Demand estimation and assortment optimization under substitution: methodology and application

This is an extended abstract of a paper that was a finalist in the Manufacturing and Service Operations Management Society's 2003 Student Paper Competition. Using a relatively simple model of demand substitution and a novel methodology for demand estimation under substitution, a substitution rate for all stores in a retail chain is estimated. The method was applied at a large Dutch supermarket chain, and suggested a potential 50% increase in profits.