Solving the competitive facility location problem considering the reactions of competitor with a hybrid algorithm including Tabu Search and exact method

In this paper, a leader-follower competitive facility location problem considering the reactions of the competitors is studied. A model for locating new facilities and determining levels of quality for the facilities of the leader firm is proposed. Moreover, changes in the location and quality of existing facilities in a competitive market where a competitor offers the same goods or services are taken into account. The competitor could react by opening new facilities, closing existing ones, and adjusting the quality levels of its existing facilities. The market share, captured by each facility, depends on its distance to customer and its quality that is calculated based on the probabilistic Huff's model. Each firm aims to maximize its profit subject to constraints on quality levels and budget of setting up new facilities. This problem is formulated as a bi-level mixed integer non-linear model. The model is solved using a combination of Tabu Search with an exact method. The performance of the proposed algorithm is compared with an upper bound that is achieved by applying Karush-Kuhn-Tucker conditions. Computational results show that our algorithm finds near the upper bound solutions in a reasonable time.