Finding location equilibria for competing firms under delivered pricing

Abstract

We address the problem of finding location equilibria of a location-price game where firms first select their locations and then set delivered prices in order to maximize their profits. Assuming that firms set the equilibrium prices in the second stage, the game is reduced to a location game for which a global minimizer of the social cost is a location equilibrium if demand is completely inelastic and marginal production cost is constant. The problem of social cost minimization is studied for both a network and a discrete location space. A node optimality property when the location space is a network is shown and an Integer Linear Programming (ILP) formulation is obtained to minimize the social cost. It is also shown that multiple location equilibria can be found if marginal delivered costs are equal for all competitors. Two ILP formulations are given to select one of such equilibria that take into account the aggregated profit and an equity criterion, respectively. An illustrative example with real data is solved and some conclusions are presented.

Keywords:

• location
• game theory
• integer programming
• delivered pricing

Acknowledgements

This research has been supported by the Ministry of Science and Technology of Spain under the research projects ECO-2008-00667/ECON and ECO-2008-05589/ECON, in part financed by the European Regional Development Fund (ERDF).