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European Journal of Operational Research 129 (2001) 461±470

www.elsevier.com/locate/dsw

Invited Review

Static competitive facility location:


An overview of optimisation approaches
Frank Plastria *

Department of Management Informatics, BEIF ± 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. Ó 2001 Elsevier Science B.V. All rights reserved.

Keywords: Facility location; Competition; Consumer behaviour

1. Introduction in the market and that the new facility(ies) will


have to compete with them for its (their) market
A large part of location theory in operational share. The apparent simplicity of this statement
research has been built around the (mostly im- hides several implicit and explicit notions which
plicit) modelling assumption of a spatial monop- have to be made more precise before a clear and
oly: the facility to be located o€ers a unique well-de®ned model arises.
product or service and is the single player in the It is the aim of this paper to give an overview of
part of the market that is considered. Most situa- these questions and the many di€erent ways in
tions in practice do not ®t such models and the which they may be ®lled in, leading to as many
need arises to incorporate competition with other di€erent models with corresponding theoretical
players. This has long been understood by econ- results and/or techniques. Many survey papers
omists who have studied competition, including its about this research area have already appeared in
spatial aspects, for some 70 years. print, such as [14,19,21±23,34,61].
A location model is said to be about competitive What distinguishes this survey is its emphasis
facilities when it explicitly incorporates the fact on the part of the ®eld clearly lying within Oper-
that other facilities are already (or will be) present ational Research and in which several develop-
ments have taken place in recent years: we focus
our attention towards those competitive location
*
Tel.: +32-26293609; fax: +32-26293690. models which are directly phrased as (one stage)
E-mail address: frank.plastria@vub.ac.be (F. Plastria). optimisation problems.

0377-2217/01/$ - see front matter Ó 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
462 F. Plastria / European Journal of Operational Research 129 (2001) 461±470

2. Ingredients One of the traditional questions in this respect


is the possible (in)existence of equilibrium situa-
We start by a discussion of the di€erent ingre- tions, dear to economists, to which such a system
dients and their ¯avors that enter into the recipe of might evolve. It is in fact this point of view that
competitive location models. The three main forms the root of competitive location theory
questions are related to the competition, to the thanks to the seminal paper of Hotelling [39]. This
market, and to the decision space. large area of research has been most often sur-
veyed, see e.g., [19,22±24,34,38,46] and will not be
discussed here.
2.1. Features of competition

2.1.1. Static competition 2.2. Features of the market


The simplest competitive models arise when
competition is assumed to be already present in the Demand for the facility's product(s) and/or
market. The whereabouts and characteristics of service(s) forms the raison d'^etre of competition.
this competition are known in advance and as- The spatial distribution, characteristics and beha-
sumed to be ®xed. This kind of static situations are viour of demand are therefore paramount in the
discussed in more detail in the remainder of this model's description. Current models in the
paper. framework to be discussed, do not di€erentiate
Such models correspond to a short term view: between several products, or consider any prod-
they are based on the assumption that the time uct-mix questions. Therefore, in all what follows,
and/or e€ort/cost needed for the competition to demand is assumed to be for one product only,
react is suciently long to harvest the main ben- which might, however, represent a complete
e®ts of the new facility. These models also form the product class, like `food' or `clothing'.
basis on which more complex models may be built. The term customer is used in a rather loose
fashion, and may have di€erent interpretation in
2.1.2. Competition with foresight di€erent applications. Typically a customer is an
The situation becomes quite di€erent when a individual or a group of such with a unique and
virgin market is entered in the knowledge that identi®able location and behaviour. In practice
other competing actors will enter it soon after- this may mean that the same person should be
wards. It will then be necessary to make decisions considered as several customers in order to dis-
with foresight about this competition, which itself tinguish between several (location, behaviour)
will enter a market where competition is already pairs, such as (at home, personal time) and (at
present. The ensuing Stackelberg-type models, work, professional time). Since a customer has a
where each evaluation of the main objective in- location and issues demand, we freely use the term
volves the solution of the competitor's nontrivial demand point as a synonym.
optimisation model, quickly become extremely Finally we use the term market for the collec-
complex. We enter here the realm of sequential tion of all customers and their demand.
models, which were recently extensively surveyed
in [21]. 2.2.1. Point vs. regional demand
Where does demand originate? Is it discrete,
2.1.3. Dynamic models and competitive equilibrium i.e., concentrated in a ®nite set of points or rather
Existing competition will most probably alter continuously dispersed over a region? In both
its strategy when it loses part of or even all of its cases a precise description is needed of its spatial
market share to a newcomer, implying that the distribution.
competitive environment changes. This leads to In case of point demand its volume, be it ex-
dynamic models which aim at describing the ac- pressed in terms of quantity, frequency and/or
tion/reaction cycles of the competing actors. currency (then sometimes called `buying power'),
F. Plastria / European Journal of Operational Research 129 (2001) 461±470 463

at each demand point should be given. For re- which it is attracted most. This conceptually sim-
gional demand this is described by a continuous ple patronising rule is the most common one in the
spatial distribution, often assumed to be uniform. literature. Basically it assumes that as long as the
It may be argued that in principle individual supply side remains unchanged customers will al-
customers form a discrete set, so should be de- ways patronise one and the same facility.
scribed by a point distribution. However, there are The deterministic rule stated above does not
usually too many individuals involved and their clarify what happens in the case of ties, in other
location in space is not ®xed in time, hence a words when a customer feels equally and maxi-
continuous distribution might also be necessary mally attracted towards several facilities, including
and/or adequate. Observe, however, that regional a new one. Several tie resolution rules may be
demand typically has meaning only in a continu- considered: either the demand is (equally ?) split
ous or network environment (see below). over all tied facilities, or it goes fully towards the
new facility, or may stick to the competing facili-
2.2.2. Quality elastic vs. inelastic demand ty(ies).
Next it must be determined whether demand is A deterministic choice rule does not allow for
elastic or inelastic with respect to quality. In other the `changing mood' of customers. The choice is
words does the volume of demand, depend on the probabilistic when each customer splits its volume
(conditions of) supply or may it be considered as of demand over the di€erent facilities, with prob-
®xed. abilities determined some way by the attraction
This will largely be determined by the product felt towards each facility. At present this seems to
type. It is customary to consider demand for es- be the only alternative proposed to the determin-
sential goods such as bread to be inelastic (within istic `all or nothing' rule.
time-periods during which populations may be
considered as constant), as opposed to inessential, 2.2.4. Attraction function
e.g., luxury, goods for which demand may be The attraction function describes how a cus-
highly supply/price sensitive. tomer's attraction (also often called utility, par-
Demand may also vary independently of the ticularly in economics) towards a facility is
supply, due to the inevitable uncertainties in the obtained. In location theory it is always assumed
market's description, or due to inherent random- that some notion of distance between customer
ness, e.g., weather e€ects. Such situations then are and facility plays a crucial role in this attraction.
modelled by stochastic demand. For models of this Typically attraction will decrease with distance
type we refer to [15,51]. and the attraction function describes in what pre-
cise way.
2.2.3. Patronising behaviour In case all competing facilities, existing and
In order to be able to determine the market new, are uniform, i.e., apart from their site they are
share of a facility it is necessary to describe in a further indistinguishable in the sense that they
precise manner which part of the demand will be o€er exactly comparable, and thus substitutable,
captured by each of the competing facilities. This products and services at the same prices, the dis-
involves the way customers behave when making tance will be the sole determinant in the attraction.
the choice which of several facilities to patronize. It may be observed that in this case it is usually
It is generally considered that each customer considered that only deterministic behaviour ap-
feels some attraction towards each of the com- plies.
peting facilities. It is the way these attraction In many cases, however, facilities are multiform,
forces determine the actual patronising choice i.e., they do di€er in other aspects than the mere
which leads to two quite di€erent types of cus- site where they are located, and customers will
tomer behaviour models. take these di€erences into account in the way they
This choice is deterministic when the full de- feel attracted to them. These di€erences should
mand of each customer is served by the facility to then be incorporated into the attraction function,
464 F. Plastria / European Journal of Operational Research 129 (2001) 461±470

as additional parameters on top of the distance. In network environment both demand and fa-
There are basically two standard ways in which cilities may lie anywhere along the edges of the
this may be done. network. The nodes of the network are just the
In Economics it is often considered that the points where edges meet. Since travel is assumed to
product's observed price primarily determines the be restricted to the network, distance is typically
customer's choice. A notion of attraction in such a calculated as shortest path distance. Location of
setting is therefore fully price based. In the tradi- new facilities might be further restricted to only
tional mill pricing system the price actually paid part of the network, as de®ned by a set of edge-
for the product is given at the facility, but the segments.
customer should travel to the facility and its travel It should be observed that the term network
cost, determined by the distance of travel, should location is often used in a more restrictive sense,
be included in the full observed price. Typically where only nodes of the network are candidate
this leads to additive attraction functions. sites. In our terminology such problems are con-
Apart from distance, one may consider the sidered as discrete problems, and the network
price as just one of several ingredients in the setting is only used in order to obtain a standard
overall attraction process, in which other features way to calculate distances by shortest paths.
like ¯oor area, number of cashing counters, On the other hand theoretical developments in
product mix, publicity, etc. also play an important network setting most often lead to the identi®ca-
role. All these properties (excluding distance) may tion (and ecient construction) of ®nite sets of
be summarized into a single measure for which the points which are guaranteed to contain at least one
unattractive word `attractiveness' has been used, or all optimal sites for the location problem at
and which we prefer to simply call the quality. In hand. Such `localisation' theorems then allow to
this context one usually ®nds proposals for multi- reduce the original network location problem to a
plicative attraction functions. Note that this type of discrete one by restricting the search for optimal
attraction function has recently been criticized in sites to this `®nite dominating set', thereby gener-
[16] since it might imply that a choice of facility ating the situation described in previous para-
may change during the trip towards the facility. graph. Similar discretisation results often appear in
continuous setting too.
Continuous space refers to a locational space
2.3. Features of decision space determined by a coordinate system in which in
principle any real coordinate values are admissible.
2.3.1. Location space One-dimensional space is equivalent to the sim-
In competitive location models one ®nds back plest possible network: a linear segment (or line), a
the three traditional spatial settings of location very popular setting for competitive equilibrium
theory: discrete space, a network, and continuous studies in virtue of its simplicity. Other settings are
space. Observe that a complete description of of course the geographical space modelled as a
space should also include the distance measure two-dimensional plane or possibly a sphere. Ap-
used. plications in e.g., product positioning may involve
In discrete space there are only a (relatively even higher dimensional settings.
small) ®nite list of candidate sites and the market is In continuous space it is necessary to specify the
always assumed to consist of point demand. Dis- type of distance which is used. Classically this will
tances may then in principle be obtained in a very often be the euclidean distance, but many other
precise way including all possible special features distance measures may be considered (see e.g.,
necessary for an adequate description of reality. [54]), like `p …1 6 p 6 ‡ 1†, of which the rectan-
Indeed the full set of demand-(candidate) facility gular (or Manhattan) distance (p ˆ 1) and euclid-
site pairs is fully known and ®nite. The central ean distance (p ˆ 2) are special instances, or block
diculty in practice resides in the amount of data norms, obtained by shortest paths using only a
to be collected. ®nite set of travel directions and velocities ± and
F. Plastria / European Journal of Operational Research 129 (2001) 461±470 465

even their asymmetric cousins block gauges ± · existing competition is known and ®xed,
which usually lead to easily manageable linearity · customers patronise the most attracting facility
properties. with their full demand, i.e., `the winner gets it
all' principle.
2.3.2. Number of new facilities
The number of new facilities to locate strongly
in¯uences the diculty of the model. In static 3.1. Captured market
models we simply distinguish between single and
multiple facility models. In models with foresight Let us ®rst take a look at how the demand of
and in equilibrium studies one also distinguishes the whole market is split over the di€erent com-
with respect to the number of (future) competing petitors, also called their market area. So for the
facilities. moment no location question is asked, but only
the allocation question is addressed.
2.3.3. Facility design This question has mainly been studied in a
The full question to be answered by the model continuous space, such as the plane. Since cus-
may involve more than the location. If the prod- tomers patronise the most attracting facility, the
uct's price is not ®xed then the most favorable market area of a facility is determined as the set of
price-setting might be looked for. Similarly the all demand points which feel most attracted to that
model might be asked to determine the facility's particular facility. When attraction is some con-
quality. In all such cases we will talk about location tinuous and strictly decreasing function of dis-
and design of the facility. tance, and demand is supposed to be continuously
distributed, these market areas form a set of dis-
2.3.4. Objective joint open regions, the closure of which usually
The ®nal question to answer is which objective cover the whole space. The simplest and best
is exactly pursued. known example is the standard Voronoi diagram,
One of the main objectives studied involves obtained with euclidean distance in the plane and a
maximising the market share of the incoming same attraction function towards all facilities ±
player. This is the total demand volume captured for each facility its market share is the polygon
by the new facilities. More precisely it is the sum obtained by intersecting all the halfplanes of
over all customers of the volume of their demand points closer to it than to another competing fa-
which will be served by the new facility(ies). cility. For other model-assumptions the shape of
More generally, this objective should be ex- the market shares may be quite complex with
pressed as pro®t maximisation, allowing for the highly nonlinear boundaries and several connected
introduction of costs next to the incomes reaved components, see e.g., [7].
from the market. This will be particularly neces- Such diagrams have been extensively studied,
sary in location-design models to adequately both from their structural and their construction
measure the cost/bene®t trade-o€s in the design point of view. For an overview of this type of
choice. market area research see [36]. The wonderful book
Many other objectives may be considered, e.g., [48] gives all details on applications and algorith-
related to voting theory, but these would lead us mic construction of generalized Voronoi diagrams
too far. One multiobjective approach has also been in many ®elds. Applications to location questions
attempted, see [42]. are detailed in [49]. Since such diagrams are geo-
metric objects, usually of low dimension (mostly
2), they are constructed with the tools of compu-
3. Static deterministic competitive facility location tational geometry; for an elementary construction
of the standard Voronoi diagram see [5], for an
The basic assumptions in this section are sum- interesting discussion of the relationship with
marised as follows: convex hulls and its algoritmic consequences see
466 F. Plastria / European Journal of Operational Research 129 (2001) 461±470

[44], and for an investigation of generalisations of yi ‡ zi 6 1 …i 2 I†;


these approaches to other distance measures see X
[43]. xs 6 p;
Voronoi diagrams on networks are studied in s2S

[35]. They are constructed by an extension of the yi ; zi 2 ‰0; 1Š …i 2 I†;


traditional Dijkstra method for shortest paths.
In case of pointwise demand one may deter- xs 2 f0; 1g …s 2 S†;
mine for each demand point what is the attraction
felt towards each existing facility. The maximum where customer i 2 I has demand wi , Pi denotes the
value will be the current attraction this consumer set of sites s which i would patronise if a new fa-
feels, which determines its current choice of facility cility would be opened there, while Ti is the set of
to patronise. sites for i tied with the currently patronized com-
petitor's facility. The main decision variables are
the location variables xs answering the question
3.2. Pure location `will a facility be opened at s?' Auxiliary variables
are yi (`is i fully captured?') and zi (`is i tied with a
The market captured by the new facilities con- competitor?').
sists of that part of the demand for which its This leads to combinatorial optimisation mod-
current attraction is beaten by the attraction to the els similar to covering, as exhaustively reviewed in
new facility. Since attraction is an increasing [61].
function of distance, this is equivalent to the dis- Discrete models without split demand lead to
tance between demand point and new facility be- the maximal covering type location model intro-
ing within some critical value, sometimes called the duced in [8] (see e.g., section 4.5 in [11]). This is a
break-even distance [12], which may be interpreted simpli®ed version of the maximal capture problem
as the distance a consumer is willing to travel for given above in which all tie sets Ti are empty, and
the product or service at the new facility. therefore without the auxiliary tie variables zi .
An important point is to know what happens in Typically these models will have many optimal
the case of ties, i.e., when the new facility lies ex- solutions, a feature which is troublesome for
actly at the break-even distance from a demand standard exact search branch and bound methods,
point. but makes heuristic approaches particularly ap-
In discrete setting this happens mainly when the pealing. A recent proposal [6] for solving large-
new facility site chosen coincides with some com- scale models of this type consists of a Tabu search
peting facility. It is then customary to assume that method.
demand is evenly split between all the highest at- Since in network and continuous setting ties
tracting facilities. For technical reasons this is of- appear whenever a site is chosen which is exactly at
ten simpli®ed into the rule that the existing break-even distance from the demand point, the
facility(ies) and the new facility(ies) obtain each as deterministic allocation rule inevitably leads to
a group half of the demand. This results in the discontinuity of the capture function at such
following discrete maximal capture problem, initi- points, and previous rule of even split enhances
ated in [58]. this. Without split one at least retains semi-conti-
nuity. Two extreme situations without split de-
X X wi mand may now be considered.
Max wi yi ‡ zi First there is convervatism, stating that in case
i2I i2I
2
X of tie with a new facility, customers will go on
yi 6 xs …i 2 I†; patronising the existing facility they patronised
s2Pi
X before. This is the rule followed in [34] introducing
zi 6 xs …i 2 I†; the NP-hard …r; Xp †-medianoid problem: ®nd r
s2Ti sites on a network maximising the total weight of
F. Plastria / European Journal of Operational Research 129 (2001) 461±470 467

demand vertices lying closer (in terms of shortest 3.3. Location and design
paths) to one of them than to any of the compet-
itors Xp . The characteristics of the new facility are often
Second, the opposite assumption of novelty not ®xed in advance, and their choice may then be
orientation, i.e., in case of tie the new facility gets incorporated into the decision process. Hence the
all demand [56], gives rise to closed captured attraction towards the new facility can now be
markets, a feature of particular importance in the in¯uenced both by location and by quality, and the
next section. With this tie-resolution rule there break-even distance becomes a function of the new
corresponds to each demand point a (closed) decision variable quality. A higher quality will in-
subset of the location space of all sites for the new crease the captured market and hence income, but
facility(ies) that would capture that demand. In at the expense of extra costs. Good solutions will
other words, we have a collection of subsets, each therefore have to balance both e€ects, which is
related to a given demand volume. For a particular usually achieved by using some notion of total
site the total captured demand is then obtained by pro®t as objective.
summation of the volumes of all sets it lies in. It turns out that such problems are only
Maximising the captured demand now means mathematically well behaved when demand is as-
®nding (a point in) a nonvoid intersection of such sumed to be novelty oriented. It was shown in
sets corresponding to the highest total volume. In [56,57] that any other tie-resolution rule leads to
the euclidean plane these sets are circular balls and non-existence of optimal solutions: any solution
it is easy to show that optimal solutions will always can be beaten by another solution suciently close
exist among all intersection points of two of the to a novelty-oriented optimal one.
boundary circles, an easily enumerated ®nite set of When the quality is to be chosen from a discrete
candidates. Drezner [17] shows how to do this ef- set of available values, each value may be consid-
®ciently for a single facility, while [45] suggest a ered separately, the resulting subproblems solved
dynamic programming approach for the multifa- as pure location situations, and the endresults
cility version. compared to obtain an integrated decision.
This type of model has also been advocated When location of the new facility is ®xed only
in marketing studies for brand-positioning quality is to be optimally determined, which is easy
[25,26,30,60] and even in political science (see in the deterministic behavioural model with point
[60]). In the ®rst case product characteristics are demand, even when the quality has to be selected
taken as coordinates in a feature space, demand from an interval of values: pro®t changes only at
is represented by consumer groups having a particular threshold qualities, each corresponding
common ideal brand-description, and attraction to capture of an additional demand point. There-
towards a brand is expressed by way of the fore a ®nite solution method may consist in the
(euclidean) distance between the points repre- following steps:
senting the ideal and the real brand. This leads 1. for each demand point determine at which
to ball intersection problems in higher dimen- threshold quality it starts to be captured by
sions which turn out to be NP-hard when di- the new facility,
mension is part of the input [9], but polynomial 2. sort the demand points for increasing threshold
in ®xed dimension. Several solution approaches quality,
have been developed recently, all relying on 3. calculate cumulatively in this order the corre-
geometric construction and evaluation of a ®nite sponding captured demand for each demand
dominating set [2±4,9,10,37]. point,
Continuously distributed demand has not 4. calculate the pro®t for each threshold quality
been studied much in this setting. The main using captured demand,
contribution at present seems to be [18] and 5. select the quality yielding highest pro®t.
concerns the rather theoretical linear segment For a ®xed quality we have a pure location
market. problem, and the results of Section 3.2 show that
468 F. Plastria / European Journal of Operational Research 129 (2001) 461±470

we can then usually identify a ®nite dominating set where CF is the set of existing competing facilities,
of candidate optimal sites. It turns out that this set and attr…i; x† (resp. attr…i; f †) denotes the attraction
may often be chosen independently of the quality. felt by customer i towards facility x (resp. f). Re-
Therefore we have a ®nite set of candidate optimal call that attraction is a decreasing function of
location/quality integrated decisions, even when distance between customer site and facility, and
both location and quality are continuous vari- increases with quality a.
ables. For planar setting, this property was ex- The resulting optimisation model in continuous
ploited in [56] for multiplicative attraction context lacks all of the usual convexity properties
functions, and in [57] for general attraction func- needed for solvability by traditional methods. A
tions. Ecient methods of solution of computa- locally optimal location for a single facility may be
tional geometry type are discussed in [55]. obtained by local search [13], while for a guaran-
teed globally optimal location one will have to rely
on global optimisation, e.g., the big square small
square method, as suggested in [53].
4. Static probabilistic competitive facility location
A corresponding multifacility location model is
even more complicated, investigation of which was
The basic assumptions in this section are sum-
started anyway in [14], but remains, however,
marised as follows:
virtually unsolved.
· existing competition is known and ®xed,
· customers patronise several facilities and split On networks the situation is often much easier.
Indeed, when attraction has the frequent form
their demand between them.
a
attr…i; x† ˆ ;
c…dist…i; x††
4.1. Pure location
where the (strictly positive) function of distance c
4.1.1. The Hu€ model is concave increasing (both the subjective impres-
Hu€ [40] introduced the idea to interpret at- sion and the cost of distance usually have this
traction (up to that time expressed in terms of property), the objective is convex on each edge,
distance only) not as something each consumer leading to a node-optimality property, [32,33,52].
maximises in its facility-choice, but rather as a In other words only nodes of the network (in-
measure of patronising probability. Note that Hu€ cluding the demand points) should be inspected in
considered cities instead of customers, in analogy the search for optimal sites. Therefore the problem
with the gravity models for economic interaction reduces to a discrete case. For general attraction
that were fashionable at that time. Therefore he functions which lack the previous property, how-
also made use of a multiplicative attraction func- ever, no such discretization seems to be possible
tion in analogy with the gravitational law in and one has to rely on global optimisation tech-
physics. This called for an analogy to mass, and niques ([51]).
thereby Hu€ also introduced a concept of quality, Following up on the initial attempt [41], dis-
to him mainly the size of the facility, as given by crete multifacility location models of this kind
¯oor area. This was generalized in [31,47] to in- have been at the heart of a lot of research in the
clude other facility properties. retail sector [1,27±29], usually proposing complete
The market share of a single new facility x of enumeration schemes applicable to small scale
quality a P 0 is now the sum over all customers of problems only.
the expected value of the volume of their demand
served by this new facility:
4.1.2. The Pareto±Hu€ model
X attr…i; x† In Hu€'s original proposal any customer al-
MS…a; x† :ˆ wi : P ; ways patronises all facilities with non-zero
attr…i; x† ‡ f 2CF attr…i; f †
i2I probability. Arguing that one may accept to
F. Plastria / European Journal of Operational Research 129 (2001) 461±470 469

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