Assortment and Price Optimization in an Omnichannel Setting

Abstract

As firms are starting to move to selling through both online and offline channels, customers are getting the chance to explore products, touch and feel them, and identify diverse attributes before making a purchase. Such a setting in which a retailer uses several channels that interact together is referred to as an omnichannel setting. In this setting, the products offered in one channel affect the demand in other channels. In an omnichannel setting consisting of an online channel and an offline channel, we analyze how a firm can optimize assortment selection and set product prices so as to maximize profit. Our results include developing a model for a pure showcase decision problem, where all products are sold in the online channel, and a subset of these products is offered in the offline channel, which acts as a showroom only, with no sales. In this model, based on the multinomial logit demand, we incorporate how physical inspection of products modifies customer utility towards the product and affects the consumer demand model, and, accordingly, select the optimal assortment of products to showcase in the offline channel. We further extend the model to allow for price optimization and study the structure of the optimal pricing and assortment. We find that the optimal prices in the online channel are characterized by equal profit margins and that the optimal assortment in the showroom consists of “undervalued” having a valuation that improves upon physical inspection by the customer.