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Profit maximization and reduction of the cannibalization effect in chain expansion

Author

Listed:
  • Blas Pelegrín

    (University of Murcia)

  • Pascual Fernández

    (University of Murcia)

  • María Dolores García Pérez

    (San Antonio Catholic University)

Abstract

We consider the facility location problem for an expanding chain which competes with other chains offering the same goods or service in a geographical area. Customers are supposed to select the facility with maximum utility to be served and facilities in the expanding chain may have different owners. We first use the weighted method to develop an integer linear programming model to obtain Pareto optimal locations related to the inner competition between the owners of the old facilities and the owners of the new facilities. This model is applied to maximizing the profit of the expanding chain taking into account the loss in market share of its old facilities caused by the entering of new facilities (cannibalization effect). A study with data of Spanish municipalities shows that the cannibalization effect can be significantly reduced by sacrificing a small portion of profit.

Suggested Citation

  • Blas Pelegrín & Pascual Fernández & María Dolores García Pérez, 2016. "Profit maximization and reduction of the cannibalization effect in chain expansion," Annals of Operations Research, Springer, vol. 246(1), pages 57-75, November.
    • Handle: RePEc:spr:annopr:v:246:y:2016:i:1:d:10.1007_s10479-014-1676-5
    DOI: 10.1007/s10479-014-1676-5
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    References listed on IDEAS

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