Designing a retail store network with strategic pricing in a competitive environment

This paper presents a location and pricing model for a retailer that sells a homogeneous product to maximize profit in a competitive environment. Specifically, the retailer is to locate a given number of stores and simultaneously to determine the mill price charged at each open store. We assume that mill price and travel cost are two main utility factors considered by customers, and adopt the multinomial logit model to express the flows of customers traveling to stores. The problem is formulated as a mixed integer nonlinear program. We develop a solution framework composed of two phases (location and pricing) to solve the problem. Given a set of open stores, three pricing heuristics are used to determine the optimal price at each open store. Three location heuristics are proposed to find the best set of open stores. Computational experiments suggest us to use a path-following approach provided in the literature for pricing and a tabu search procedure for location. We finally investigate an illustrative example and derive a number of managerial insights regarding location and pricing strategies.