Location-pricing decisions with carbon emission considerations: A behavioral game-theoretic approach

Abstract

The location-pricing problem aims to solve pricing and facility location problems at the same time. While the demand of customers is known in the classical facility location problem, it is a function of price in the location-pricing problem. Moreover, some other factors, such as production, transportation and inventory costs, and competition, can affect the final price of products, making the location-pricing problem more complicated. Considering the necessity of incorporating environmental aspects into supply chain design and the importance of considering the behavioral characteristics of decision-makers, this study addresses the location-pricing problem based on these two significant perspectives. In this paper, there is a lead company responsible for locating and planning a set of manufacturers in the first echelon. On the other hand, the focal manager controls the total emissions and sets the wholesale price. In the second echelon, there are two retailers that base their pricing strategies on social preferences in order to gain a larger market share. The competition between the retailers determines the demands of the customers. The modeling approach is based on the Stackelberg-behavioral Nash game and is formulated as a bi-level mixed-integer nonlinear programming model. The problem is solved using a combination of an analytical solution method and the utilization of a commercial optimization solver. The proposed model is assessed using a real case study in the energy sector. The results indicate that deviating from purely selfish behavior in the pursuit of profit can lead to beneficial outcomes. Generally speaking, price competition between status-seeking retailers results in lower prices for the leader and followers compared to the standard game theory approach. This leads to an increase in average demand in the market, which results in increased profit for members and consequently improves the performance of the whole system. Also, it is worth mentioning that the status-seeking behavior of retailers results in a decrease in retail prices, which improves social welfare.