoretical research, Prof Gallego has developed strong collaboration with global corporations such as Disney World, Hewlett Packard, IBM, Lucent Technologies, Nomis Solutions, and Sabre Airline Solutions. He has also worked with government agencies such as the National Research Council, the National Science Foundation in United States and the Ireland Development Agency. His graduate students are associated with prestigious universities and occupy leading roles in their chosen fields. He spent his 1996-97 sabbatical at Stanford University and was a visiting scientist at the IBM Watson Research Center from 1999-2003. Professor Gallego received both his PhD degree and MS degree in Operations Research and Industrial Engineering from Cornell University in 1988 and 1987.
