Threshold distance versus side payment to reduce the cannibalization effect in retail chain expansion

Abstract

We deal with the store location problem for an expanding retail chain in competition with other retail chains that offer the same type of product. The aim of the expanding retail chain is profit maximization, but counteracting the possible loss in profit of the existing stores in the chain caused by the appearance of the new ones. In this article, we compare two approaches, one based on a threshold distance and another based on a side payment, to reduce the effect of cannibalization of existing stores under a delivered pricing policy in a transportation network. It is proved that optimal store locations can be found at the nodes of the network and an integer linear programming model is shown to solve the store location problem for each approach. A study with data of Spanish municipalities is presented where the percentage of profit increase after the expansion and the percentage of cannibalized profit corresponding to the optimal solutions of the two models are compared for different combinations of the threshold distance, the side payment, and the number of new stores.