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On the location of new facilities for chain expansion under delivered pricing

  • Pelegrín, Blas
  • Fernández, Pascual
  • Dolores García Pérez, María
  • Cano Hernández, Saúl
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    We study the problem of locating new facilities for one expanding chain which competes for demand in spatially separated markets where all competing chains use delivered pricing. A new network location model is formulated for profit maximization of the expanding chain assuming that equilibrium prices are set in each market. The cannibalization effect caused by the entrance of the new facilities is integrated in the objective function as a cost to be paid by the expanding chain to the cannibalized facilities. It is shown that the profit of the chain is maximized by locating the new facilities in a set of points which are nodes or iso-marginal delivered cost points (points on the network from which the marginal delivered cost equals the minimum marginal delivered cost from the existing facilities owned by the expanding chain). Then the location problem is reduced to a discrete optimization problem which is formulated as a mixed integer linear program. A sensitivity analysis respect to both the number of new facilities and the cannibalization cost is shown by using an illustrative example with data of the region of Murcia (Spain). Some conclusions are presented.

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    Article provided by Elsevier in its journal Omega.

    Volume (Year): 40 (2012)
    Issue (Month): 2 (April)
    Pages: 149-158

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    Handle: RePEc:eee:jomega:v:40:y:2012:i:2:p:149-158
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    1. Aboolian, Robert & Berman, Oded & Krass, Dmitry, 2007. "Competitive facility location and design problem," European Journal of Operational Research, Elsevier, vol. 182(1), pages 40-62, October.
    2. Cesaltina Pires, 2009. "Location choice under delivered pricing: a reinterpretation," The Annals of Regional Science, Springer, vol. 43(1), pages 199-213, March.
    3. Fernandez, Pascual & Pelegrin, Blas & Garcia Perez, Maria Dolores & Peeters, Peter H., 2007. "A discrete long-term location-price problem under the assumption of discriminatory pricing: Formulations and parametric analysis," European Journal of Operational Research, Elsevier, vol. 179(3), pages 1050-1062, June.
    4. Pablo Dorta-González & Dolores R. Santos-Peñate & Rafael Suárez-Vega, 2005. "Spatial competition in networks under delivered pricing," Papers in Regional Science, Wiley Blackwell, vol. 84(2), pages 271-280, 06.
    5. Partovi, Fariborz Y., 2006. "An analytic model for locating facilities strategically," Omega, Elsevier, vol. 34(1), pages 41-55, January.
    6. Plastria, Frank, 2001. "Static competitive facility location: An overview of optimisation approaches," European Journal of Operational Research, Elsevier, vol. 129(3), pages 461-470, March.
    7. Charles ReVelle & Alan T. Murray & Daniel Serra, 2004. "Location models for ceding market share and shrinking services," Economics Working Papers 753, Department of Economics and Business, Universitat Pompeu Fabra.
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