Robust Optimization of the 0-1 Knapsack Problem: Balancing Risk and Return in Assortment Optimization

Retailers face the important but challenging task of optimizing their product assortments. The challenge is to find, for every category in every store, the assortment that maximizes (expected) category profit. Adding to the complexity of this 0-1 knapsack problem, retailers should also consider the risk associated with every assortment. While every product in the assortment offers an expected return, there is also uncertainty around its expected demand and profit contribution. Therefore, retailers face the difficult task of designing a portfolio of products that balances risk and return. In this paper, we develop a robust approach to optimize retail assortments that offers this balance. Since the dimensionality of this robust 0-1 knapsack problem in practice often precludes full enumeration, we propose a novel, efficient and real-time heuristic that solves this problem. The heuristic constructs an approximation of the risk-return Efficient Frontier of assortments. We find that the robust solutions offer the retailer a considerable reduction in risk (variance), yet only imply a small reduction in expected return. The constructed approximations contain assortments that are optimal solutions to the robust assortment optimization problem. Moreover, they represent insightful visualizations of the solution space, allowing for interactivity (“what risk premium should the retailer pay?”) in real-time (matter of seconds). Keywords: Retailing, Assortments, Risk-Return, Efficient Frontier, Robust Optimization, Knapsack Proble

The dynamic interplay between recorded music and live concerts: The role of piracy, unbundling, and artist characteristics

The business model for musicians relies on selling recorded music and selling concert tickets. Traditionally, demand for one format (e.g., concerts) would stimulate demand for the other format (e.g., recorded music) and vice versa, leading to an upward demand spiral. However, the market for recorded music is under pressure due to piracy and the unbundling of albums, which also entail threats for the traditional demand spiral. Despite the fundamental importance of recorded music and live concerts for the multibillion-dollar music industry, no prior research has studied their dynamic interplay. This study fills this void by developing new theory on how piracy, unbundling, artist fame, and music quality affect dynamic cross-format elasticities between record demand and concert demand. The theory is tested with a unique data set covering weekly concert and recorded music revenues for close to 400 artists across more than six years in the world's third-largest music market, Germany. The cross-format elasticity of record on concert revenue is much stronger than the reverse elasticity of concert on record revenue. The results show the key role of piracy, unbundling, and artist characteristics on these cross-format elasticities, which have implications for the business model of the music industry

Marketing research on product-harm crises: a review, managerial implications, and an agenda for future research

© 2017, Academy of Marketing Science. A product-harm crisis is a discrete event in which products are found to be defective and therefore dangerous to at least part of the product’s customer base. Product-harm crises are not only dangerous for consumers; they also represent a major threat to the reputation and equity of brands or companies, which often struggle with how to best respond. The marketing literature has witnessed a surge in interest on the consequences of product-harm crises for a variety of stakeholders, including consumers, the brand or company itself, its investors, as well as competitors. This article offers a systematic review of research on product-harm crises in the marketing literature. We discuss the antecedents and consequences of product-harm crises, their moderators and mediators, and the theories and methodologies used. We identify commonalities and differences between the studies, as well as gaps in the literature and avenues for future research. Finally, we synthesize the managerial implications across studies

Is 75% of the sales promotion bump due to brand switching? No, only 33% is

Several researchers have decomposed sales promotion elasticities based on household scanner-panel data. A key result is that the majority of the sales promotion elasticity, approximately 74% on average, is attributed to secondary demand effects (brand switching) and the remainder is attributed to primary demand effects (timing acceleration and quantity increases). The authors demonstrate that this result does not imply that if a brand gains 100 units in sales during a promotion, the other brands in the category lose 74 units. The authors offer a complementary decomposition measure based on unit sales. The measure shows the ratio of the current cross-brand unit sales loss to the current own-brand unit sales gain during promotion; the authors report empirical results for this measure. They also derive analytical expressions that transform the elasticity decomposition into a decomposition of unit sales effects. These expressions show the nature of the difference between the two decompositions. To gain insight into the magnitude of the difference, the authors apply these expressions to previously reported elasticity decomposition results and find that approximately 33% of the unit sales increase is attributable to losses incurred by other brands in the same category

Engaging the unengaged customer: The value of a retailer mobile app

Mobile apps are becoming a go-to tactic for retailers because they offer the promise of highly convenient digital engagement. We hypothesize that two types of customers are best served by these apps — “offline-only” customers currently purchasing exclusively from the retailer's physical store, and “distant” customers who reside far from the physical store. For offline-only customers, the app complements the physical engagement they currently have. For distant customers, the app offers convenient engagement their remoteness currently precludes. We model app access and purchase behavior of 629 customers who downloaded a retailer's app. We find that apps generate more incremental sales among distant customers compared to near customers, and more incremental sales among offline-only customers compared to online customers. On an illustrative base of 100 K app users, we find accessing the app would generate $2.3 M in incremental sales. Consistent with our segmentation results, we find that the users with the greatest purchase lift (9.5%) due to app usage are those that are distant and offline-only. Our results confirm the economic value of retailer apps and their role as a segmentation strategy to enhance customer engagement