Competitive store closing during an economic downturn

Abstract

The economic downturn of the late 2000s resulted in the closing of a number of retail stores. When doing so a firm has to consider which stores to close, and when to close them, so that profits are maximized. Since retail stores operate in a competitive environment, these decisions are not simply a function of a retailer's existing store locations but are also contingent on the location, and closing decisions, of stores operated by rival firms. This paper examines a game between two retail chains looking to downsize operations in a given region and presents a solution procedure that captures the equilibrium store closing decisions. The solution procedure includes a single period mixed integer program model and a multi-period heuristic with a backward and forward pass to find near optimal solutions. Our results provide guidelines for developing effective strategies to systematically reduce the number of stores so that profit is maximized while competitive pressure is exerted on rival stores.