Entry deterrence and credible threat analysis in facility location problems

Abstract

Abstract Location of retail networks in a competitive environment is a branch of study under location theory. The objective is to maximize profits while competing for customers and hence market share. With the need of firms to set-up multiple facilities in a given region, it is required to find the optimum number and location of stores which ensures maximum profit even in the case when a competitor tries to enter the market. This is the maximum strategy where one makes a choice that would maximize the minimum gain that can be made. A company`s cost structure can etc. as a deterrent for its competitors as for similar market shares, a lower cost structure would imply better profits and hence higher staying power. This paper tries to answer the following questions in a demand network.  How many stores should one set up in order to put up a strong entry deterrence for the competitor  What should be ones operating and fixed cost be vis a vis the competitor for one to put up the deterrence.  When is it unprofitable for one to enter the market given the competitor will respond by putting up stores.