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facility_location_survey

facility_location_survey

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Invited Review
Static competitive facility location:
An overview of optimisation approaches
Frank Plastria*
Department of Management Informatics, BEIF \u00b1 Vrije Universiteit Brussel, Pleinlaan 2, B 1050 Brussels, Belgium
Received 01 July 1999; accepted 29 May 2000
Abstract

We give an overview of the research, models and literature about optimisation approaches to the problem of op- timally locating one or more new facilities in an environment where competing facilities are already estab- lished.\u00d3 2001 Elsevier Science B.V. All rights reserved.

Keywords:Facility location; Competition; Consumer behaviour
1. Introduction

A large part of location theory in operational research has been built around the (mostly im- plicit) modelling assumption of a spatial monop- oly: the facility to be located o\u0080ers a unique product or service and is the single player in the part of the market that is considered. Most situa- tions in practice do not \u00aet such models and the need arises to incorporate competition with other players. This has long been understood by econ- omists who have studied competition, including its spatial aspects, for some 70 years.

A location model is said to be aboutcompetitive facilities when it explicitly incorporates the fact that other facilities are already (or will be) present

in the market and that the new facility(ies) will have to compete with them for its (their) market share. The apparent simplicity of this statement hides several implicit and explicit notions which have to be made more precise before a clear and well-de\u00aened model arises.

It is the aim of this paper to give an overview of these questions and the many di\u0080erent ways in which they may be \u00aelled in, leading to as many di\u0080erent models with corresponding theoretical results and/or techniques. Many survey papers about this research area have already appeared in print, such as [14,19,21\u00b123,34,61].

What distinguishes this survey is its emphasis on the part of the \u00aeeld clearly lying within Oper- ational Research and in which several develop- ments have taken place in recent years: we focus our attention towards those competitive location models which are directly phrased as (one stage) optimisation problems.

European Journal of Operational Research 129 (2001) 461\u00b1470
www.elsevier.com/locate/dsw
*Tel.: +32-26293609; fax: +32-26293690.
E-mail address:frank.plastria@vub.ac.be (F. Plastria).
0377-2217/01/$ - see front matter\u00d3 2001 Elsevier Science B.V. All rights reserved.
PII: S 0 3 7 7 - 2 2 1 7 ( 0 0 ) 0 0 1 6 9 - 7
2. Ingredients

We start by a discussion of the di\u0080erent ingre- dients and their \u00afavors that enter into the recipe of competitive location models. The three main questions are related to thecompetition, to the

market, and to the decision space.
2.1. Features of competition
2.1.1. Static competition

The simplest competitive models arise when competition is assumed to be already present in the market. The whereabouts and characteristics of this competition are known in advance and as- sumed to be \u00aexed. This kind ofstatic situations are discussed in more detail in the remainder of this paper.

Such models correspond to a short term view: they are based on the assumption that the time and/or e\u0080ort/cost needed for the competition to react is su\u0081ciently long to harvest the main ben- e\u00aets of the new facility. These models also form the basis on which more complex models may be built.

2.1.2. Competition with foresight

The situation becomes quite di\u0080erent when a virgin market is entered in the knowledge that other competing actors will enter it soon after- wards. It will then be necessary to make decisions with foresight about this competition, which itself will enter a market where competition is already present. The ensuing Stackelberg-type models, where each evaluation of the main objective in- volves the solution of the competitor's nontrivial optimisation model, quickly become extremely complex. We enter here the realm ofsequential models, which were recently extensively surveyed in [21].

2.1.3. Dynamic models and competitive equilibrium

Existing competition will most probably alter its strategy when it loses part of or even all of its market share to a newcomer, implying that the competitive environment changes. This leads to

dynamicmodels which aim at describing the ac-
tion/reaction cycles of the competing actors.

One of the traditional questions in this respect is the possible (in)existence ofequilibrium situa- tions, dear to economists, to which such a system might evolve. It is in fact this point of view that forms the root of competitive location theory thanks to the seminal paper of Hotelling [39]. This large area of research has been most often sur- veyed, see e.g., [19,22\u00b124,34,38,46] and will not be discussed here.

2.2. Features of the market
Demandfor the facility's product(s) and/or

service(s) forms theraison d'\u0094etre of competition. The spatial distribution, characteristics and beha- viour of demand are therefore paramount in the model's description. Current models in the framework to be discussed, do not di\u0080erentiate between several products, or consider any prod- uct-mix questions. Therefore, in all what follows, demand is assumed to be for one product only, which might, however, represent a complete product class, like `food' or `clothing'.

The termcustomer is used in a rather loose fashion, and may have di\u0080erent interpretation in di\u0080erent applications. Typically a customer is an individual or a group of such with a unique and identi\u00aeable location and behaviour. In practice this may mean that the same person should be considered as several customers in order to dis- tinguish between several (location, behaviour) pairs, such as (at home, personal time) and (at work, professional time). Since a customer has a location and issues demand, we freely use the term

demand pointas a synonym.
Finally we use the termmarket for the collec-
tion of all customers and their demand.
2.2.1. Point vs. regional demand

Where does demand originate? Is it discrete, i.e., concentrated in a \u00aenite set of points or rather continuously dispersed over a region? In both cases a precise description is needed of its spatial distribution.

In case ofpoint demand its volume, be it ex- pressed in terms of quantity, frequency and/or currency (then sometimes called `buying power'),

462
F. Plastria / European Journal of Operational Research 129 (2001) 461\u00b1470
at each demand point should be given. Forre-
gional demandthis is described by a continuous
spatial distribution, often assumed to be uniform.

It may be argued that in principle individual customers form a discrete set, so should be de- scribed by a point distribution. However, there are usually too many individuals involved and their location in space is not \u00aexed in time, hence a continuous distribution might also be necessary and/or adequate. Observe, however, that regional demand typically has meaning only in a continu- ous or network environment (see below).

2.2.2. Quality elastic vs. inelastic demand
Next it must be determined whether demand is
elasticor inelasticwith respect to quality. In other

words does the volume of demand, depend on the (conditions of) supply or may it be considered as \u00aexed.

This will largely be determined by the product type. It is customary to consider demand for es- sential goods such as bread to be inelastic (within time-periods during which populations may be considered as constant), as opposed to inessential, e.g., luxury, goods for which demand may be highly supply/price sensitive.

Demand may also vary independently of the supply, due to the inevitable uncertainties in the market's description, or due to inherent random- ness, e.g., weather e\u0080ects. Such situations then are modelled bystochastic demand. For models of this type we refer to [15,51].

2.2.3. Patronising behaviour
In order to be able to determine themarket
shareof a facility it is necessary to describe in a

precise manner which part of the demand will be captured by each of the competing facilities. This involves the way customers behave when making the choice which of several facilities to patronize.

It is generally considered that each customer feels some attraction towards each of the com- peting facilities. It is the way these attraction forces determine the actual patronising choice which leads to two quite di\u0080erent types of cus- tomer behaviour models.

This choice isdeterministic when the full de-
mand of each customer is served by the facility to

which it is attracted most. This conceptually sim- ple patronising rule is the most common one in the literature. Basically it assumes that as long as the supply side remains unchanged customers will al- ways patronise one and the same facility.

The deterministic rule stated above does not clarify what happens in the case of ties, in other words when a customer feels equally and maxi- mally attracted towards several facilities, including a new one. Severaltie resolution rules may be considered: either the demand is (equally ?) split over all tied facilities, or it goes fully towards the new facility, or may stick to the competing facili- ty(ies).

A deterministic choice rule does not allow for
the `changing mood' of customers. The choice is
probabilisticwhen each customer splits its volume

of demand over the di\u0080erent facilities, with prob- abilities determined some way by the attraction felt towards each facility. At present this seems to be the only alternative proposed to the determin- istic `all or nothing' rule.

2.2.4. Attraction function

Theattraction function describes how a cus- tomer's attraction (also often called utility, par- ticularly in economics) towards a facility is obtained. In location theory it is always assumed that some notion of distance between customer and facility plays a crucial role in this attraction. Typically attraction will decrease with distance and the attraction function describes in what pre- cise way.

In case all competing facilities, existing and new, areuniform, i.e., apart from their site they are further indistinguishable in the sense that they o\u0080er exactly comparable, and thus substitutable, products and services at the same prices, the dis- tance will be the sole determinant in the attraction. It may be observed that in this case it is usually considered that only deterministic behaviour ap- plies.

In many cases, however, facilities aremultiform, i.e., they do di\u0080er in other aspects than the mere site where they are located, and customers will take these di\u0080erences into account in the way they feel attracted to them. These di\u0080erences should then be incorporated into the attraction function,

F. Plastria / European Journal of Operational Research 129 (2001) 461\u00b1470
463

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