A continuum approximation approach to competitive facility location design under facility disruption risks

This paper presents game-theoretical models based on a continuous approximation (CA) scheme to optimize service facility location design under spatial competition and facility disruption risks. The share of customer demand in a market depends on the functionality of service facilities and the presence of nearby competitors, as customers normally seek the nearest functioning facility for service. Our game-theoretical models incorporate these complicating factors into an integrated framework, and use continuous and differentiable density functions to represent discrete location decisions. We first analyze the existence of Nash equilibria in a symmetric two-company competition case. Then we build a leader–follower Stackelberg competition model to derive the optimal facility location design when one of the companies has the first mover advantage over its competitor. Both models are solved effectively, and closed-form analytical solutions can be obtained for special cases. Numerical experiments (with hypothetical and empirical data) are conducted to show the impacts of competition, facility disruption risks and transportation cost metrics on the optimal design. Properties of the models are analyzed to cast interesting managerial insights.

► The paper proposes game-theoretic competitive and reliable facility location models. ► Facility competition and disruption risks are modeled via continuum approximation. ► Nash equilibria and Stackelberg games are analyzed for a two-company competition. ► The proposed models can be solved effectively, sometimes with closed-forms solutions.