A competitive hub location and pricing problem

Abstract

We formulate and solve a new hub location and pricing problem, describing a situation in which an existing transportation company operates a hub and spoke network, and a new company wants to enter into the same market, also using a hub and spoke network. The entrant maximizes its profit by choosing the best hub locations and network topology and applying optimal pricing, considering that the existing company applies mill pricing. Customers’ behavior is modeled using a logit model. We solve instances derived from the CAB dataset using a genetic algorithm and a closed expression for the optimal pricing. Our model confirms that, in competitive settings, seeking the largest market share is dominated by profit maximization. We also describe some conditions under which it is not convenient for the entrant to enter the market.