How to Analyze the Results of Linear

Programs-Part 2: Price Interpretation

Mathematics Departnletlt
Unzversity of Colorado at Denver
PO Box 173364
Derlver, Colorado 80217-3364

In the second part of a four-part series, I consider an exercise in

analysis that arises in many applications: Why is the price of
(some commodity) equal to (whatever its solution value)? The
ability to interpret dual prices in a linear programming solution
is part of economic analysis, and the mathematical basis is as
old as linear programming, itself. New approaches, however,
go beyond the usual duality arguments in answering this ques-
tion in more practical terms. One of these new approaches is
path tracing, which seeks a portion of the linear program that
accounts for the row's price by activity costs from sources to
the row. In some cases this is a simple path in a network prob-
lem. More generally, in ordinary network terms, it can be a tree
or involve embedded cycles, but it is regarded as a path in
hypergraph terms.

T his paper is concerned with interpret-

ing dual prices in a n optimal instance
of a linear program. I use terms and con-
cepts that were introduced in Part 1
[Greenberg 1993al of this series.
I shall begin with the transportation
problem, partly because of its familiarity
Cupyr~ght 1 1993, The Institute of Management Sacnccs
0091-2102/93/2305/0057$01 25
Th~spaper was refereed
and partly because of its simplicity. I shall
show how we can go deeper into explain-
ing why a price has a particular value at
optimality. Then, I shall consider another
problem, with which I shall illustrate a
path-tracing procedure. After stepping
through the analysis as a n L P expert, I
P R O G R A M M I N C - -LINEAR

INTERFACES 23: 5 September-October 1993 (pp. 97-1 14)

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GREENBERG

shall demonstrate automatic interpretation subject to

with the ANALYZE rule-base [Greenberg
A, T 2 0; TI - A' 5 Cll
1988, 1993bl.
Transportation Problem for i = 1 , . . . , m , j = l , . . . , n.
I start with the transportation problem.
The dual constraint says, in effect, that
We are given a set of suppliers, which I
no consumer will pay more than the deliv-
denote by i in the set j l , 2, . . . , m ) , and a
ered price. The delivered price from the
set of consumers, which I denote by j in
i-th supplier to the 1-th consumer is A,
the set (1, 2, . . . , n}. The i-th supplier has
s, units, and the j-th consumer demands dl
+ c,,-that is, the sum of the i-th supplier's
price and the transportation cost. This con-
units. Assume total supply is at least as
straint represents a behavioral condition of
great as total demand: 2, sl 2 C,d,. The
a competitive market. It is useful to think
cost to ship one unit from the i-th supplier
of a bidding system, where the j-th con-
to the j-th consumer is c,,, and assume total
sumer will buy from the lowest bidder.
cost is a linear function of shipment levels.
From this perspective, an optimal solu-
An algebraic formulation is given by
tion has the property that if the j-th con-
minimize sumer buys from the i-th supplier, the con-
C C,,X'/ sumer's price equals the delivered price.
'I Mathematically, this is known as comple-
subject to mentary slackness: if x: > 0, then ?r, = A,

x r 0;
+- c,,. (See Greenberg and Murphy [I9851
for a way to see the linear program as a
s , i = l , . . . , m;
~ x , , ~ for model of market equilibrium conditions.)
I
To see how to use this property, con-
x x l , 2 d l for j = l , . . . , n. sider the following implications:
I
(1) 'Two suppliers that ship to a common
A solution to an instance of the trans- consumer differ in their prices precisely by
portation problem not only gives optimal the difference in their transportation
levels of flows, x*, but also gives dual costs-that is, A, - XA = c,, - q,.
prices associated with the constraints. Let
us interpret these prices with a few basic
properties, then I shall consider numerical
examples to go deeper into price interpre-
tation.
Let A, be the i-th supplier price, and let
hk
T , be the j-th consumer price. Mathemati-
This follows because the consumer's price
cally, the dual linear program is given by
equals the delivered price of the i-th sup-
maximize plier and of the k-th supplier: x; > 0 and
C dlrl C - SIX,
xtl > 0 imply Xi +
ckl = T, = A, + c,,.
I I (2) Two consumers that receive from a

INTERFACES 23:5 98
LINEAR PROGRAMS

common supplier differ in their prices pre-
cisely by the difference in their transporta-
tion costs-that is, T,- T~ = c,, - c,k.
This property can be used to aid model
validation in the following sense. If this
price relation does not make sense for an
application, the network model is not
valid--that is, it does not accurately model
what it is intended to represent. It may be,
for example, that shipments are con-
strained by some fixed shares among sup-
pliers and consumers. In general, when we
establish a property of a formulation, it is
basic science to ask whether this property
is valid. If not, the formulation is not valid.
The graph depiction of these two prop-
erties is the row digraph of the linear pro-
gram, and I used it to explain a coal model
to a consortium formed by Chase Econo-
metrics. Once the coal-producing compa-
nies saw this property, they immediately
raised the validity question. The supply
prices in the coal model are mine-mouth
prices, and the company representatives
know that they are not related simply by
differential transportation costs. That ob-
servation revealed an erroneous assump-
tion, which was fixed by incorporating
fixed shares of movements from mines to
markets. This revision of the transportation
activity structure still represents price rela-
tions, but now each dual price relation in-
volves more than one supply price and one
market price.
Now let us consider some numerical ex-
amples. Rubin and Wagner [I9901 have il-
lustrated some interesting interpretations
of optimal solutions. Figure 1 shows one of
their examples that illustrates unique dual

Sup~lv Supplier
Prices

Demand: 10 15 10
Consumer Prices: 55 65 75
Figure 1: In this example with alternative optimal shipping patterns and unique prices [Rubin
and Wagner 19901, each of the 2 X 3 cells corresponds to the link from the associated supplier
to the associated consumer. The number boxed in the Northwest corner of each cell is the
shipping cost. The number in the Southeast corner of each cell is the level of shipment, above
which is an alternative optimal shipment in parentheses.

September-October 1993 99

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GREENBERG
prices with alternative shipment patterns.
For example, in the first optimal solu-
tion, the first supplier sends 10 units to
consumer 1, five units to consumer 2, and
none to consumer 3. His total supply is 20,
so he has five units of surplus (that is, not
shipped). In the second solution, the first
supplier sends none to consumer 1, five to
consumer 2, and 10 to consumer 3. His
surplus is still five units.
Because the first supplier has surplus,
the price is zero because that is the value
of adding one unit or taking one away. If
the first supplier has 21 (or a million) units,
only 15 would still be used, as they are in
this optimal solution, so there is no value
to having extra units. Similarly, if a unit is
taken away, so the first supplier has only
19 units, it also would not change the so-
lution. No value is lost, hence the zero
price whenever there is surplus.
Now I shall interpret the $50 price of
the second supplier. Suppose the supplier
can obtain one more unit (21 instead of
20). What would it be worth? Using the
first optimal solution, he could send that
one unit to the first consumer who then
would decrease his purchase from the first
supplier. The first consumer currently pays
$55 (= XI + +
ell = 0 55). Subtracting the
transportation cost, c~~ = 5, the second
supplier could ask any price up to $50 and
sell this unit to the first consumer. The so-
lution price, X2 = 50, reflects this.
Consumer 2 is paying $65. His pur-
chases are split between the two suppliers,
and their prices differ by their transporta-
tion costs: XI - X2 = c12 - cz2 = 65 - 15
= 50. Since XI = 0, we must have X2 = 50,
as shown.
Consumer 3 is already buying all of his
INTERFACES 23:5
units from supplier 2, at the delivered price
+
of $75 ($50 supply price $25 transporta-
tion cost). We can, however, ask the re-
lated question, "What if supplier 2 loses
one unit, so he has only 19 to distribute in-
stead of 20?" There are two possibilities to
consider:
(1) Supplier 2 reduces sales to consumer 3,
causing consumer 3 to buy one unit from
supplier 1 (who has surplus units to sell).
(2) Supplier 2 reduces sales to consumer 2,
causing consumer 2 to buy an additional
unit from supplier 1.
In case 1, consumer 3 still pays $75 since
that is his delivered price from supplier 1.
In case 2, consumer 2 still pays $65 since
that is his delivered price from supplier 1.
In both cases, the loss or gain of one unit
of supply from supplier 2 results in a $50
loss or gain, respectively, and the ship-
ments adjust accordingly.
Now consider a more complex situation,
in which there are alternative dual prices
(for a uniquely optimal shipping pattern).
Figure 2 shows such a case, and Figure 3
gives a graphic view.
Let us begin the price interpretations
with the supply side.
(1) The 0 price of supplier 1 means
added supply has no value. He already has
surplus supply in the optimal flow, so
more would just add to the surplus. Fur-
ther, loss of one unit has no value as well
since it is not taken away from any con-
sumer.
(2) If supplier 2 lost a unit of supply
(As, = -I), the optimal flows adjust by
having either consumer 2 or consumer 3
buy the missing unit from supplier 1. The
least costly choice is reasoned as follows. If
consumer 2 is chosen, ACost = 65 - 15
100
LINEAR PROGRAMS

Supply Supplier
Prices

0 (0)

Demand: 10 10 10
Consumer Prices: (55) 55 (60) 65 (70) 75
Figure 2: In this example, there is a unique optimal shipping pattern and alternative dual
prices [Rubin and Wagner 19901.

= 50. If consumer 3 is chosen, ACost = 80
- 25 = 55. The best choice, therefore, is to
choose consumer 2. The net change in cost
is ACost = -50As, (for As, < 0).
Now suppose supplier 2 obtains one
more unit of supply (As2 = 1). He could
send it to consumer 1, displacing one of
the units consumer 1 currently obtains
from supplier 1. The change in total cost is
ACost = 10 - 55 = -45As,. This is the
meaning of the $45 supplier price in the
alternative solution. Summarizing, the $SO
represents the rate at which the minimum
cost increases if the supply is decreased;
and, the $45 represents the rate at which
the minimum cost decreases if the supply
is increased. This asymmetry in the rates
arises because the response to a loss is dif-
ferent from the response to a gain in the
amount of supply for supplier 2.

r Surplus = 10

Price = 0 Price = 55

x2,= 1 0 @ $15
(D2) -
Price = 65
10

Price = 50 Price = 75
Figure 3: A graphic view of optimal flows shows two components in the solution.

September-October 1993 101

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GREENBERG
Now consider the demand side.
(1) The $55 price of consumer 1 is the
marginal cost of shipping with the optimal
pattern. He buys from supplier 1 at $55,
and he would continue to do so if his de-
mand increased or decreased one unit. The
total cost then changes at the rate of $55
per unit of demand change: ACost
= 55 Adl.
(2) If the demand increased a bit (Ad2
> 0), consumer 2 would have to buy from
supplier 1 at a cost of $65 per unit. This is
the meaning of the consumer price: ACost
= 65 Ad2. There is, however, an alternative
to consider. Suppose the added demand is
satisfied by supplier 2, at a cost of only
$15. Then, this would take away from
consumer 3, whose demand must be made
up with his purchase from supplier 1. The
net effect, for Ad2 = 1, is ACost = 15 - 25
+ 80 = 70. It is therefore better to choose
the first adjustment, giving the least in-
crease in total cost.
Now what accounts for the $60 price in
the alternative solution? If the demand of
consumer 2 is decreased (Ad2 < O), not
only do we save the $15, but also that unit
of supply can be shipped to consumer 1,
displacing one of the units currently
shipped by supplier 1, at a net savings of
$10 - $55, or -$45. Adding this savings
to the $15 unspent by consumer 2, the net
effect is ACost = 60 Ad2 (for Ad2 < 0).
Summarizing, the $65 represents the rate
at which the min-cost increases if demand
is increased; and, the $60 represents the
rate at which the min-cost decreases if the
demand is decreased. The asymmetry is
again due to different responses, depend-
ing upon whether the demand is increased
or decreased.
INTERFACES 23:5
(3) The alternative prices for demand in
the third market have an asymmetry simi-
lar to that for the second market. If the de-
mand is increased a bit (Ad3 > 0), con-
sumer 3 would buy from supplier 2 at a
unit cost of $25. Supplier 2, however, is
using all of his supply, so he must decrease
shipment to market 2. This reduces the net
change in cost by $15, but then consumer
2 must buy the unit from supplier 1 at a
cost of $65. The net change in flows to ac-
commodate this increase in demand 3 is
+
thus 25 - 15 65, which equals the con-
sumer 3 price, $75.
On the other hand, if the demand de-
creases a bit (Ad3 < O), consumer 3 reduces
his purchase from supplier 2. This not only
saves the $25 shipping cost, but also
makes another unit available for supplier 2
to sell to market 1. Doing so saves $45 (the
difference between the $10 from supplier 2
to market 1 and the $55 from supplier 1 to
market 1). The net effect, therefore, is the
sum of the direct savings ($25) plus the
savings from displacement ($45) for a total
savings of $70, which is the alternative
dual price.
Reduced Costs and Economic Rents
In this section, I describe the notion of
economic rent and its connection with dual
prices. Basically, an economic rent is the
difference between a market clearing price
(under perfect competition) and a selling
price. Imagine, for example, two sources of
supply, A and B, in increasing order of
cost. Suppose the less expensive A has lim-
ited capacity, and the demand requires
some supply from source B. The marginal
price is the cost of supplying B, say $b, but
this is the (only) market price. This means
that while the supplier would be content to
102
LINEAR PROGRAMS
sell A at $a (where a < b), he actually re-
ceives $b for all goods brought to market.
He is said to receive an economic rent of
$(b - a).
Figure 4 makes this concrete. There is
one supplier, labelled s, that is much
farther from the market than the other
suppliers, shown with small boxes. Sup-
pose each supplier's production cost is $1,
and each of the nearby suppliers have zero
transportation cost while the distant sup-
plier has a transportation cost of $9. If the
market demand is less than the total quan-
tity that the nearby suppliers can supply,
the market price is only $1, and the distant
supplier ships nothing. Suppose, however,
the nearby suppliers can provide only 100
units, but the market demand is 110 units.
Then, the distant supplier ships 10 units,
and the market price is $10 ($1 production
+
cost $9 transportation cost). The nearby
suppliers also receive the market price of
$10, so they receive an economic rent
of $9.
In general, we have the following terms:
Delivered cost = Production cost
-tTransportation cost,
Marginal price = Delivered cost
-t Economic Rent.
To see this connection with LP, consider
Figure 5, which shows a price-quantity
supply function. The first step represents
the nearby supply of 100 units at $1; the
second step represents the distant supplier
El
Market
Figure 4: An economic rent arises when
market demands shipments from a
distant supplier.
September-October 1993
Copyright O 2001 All Rights Reserved
Price
1
l o _ 100 150 Quantity
Minimize COST subject to:
COST = P I + 10*P2
SUPPLY = P I + P2 - M = 0
DEMAND = M=110
0 5 P1 r 100, 0 5 P2 r 50
Figure 5: An LP can represent a step function
of supply price quantity with an activity per
step.
of another 50 units at $10.
Activity P1 is the production from the
nearby suppliers; its bound is the first
step's width (loo), and its cost c o e h i e n t is
the step's height ($1). Activity P2 is the
production from the distant supplier; its
bound is the second step's width (501, and
its cost coefficient is the step's height ($10).
Activity M logically moves all production
from the SUPPLY row to the DEMAND
row (actual transportation costs are ab-
sorbed in the production activities). The
DEMAND equation requires the level of M
to be the demand of 110 units. This causes
the optimal level of P1 to be at its bound
of 100 and activity P2 to be basic with a
production level of 10 units. The cost of P2
sets the marginal price of the SUPPLY row
to be $10, and the reduced cost of P1 is
-9, which represents an economic rent of
$9 to the nearby suppliers.
If, instead of a demand of 110 units, the
demand is less than 100 units, activity P2
is nonbasic at zero level with a reduced
cost of 9, while the level of P1 equals the
103
GREENBERG
demand and P1 sets the SUPPLY price at
$1. In this case, the meaning of the re-
duced cost of P2, which is 9, is the differ-
ence between the distant supplier's deliv-
ered cost to market ($10) and the market
price ($1).
A special demand value is 100 units,
which is the capacity of the nearby sup-
pliers. In this case, there are alternative
dual solutions (with a unique shipment of
P I = M = 100 and P2 = 0). The first solu-
tion is with P1 in the basis at its upper
bound value, and the dual price is $1 (of
both SUPPLY and DEMAND rows, equal-
ity implied by the zero cost of activity M).
The second solution is with P2 in the basis
at zero level, and the dual price is $10.
The first solution gives the rate at which
the min-cost changes with respect to a de-
crease in demand, say to 99. That is, the
cost decreases at $1 per decrease in de-
mand, which is the savings from the asso-
ciated level of P I . The second solution
gives the rate at which the min-cost
changes with respect to an increase in de-
mand, say to 101. That is, the cost in-
creases at $10 per increase in demand,
which is the cost from the associated level
of P2. These simple examples form the ba-
sis for what I describe in the next section.
Another Problem
The foregoing examples give us a start-
ing point for going deeper into price inter-
pretation (see, also, [Akgiil 1984; Gal 1979;
Greenberg 1986; and Ho and Smith
19871). NOWconsider another problem,
where I shall show how to use path tracing
for problems too large to see on one
screen. The figures show the information,
as obtained from ANALYZE [Greenberg
1983, 1987, 1988, 1992a,b, 1993133 (com-
INTERFACES 23:5
mands used are suppressed).
I begin to gain an understanding of the
linear program by seeing its syntax. Figure
6 gives an overview of a linear program
we shall consider, called WOODNET. First,
it displays the schema, which shows three
activity classes and two row classes (and
the objective row, named COST). Row
class S balances supplies, and row class D
balances demands. The domain informa-
tion gives the meaning of each of the three
sets in the model. Then, it displays the
translations of the row and column classes.
In this formulation, all right-hand sides
are zero. Supply limits are represented by
upper bounds on the supply activity levels,
and demands are fixed values of demand
activity levels. This is a n equivalent model
of the transportation problem. Each cell
entry gives the range of nonzeroes in this
instance, where a blank means that there
are no nonzero coefficients in the subma-
trix defined by the row and column
classes. For example, the supply activities
(whose names begin with S) do not inter-
sect any of the demand balance rows
(whose names begin with D).
The analysis problem is to interpret the
demand prices in the solution. I shall first
go through the analysis to arrive at what
we can regard as a mathematical solution.
Then, we have the second phase of putting
the response into English, which uses the
syntax information, summarized in Fig-
ure 6.
Figure 7 displays the demand prices. The
first demand price we want to explain is
the $73 for mahogany (MO in the set of
materials, MT) in Chicago (CH in the set of
demand regions, DR). The name of the as-
sociated demand balance row is DMOCH.
LINEAR PROGRAMS

...........
,..........::::::BLOCK S C H E M A ::::::::::::::
S(MT,SR) T(MT,SR,DR) D(MT,DR) HOMOGEN
S(MT,SR) 1 -1 = 0
D(MT,DR) 1 -1 = 0
COST 10160 5/20 .. . M I N
: LO 0 0 51100
:UP 5/* * .-
-

DOMAIN INFORMATION
MT material
SR location
DR 1o c a t i o n
Row s y n t a x has 2 c l a s s e s
A row t h a t b e g i n s w i t h S b a l a n c e s s u p p l y o f some m a t e r i a l i n
some l o c a t i o n .
A row t h a t b e g i n s w i t h D b a l a n c e s demand o f some m a t e r i a l i n
some 1 oca t i o n .
Column s y n t a x has 3 c l a s s e s
A colurrin t h a t b e g i n s w i t h S s u p p l i e s some m a t e r i a l a t some
1o c a t i o n .
A c o l u m n t h a t b e g i n s w i t h T t r a n s p o r t s some m a t e r i a l f r o m
some l o c a t i o n t o some l o c a t i o n .
A column t h a t b e g i n s w i t h D demands some m a t e r i a l a t some
1o c a t i o n .

Figure 6: An overview of the WOODNET syntax gives insights into the LP structure.

From the schema, we can view the initial
portion of the fundamental digraph, as fol-
lows.
(DMOCH) -+[DMOCH] -, Price = 73
we want to obtain a delivery path that
accounts not only for the flow from some
source(s) to satisfy the demand, but also
for the price of $73. We begin our analysis
ports mahogany to Chicago, and we must
continue the trace back to the source.
Equivalently, we want to expand the sub-
matrix, which contains the demand row
(DMOCH) and its adjacent activities, to
bring in other rows that intersect the trans-
Prices o f D(MT,DR)
---......_---_..DR
. ............... ~::~~=~::=:~:~:Iz~

by finding all the basic columns that inter-

MT CH DE LA SE SF
sect row DMOCIl in order to find the MO 73 75 68 71 65
link(s) in the delivery path. Doing so adds OK 60 69 62 65 60
one more link, as follows. PI 22 22 17 20 24

[TMOSECII] -- (DMOCH) - [DMOCf-I]-*

WA 78 68 75 78

Figure 7: The table display of WOODNET de-

70

We have found a basic transportation mand prices gives a quick view of what they
activity, namely TMOSECH, which trans- are, by material (MT) and location (DR).

September-October 1993 105

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GREENBERG

isfy the (homogeneous) balance equations.

D S T The result of the path trace is the subma-
M M M trix pictured in Figure 8.
The 3 X 3 submatrix shows the COST
0 0 0
and a flow from the supply activity
C S S SMOSEl, shipped by the transportation
H E E activity TMOSECH, and finally consumed
1 1 C by the demand activity, DMOCHl. The
H picture is useful for seeing sign patterns
COST + + = MIN and having a quick look at a submatrix.
DMOCH - + = 0 Figure 9 shows the graph-based view of
the delivery path in the fundamental di-
SMOSE + - = 0
graph.
Figure 8: After completing the path trace, we To complete the interpretation, we re-
can picture the submatrix to see how quire additional information. Figure 10 lists
mahogany is delivered to Chicago. the equations in the submatrix, so we can
use the COST values, and it displays the
portation column. This, in turn, can lead to three columns in the submatrix, so we can
bringing in other rows and columns, pref- see their levels and bounds. The demand
erably basic, until we eventually reach a activity (namely, DMOCHl) is at its fixed
complete submatrix-that is, with each level. The associated transportation activity
equation balanced by positive and negative (namely, TMOSECH) is thus at this same
coefficients. Because the LP is feasible, a level (25), but the supply activity
balance must be achievable in order to sat- (SMOSEl) level is 75 because it is used to

Figure 9: The final portion of the fundamental digraph is the delivery path of mahogany to
Chicago.

MIN COST = 55 SMOSEl + 18 TMOSECH

0 = DMOCH =-DMOCHl + TMOSECH
0 = SMOSE = SMOSEl - TMOSECH

CO L STAT LEVEL ( X I LO-BOUND UP-BOUND PRICE ( D l

------------.-------------...-----------.-..------------....-----------...------

DMOCHl L 25.000 25.000 25.000 7 3.000

SMOSEl B 75.000 0 * 0
TMOSECH B 25.000 0 * 0

Figure 10: To get the numbers, we can list the submatrix equations and display its columns,
which are in the delivery path.

INTERFACES 23:5
LINEAR PROGRAMS

- 75 @$55

D=O
Seattle
P = 55
25 @ $ I 8

D=O P = 73
25 @O

D = 73
+

Figure 11: A flow diagram corresponding to the submatrix in Figure 10 gives visual insight
into the price relations through activities in the delivery path.

satisfy other demands.
We are now in a position to give an al-
gebraic answer to this exercise. The trace,
working back from the initial demand row,
reveals a path from supply to demand
(Figure 11). The levels of the activities in
this path can be perturbed to accommo-
date a change in the right-hand side of the
demand row DMOCE-I (equivalently, the
fixed level of the associated demand activ-
ity, DMOCI-11).The $73 is the total unit
cost of this perturbation. The last listing
(compare Figure 10) shows that the total
(input) cost is $55 for the supply activity
(SMOSEI) and $18 for the transportation
activity (TMOSECH). Because there are no
loss or gain factors (that is, the body coeffi-
cients are &I),the actual delivered cost is
+
$55 $18, or $73.
It is not usually the case that the deliv-
ered cost equals the marginal price, owing
to economic rents to lower-cost suppliers
sending all of their supply. We next ana-
lyze such a case by performing the same
exercise for row DMOLA. The problem is
to explain the $68 (compare Figure 7) in
terms of the model's structure and the par-
ticular data. Figure 12 presents the result
of tracing activities, but now a nonbasic
activity plays an important role in finishing
the analysis.
In Figure 13 we see that the supply ac-
tivity (SMOSFI) is at its upper bound
(STAT = U), which is 30. listing the
COST row, we see that its delivered cost is
only $50 ($45 for supply activity SMOSFl
and $5 for transportation activity
TMOSFLA). The difference of $50 and $68
is what we seek to explain. This is pre-
cisely the reduced cost of the capacitated
supply activity, which is displayed as --18,
which represents an economic rent of $18.
Because this nonbasic reduced cost is non-
zero, the supply bound is binding, so the
$18 must be due to the value of the capac-
ity in fulfilling some other demand(s). That
is the story we want to develop.
We must now trace the flow out of this
supplier to explain its reduced cost. We be-
gin to explain the $18 difference by seeing
which consumers receive the other 10
units of supply from San Francisco. Figure
14 shows the result of listing the associated
D S T
M M M
0 0 0
L S S
A F F
1 1 L
A
COST + + = MIN
DMOLA - + = 0
SMOSF + - = 0
Figure 12: After the price trace for row
DMOLA is complete, we can picture the sub-
matrix to see the relevant porkon of the LP.

September-October 1993 107

Copyright O 2001 All Rights Reserved

GREENBERG

supply row (SMOSF) with the columns of
not only basic activities, but also of all col-
umns with zero reduced cost. (This distinc-
tion will become apparent, as our problem
needs to include dual degeneracy when
tracing prices.)
First, the submatrix that contains row
SMOSF and its adjacent columns that have
zero reduced cost are defined. The result is
the following 1 X 3 system.
0 = SMOSF = -TMOSFDE
- TMOSFLA - TMOSFSE.
We then apply the trace procedure to this
1 X 3 submatrix to balance its flows with
price-setting activities, and Figure 14 pic-
tures the resulting submatrix.
We now want to see the flows and the
reduced costs on the activities in this sub-
matrix. To d o so, we display the rows and
columns, shown in Figure 15. Our story
starts to take shape, as the San Francisco
supplier ships to other places.
Now we want to see the costs of the
submatrix columns:
COST = 45 SMOSFl + 12 TMOSFDE
+ 5 TMOSFLA + 8 TMOSFSE
This tells us the delivered costs to Denver,
Los Angeles, and Seattle. That is, we al-
ready know the supply cost in San Fran-
cisco is $45, and the trace told us that
there are three activities with zero reduced
cost. The first is TMOSFDE, which trans-
ports mahogany from San Francisco to
Denver at a unit cost of $12. The second is
TMOSFLA, which transports mahogany
from San Francisco to Los Angeles at a
unit cost of $5, which is the one we al-
ready saw when we started this exercise.
The third is TMOSFSE, which transports
mahogany from San Francisco to Seattle at
a unit cost of $8.
Notice that the consumer prices differ by
their transportation costs since they receive
their supply from the same supplier. For

CO L STAT LEVEL ( X I LO-BOUND UP-BOUND PRICE ( D l

--~-~~~.~~---~.~------~-------~--~..-~--~...~~

DMOLAl L 20.000 20.000 20.000 68.000

SMOSFl U 30.000 0 30.000 -18.000
TMOSFLA B 20.000 0 * 0

ROW STAT LEVEL ( Y l LO-BOUND UP-BOUND PRICE ( P I

.................................................................

COST B 25135.000 -* -k -1.0

DMOLA L 0 0 0 68.000
SMOS F L 0 0 0 63.000
M I N COST = 4 5 SMOSFl + 5 TMOSFLA

Figure 13: We use the display of columns and rows in the path to see solution values and
bounds. We then list the COST Row to see supply and transportation costs. Because the
delivered cost is only $50, more analysis is needed to explain the marginal price of $68.

INTERFACES 23:5 108

LINEAR PROGRAMS

therefore differ by $7. From Figure 15, the

D D D S T T T consumer prices are $75 and $68, respec-
M M M M M M M tively, which do indeed differ by $7. Simi-
0 0 0 0 0 0 0 larly, note that the $71 consumer price in
D L S S S S S Seattle differs from these by transportation
E A E F F F F
cost differences: $4 from Denver's price
l l l l D L S
E A E and $ 3 from Los Angeles' price.
COST ++++ =PIIN From Figure 16, we see that only two of
DMOOE - + 0 these margin-setting flows-that is, the ac-
DMOLA - + - 0 tivities with zero reduced cost-are posi-
DMOSE - += 0 tive. The status of activity TMOSFDE is
SMOSF + - - - = 0
basic, but its level is zero. We could ex-
plore the link with Seattle, but it is the de-
generacy of the flow to Denver that holds
Figure 14: After tracing the margin-setting
flows from the San Francisco supplier of the key for the answer we seek. Figure 16
mahogany, we can picture the resulting pictures the submatrix with the associated
submatrix. demand row (DMODE) and all columns
example, the transportation costs from San whose activity lel7el is positive. We then
Francisco to Denver and from San Fran- apply the path-tracing procedure to obtain
cisco to Los Angeles are $12 and $5, re- the answer to the question, "Where does
spectively. Their consumer prices must Denver gets its mahogany?"

ROW STAT LEVEL ( Y ) LO.BOIJND UP-BOUND PRICE ( P I

------~~...~~~~---~~...~----~~-~...~-~-----...~

DMODE L 0 0 0 75.000
DM0 LA L 0 0 0 68.000
DMOSE L 0 0 0 7 1 .OOO
SMOSF L 0 0 0 63.000

COL STAT LEVEL ( X I LORBOUND UP-BOUND PRICE ( D l

......................................................................

DMODEl L 20.000 20.000 20.000 75.000

DM0 LA1 L 20.000 20.000 20.000 68.000
DMOSEl L 10.000 10.000 10.000 7 1 .OOO
SMOSFl U 30.000 0 30.000 -18.000
TMOSFDE B 0 0 * 0
TMOSFLA B 20.000 0 * 0
TMOSFSE B 10.000 0 * 0

Figure 15: Displaying the rows and columns in the submatrix of Figure 14 gives us the prices
and activity levels, respectively.

September-October 1993 109

Copyright O 2001 All Rights Reserved

GREENBERG
I - 18 reduced cost of the supply activity
D T
M M
0 0
D S
E E
1 D
E case: it receives its shipment from another
DMODE - + = 0
Figure 16: We initialize the submatrix to trace
the price of mahogany in Denver (that is, the
price of row DMODE).
Skipping the new picture after the trace,
we immediately list the costs of the sub-
matrix columns:
COST = 55 SMOSEl + 20 TMOSEDE.
This tells us two things. First, the mahog-
any comes from only one supplier, namely
Seattle. Second, the delivered cost is $75
($55 supply, which is activity SMOSEI,
and $20 transportation, which is
TMOSEDE). This is like the first case (for
the price of row DMOCH): Denver re-
ceives all of its mahogany from a single
supplier, and there are no binding capacity
constraints in the flow path, so the mar-
ginal price of row DMODE is its delivered
cost of $75.
Now we can put the pieces together and
construct the analysis story. Figure 17
shows a flow graph that describes the situ-
ation. The San Francisco supplier sends to
Los Angeles (where we started) and to
Seattle. The latter flow turns out to be ir-
relevant to our original exercise of explain-
ing the $68 marginal price for row
DMOLA because it is not the cause of the
$18 economic rent, which shows up as the
INTERFACES 23:5
(SMOSFI). The margin-setting link is the
one to Denver, even though there is no
positive flow across that arc (activity
TMOSFDE).
The story is that the consumer price for
mahogany in Denver, which is P = 75 for
row DMODE, is determined as in the first
supplier, namely from Seattle (via the
transportation activity TMOSEDE), with
the delivered cost of $75. The presence of
the link from San Francisco to Denver,
however, allows displacement if the capac-
ity of the San Francisco supplier would in-
crease. The (actual) cost of shipping from
San Francisco to Denver is $57 ($45 supply
+ $12 transportation), so the savings from
displacement would be $18. This is what
determined the economic rent we have
sought to explain.
There are a number of ways to compose
the final explanation. One is that the con-
sumer's price of mahogany in Los Angeles
($68) is due to demand in Denver and the
limited supply in San Francisco. Even if we
reduce the production cost and the trans-
portation cost from San Francisco to Los
Angeles, the price would still be $68 due
to the market pressure resulting from lim-
ited supply capacity. The only way to re-
duce the $68 price is to reduce the deliv-
ered cost from Seattle to Denver. If, for ex-
ample, we reduce the transportation cost
from San Francisco to Denver, the effect is
to increase the economic rent-that is, the
reduced cost of activity SMOSF becomes
less than -18; the consumer price in Los
Angeles remains at $68.
Automatic Interpretation
What the examples suggest is that it is
110
LINEAR PROGRAMS
possible to shift some of the art of analysis
into the realm of science. I illustrate this
using rules for automatic price interpreta-
tion that include English translations built
on the linear program's syntax.
The analysis we just did can be auto-
mated to a great extent, at least for linear
programs with the same syntax as the
WOODNET model. Figure 18 shows that a
complete demand price interpretation de-
pends upon a supply price interpretation.
That is, once the $18 economic rent of
supply activity SMOSFl is explained, the
rest follows. (The term economic rent is
used, but this may not be understood by
the analyst. It depends on how the model
builder (or manager) wrote the rule file.)
The result is a successful interpretation
(but now automatically when we're not
there for someone else with the same
question).
I now go through the response gener-
ated by the price interpretation rule to
30 @$45
D =-I8 P = 63
10
-8$@
-----------
Figure 17: A graph of the final analysis shows how the degenerate flow from San Francisco to
Denver is the key to understanding the consumer price in Los Angeles (D = reduced cost of
supply activity; P = dual price of demand row).
September-October 1993
Copyright O 2001 All Rights Reserved
elaborate on how this was generated. In
general, a rule file in ANALYZE is com-
posed of free text (perhaps with some for-
matting instructions) until some LP infor-
mation is needed. There are two ways to
obtain LP information: simple "lookup,"
like the meaning of a row or column or a
value associated with it, and execution of
an ANALYZE command, like the path-
tracing procedure. In addition, there are
control statements, such as conditional
branching, that enable logical reasoning
based on the information obtained.
'To form the first sentence in Figure 18,
the ANALYZE rule file uses a syntactic
translation of the row in question
(DMOLA), and the second sentence is a
"literal" up to the price, $68, which is a
simple "lookup" of the price of the row in
question. Before the third sentence is com-
posed, the rule file tested some conditions
(such as whether the row is simply slack
with zero price). Then, the rule file exe-
20 @$o
+
P = 68 = Consumer Price
Seattle 10 @$O
P = 71 = Consumer Price
20 @$O
Denver
GREENBERG

Row DMOLA b a l a n c e s demand o f mahogany i n Los A n g e l e s . I s h a l l

t r y t o i n t e r p r e t i t s p r i c e o f $ 6 8 . The consumers i n Los A n g e l e s
r e c e i v e a l l o f t h e i r mahogany f r o m San F r a n c i s c o w i t h d e l i v e r e d
c o s t = $ 5 0 ( t h i s s u p p l i e r , h o w e v e r , has an economic r e n t o f
$ 1 8 ) . The m a r g i n a l p r i c e ( $ 6 8 ) = d e l i v e r e d c o s t + r e n t . We now
i n t e r p r e t t h e $18 r e n t , a s s o c i a t e d w i t h t h e l e v e l o f a c t i v i t y
SMOSFl b e i n g a t i t s c a p a c i t y l i m i t .

The ( i n p u t ) s u p p l y c o s t = $ 4 5 ( e x c l u d i n g economic r e n t ) . T h i s
s u p p l y i s d e l i v e r e d t o 2 c o n s u m e r s - - n a m e l y , t o Los A n g e l e s w i t h
t r a n s p o r t a t i o n c o s t = $ 5 ; and, t o S e a t t l e w i t h t r a n s p o r t a t i o n
c o s t = $ 8 . T h i s s u p p l i e r does n o t send any mahogany t o D e n v e r ,
b u t i t i s t h i s consumer t h a t i s s e t t i n g t h e s u p p l i e r ' s economic
r e n t . T h a t i s , any i n c r e a s e i n t h e s u p p l y o f mahogany i n San
F r a n c i s c o w o u l d go t o Denver and d i s p l a c e i t s most e x p e n s i v e
c u r r e n t d e l iv e r e d c o s t .

Figure 18: ANALYZE automatically gives a price interpretation, even in the more complex case
when the price is not equal to the delivered cost. Exact wording can be controlled by the
rule base.

cuted the path-tracing procedure, just as
we did. Upon looping over the resulting
submatrix, the rule file obtains the delivery
path. The resulting sentence is composed
from a template into which the material
(mahogany), the supplier (San Francisco),
and the delivered cost ($50) is substituted.
It also branched to the logic for the situa-
tion at hand, which is the presence of an
economic rent.
After identifying the activity that sup-
plies mahogany in San Francisco
(SMOSFI) as the key to explaining the
price of $68, another rule is instantiated to
explain the economic rent of $18.
The second part of the interpretation
proceeds by first giving the supply cost
and then executing the path-tracing proce-
dure, as we did, to find the two consumers
that receive the San Francisco supply. All
of the response so far parallels what we
did by obtaining the meanings and values
of the rows and columns, executing path-
tracing, then deciding what we must ex-
amine next. This reasoning is what makes
the automatic response formation intelli-
gent, as the logic reflects what we do as LP
experts. The rule contains logic to look for
a degenerate link. In this case, Denver is
found, and the logic goes through the
same reasoning as we did.
After giving the two consumers for
which there is positive flow from San
Francisco, the rule identifies Denver as a
key link in the solution. The actual words
are formed by templates plus "lookups" to
substitute meanings, based upon the syn-
tax, and values of elements, like the trans-
portation costs.
Concluding Remarks
The examples of price interpretation
given here are among the easy ones, nota-
bly because the linear programs are net-
works. The methods of analysis for more

INTERFACES 23:5 112

LINEAR PROGRAMS
general models, however, are similar. One
still tries to trace a margin-setting substruc-
ture that has causal properties, but instead
of a path in the sense of an ordinary net-
work, it is a hyperpath in the fundamental
digraph. It is important, however, that the
LP be in canonical form for path-tracing to
work properly. The A matrix in the equa-
tion, y = Ax, should be signed such that a
negative coefficient represents an activity's
input, and a positive coefficient represents
its output. Otherwise, the 1 / 0 structure
could be confusing to any heuristic, like
path-tracing, that depends upon this inter-
preta tion.
With a means for obtaining causal infor-
mation to support analysis, automatic in-
terpretation becomes a reasonable consid-
eration. Besides the examples given here,
the methods have been applied success-
fully to blending problems and other non-
network linear programs using ANALYZE.
A key to this is the use of the fundamental
digraph and related graphs to represent
model structures apart from data values.
There are some aspects of understanding
prices in connection with marginal sensi-
tivity analysis that I did not explain, due to
limited time and space. In addition to ref-
erences already cited, I suggest looking at
the interior point approach [Jansen, Roes,
and Terlaky 19921. For many applications,
using One particular basis from a collection
- false or mis-
of alternative optima can give
leading results. The unique partition ob-
tained by an interior point solution can be
much better. Also, the range of data for
which the solution structure does not
change is important. The basis-driven ap-
proach, which is appropriate with a sim-
plex method solution, has undergone some
September-October 1993
Copvright O 2001 All Rights Reserved
recent enhancements by Wendell [I9851
(see also [Ward and Wendell, 19901).
Again, the interior point approach gives
the better range of information, but I can-
not explain here.
As we articulate the analysis process
more precisely, we can extend and sharpen
the rules used by ANALYZE. This devel-
opment is in progress, including experi-
ments with automatic interpretation for a
variety of models and situations. There is
no substitute, however, for human analy-
sis. Many interesting applications are be-
yond the reach of current capabilities for
automatic analysis, but the gap is closing.
Acknowledgments
I gratefully acknowledge encouragement
and technical help from Frederic H.
Murphy. I also received valuable com-
ments from John Stone and an anonymous
referee that led to an improved version. In
addition, support for the ongoing project
that produced ANALYZE (among other
things) comes from a consortium of com-
panies: Amoco Oil Company, IBM, Shell
Development Company, Chesapeake Deci-
sion Sciences, GAMS Development Corpo-
ration, Ketron Management Science, and
MathPro, Incorporated.
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