Competitive facility location and design problem

We develop a spatial interaction model that seeks to simultaneously optimize location and design decisions for a set of new facilities. The facilities compete for customer demand with pre-existing competitive facilities and with each other. The customer demand is assumed to be elastic, expanding as the utility of the service offered by the facilities increases. Increases in the utility can be achieved by increasing the number of facilities, design improvements, or locating facilities closer to the customer.We show that our model is able to capture some of the principal trade-offs involved in facility location and design decisions, including demand cannibalization, market expansion, and design/location trade-offs. Managerial insights are obtained through sensitivity analysis of the model and through several illustrative examples.An efficient near-optimal solution approach, with adjustable error bound, is developed for the special case where only a finite number of design alternatives are available. Several heuristic approaches capable of handling large instances are also presented.