A bilevel uncapacitated location/pricing problem with Hotelling access costs in one-dimensional space

Abstract

We formulate a spatial pricing problem as bilevel non-capacitated location: a leader first decides which facilities to open and sets service prices taking competing offers into account; then, customers make individual decisions minimizing individual costs that include access charges in the spirit of Hotelling. Both leader and customers are assumed to be risk-neutral. For non-metric costs (i.e., when access costs do not satisfy the triangle inequality), the problem is NP-hard even if facilities can be opened at no fixed cost. We describe an algorithm for solving the Euclidean 1-dimensional case (i.e., with access cost defined by the Euclidean norm on a line) with fixed opening costs and a single competing facility.