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Convex Optimization and Online Learning: Their Applications in Discrete Choice Modeling and Pricing

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Convex Optimization and Online Learning: Their Applications in Discrete Choice Modeling and Pricing Convex Optimization and Online Learning: Their Applications in Discrete Choice Modeling and Pricing A DISSERTATION SUBMITTED TO THE FACULTY OF THE GRADUATE SCHOOL OF THE UNIVERSITY OF MINNESOTA BY Xiaobo Li IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY Advisors: Prof. Shuzhong Zhang and Prof. Zizhuo Wang May, 2018 c Xiaobo Li 2018 ALL RIGHTS RESERVED Acknowledgements First of all, I would like to express my deep gratitude to my advisor Professor Shuzhong Zhang for his mentoring, support and guidance throughout my study at the University of Minnesota as a Ph.D. student. I have been constantly inspired by his deep understanding of optimization and related fields. I have learned a lot from Professor Zhang that would not have been learned if I were not a student of him. Besides Professor Zhang's technical guidance, I am very much motivated by his passion for research, academic integrity and endless innovative ideas. Thanks to Professor Zhang's patience and student-centric mentoring, I gradually developed my own research styles and built my own research path. I am also very grateful for Professor Zhang's invaluable suggestions and tremendous help when I face difficulties during my Ph.D. study. In addition, Professor Zhang has influenced my personable growth by sharing with me his philosophy and wisdom of life and knowledge of the world. My great gratitude also goes to my co-advisor, Professor Zizhuo Wang, who provides me great academic support at the University of Minnesota. Without Professor Wang, this dissertation would not have been possible. I learned a lot from him on how to develop a topic, how to write an excellent paper, and how to better apply theories to real-world practice. For his efficient mode of working, broad research interest, great technical ability, and wide range of knowledge, Professor Wang have been an excellent academic role model for me to follow. I also benefit a lot from him through his great effort on paving the way for my academic journey, which includes, but is not limited to, paying for my conference presentations, referring me to world-class researchers, sharing with me updates on research trends and improving my writing skills. I am very grateful to Professor Saif Benjaafar for his excellent guidance and support. Professor Benjaafar has greatly broadened my research vision on operations management i through his great course and our personal discussions. He never stops inspiring me with his great vision on many operations management areas. Moreover, Professor Benjaafar has shared a lot of resources and information with me for my academic life. Thanks to his persistent help and stimulating suggestions, I have been able to finish a paper with him. But my harvest of being closely connected with Professor Benjaafar is far more than that paper. I would like to thank other faculty members in the Department of Industrial and Systems Engineering for creating a nice academic environment for my Ph.D. study. In particular, my special gratitude goes to Professor William Cooper, who provides me a lot of help as a Director of Graduate Studies. His help includes, but is not limited to, coordinating my courses, applying for scholarships/fellowships, polishing my documents for job searching, and serving as my thesis committee member. I am also grateful to Professor Tony Cui at Carlson School of Management, for devoting the time to be my thesis committee member, and for his brilliant comments and suggestions during my preliminary and final thesis defense. My Ph.D. study would not have started without Professor Karthik Natarajan at Singapore University of Technology and Design (SUTD), who brought me into the operations research and robust optimization area. As my Master's advisor, Professor Natarajan has spent countless hours to help me with every single component of being a researcher, such as proving theorems, developing topics, finding research questions and writing papers. After my graduation as a Master student, Professor Natarajan kindly offered me a one-year research assistant position at SUTD to help me smoothly transition into the Ph.D. study. I feel very lucky to have finished several research projects with Professor Natarajan. During my Ph.D. study, I still receive a lot of help and feedback from him. I always find myself improved after every single discussion with him. I would like to thank all my coauthors for their wonderful ideas, great effort, and excellent teamwork. Chapter 3 is based on a joint work with Professor Karthik Natara- jan and Professor Selin Damla Ahipasaoglu. Chapter 4 is based on a joint work with Professor Zizhuo Wang and Guiyun Feng. Chapter 5 is based on a joint work with Professor Shuzhong Zhang and Xiang Gao. Other coauthors of mine include Professor Chung-Piaw Teo, Professor Xuan Vinh Doan, Professor Zhichao Zheng and Dr. Xiang ii Li. Here, I would like to thank Professor Ahipasaoglu additionally for her support and help during my stay in Singapore. My special gratitude also goes to Professor Simai He, Professor Bo Jiang, Professor Andrew Lim, Professor Guangwu Liu, Professor Rowan Wang and Professor Yimin Yu, for their help, suggestions, and encouragements for my graduate studies in Hong Kong, Singapore and Minneapolis. Last but not least, I am very grateful to my parents, Jialin Li and Qiuling Liao, and grandparents, Yuzhen Li and Xiafang Guo, for their unconditional love, support and trust. Finally, I owe my sincere appreciation to my wife, Guiyun Feng, for her constant love and company. Without her, my life would not have been such colorful and enjoyable. iii Dedication To my parents, my grandparents and my wife. iv Abstract The discrete choice model has been an important tool to model customers' demand when facing a set of substitutable choices. The random utility model, which is the most commonly used discrete choice framework, assumes that the utility of each alternative is random and follows a prescribed distribution. Due to the popularity of the random utility model, the probabilistic approach has been the major method to construct and analyze choice models. In recent years, several choice frameworks that are based on convex optimization are studied. Among them, the most widely used frameworks are the representative agent model and the semi-parametric choice model. In this disser- tation, we first study a special class of the semi-parametric choice model { the cross moment model (CMM) { and reformulate it as a representative agent model. We also propose an efficient algorithm to calculate the choice probabilities in the CMM model. Then, motivated by the reformulation of the CMM model, we propose a new choice framework { the welfare-based choice model { and establish the equivalence between this framework and the other two choice frameworks: the representative agent model and the semi-parametric choice model. Lastly, motivated by the multi-product pricing problem, which is an important application of discrete choice models, we develop an online learning framework where the learning problem shares some similarities with the multi-product pricing problem. We propose efficient online learning algorithms and es- tablish convergence rate results for these algorithms. The main techniques underlying our studies are continuous optimization and convex analysis. v Contents Acknowledgements i Dedication iv Abstract v List of Tables viii List of Figures ix 1 Introduction 1 1.1 Organization . .2 1.2 Notation . .4 2 Discrete Choice Models 5 2.1 The Random Utility Model . .5 2.2 The Representative Agent Model . .8 2.3 The Semi-Parametric Choice Model . 11 2.4 Other Choice Models . 13 3 The Reformulation of the CMM Choice Model 15 3.1 A Representative Agent Formulation for the Cross Moment (CMM) Model 16 3.1.1 Optimization over the Unit Simplex . 18 3.1.2 Strong Concavity of the Objective Function . 21 3.1.3 Optimality Conditions and Their Implications . 22 3.2 Calculating the Choice Probabilities in the CMM model . 27 vi 3.2.1 The Gradient Ascent Algorithm . 27 3.2.2 Local Linear Convergence of the Algorithm . 28 3.3 Computational Results . 30 3.3.1 Comparison of SDP and the Gradient Method for the CMM Model 30 3.3.2 Convergence of the Gradient Method for the CMM Model . 32 3.3.3 Comparison of the CMM Model and MNP Model . 34 3.4 Conclusion . 37 3.5 Technical Proofs . 38 4 Analysis of Discrete Choice Models: A Welfare-Based Approach 57 4.1 Research Questions and Main Contribution . 58 4.2 Welfare-Based Choice Model . 60 4.3 Relation to the Random Utility Model . 65 4.4 Substitutability and Complementarity of Choices . 67 4.5 Examples and Constructions of Non-Substitutable Choice Models . 72 4.5.1 General Nested Logit model . 72 4.5.2 Quadratic Regularization . 76 4.5.3 Crossing Transformation . 77 4.6 Conclusion . 79 4.7 Technical Proofs . 81 5 Online Learning with Non-Convex Losses 97 5.1 Problem Setup . 102 5.2 The First-Order Setting . 106 5.3 The Zeroth-Order Setting . 108 5.4 Concluding Remarks . 117 5.5 Technical Proofs . 117 6 Conclusion 120 References 121 vii List of Tables 3.1 Comparison of SDPNAL+ and the gradient method in terms of accuracy for 9 instances for each n........................... 31 3.2 Comparison of SDP solver SDPNAL+ and the gradient method in terms of computational times for 9 instances for each n.............. 31 3.3 Comparison of the choice probability for alternative 1 between the MNP and CMM model. ∆µ and ∆Σ are the mean and the covariance matrix T for the utilities (u1 − u2; u1 − u3; u1 − u4; u1 − u5) . The number in parenthesis indicates the standard deviation of the estimator. 35 viii List of Figures 3.1 Local convergence of the algorithm for a random instance with n = 100.
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