Assortment Optimization with Visibility Constraints

Motivated by applications in e-retail and online advertising, we study the problem of assortment optimization under visibility constraints, referred to as APV. We are given a universe of substitutable products and a stream of T customers. The objective is to determine the optimal assortment of products to offer to each customer in order to maximize the total expected revenue, subject to the constraint that each product is required to be shown to a minimum number of customers. The minimum display requirement for each product is given exogenously and we refer to these constraints as visibility constraints. We assume that customer choices follow a Multinomial Logit model. We provide a characterization of the structure of the optimal assortments and present an efficient polynomial time algorithm for solving APV. To accomplish this, we introduce a novel function called the “expanded revenue” of an assortment and establish its supermodularity. Our algorithm takes advantage of this structural property. Additionally, we demonstrate that APV can be formulated as a compact linear program. Finally, we propose a novel, fair strategy for pricing the revenue loss due to the enforcement of visibility constraints.