UBC Theses and Dissertations
Assortment planning and price optimization with satisficing customers Pourhossein, Forough
This dissertation addresses the implications of the satisficing decision making in retail and revenue management. In the first essay, we incorporate the satisficing behavior of customers in an assortment optimization problem. While different approaches to modelling customer choice have been adopted in assortment planning, all assume customers are utility maximizers. Our work bridges the research streams of assortment planning and bounded rationality, particularly satisficing behavior. Furthermore, by defining a limit for the search budget of customers, based on which customers leave without purchase after examining a certain number of items, we bring a new perspective to the assortment planning literature. We formulate this optimization problem and prove that the firm's problem of finding the optimal assortment is NP-hard. We also establish certain structural properties of the optimal decision to reformulate the problem as a mixed integer program. We show the size of the optimal assortment cannot exceed the maximum search budget of all customers. The second essay investigates the consequences of ignoring the satisficing behavior of customers. We identify analytically a tight upper bound on the firm's percentage loss of expected profit for small instances when it assumes incorrectly that its customers are utility maximizers. In this regard, we take the multinomial logit choice model as the representative of a utility maximizing model. For larger instances, we take a numerical approach to characterize the loss. Our results indicate that when the firm is dealing with satisficers, it may face considerable profit loss by ignoring this type of behavior. In the third essay, we propose a price optimization model for a firm offering two substitutable items to satisficing customers. We define acceptability probability functions for each item and formulate the demand of each product based on the assumption that customers examine the items one-by-one until they find an acceptable alternative. We prove unimodality of the revenue function when the acceptability probabilities follow certain structures. We then provide insights into price dispersion of a utility maximizing pricing model and our satisficing model, as well as the revenue loss of a firm adopting an incorrect choice model.
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