A single allocation hub location and pricing problem

Abstract

This study introduces a new problem for uncapacitated single allocation hub location in which pricing is taken into account. The objective is profit maximization by choosing the best hub and spoke topology and applying the optimal pricing, in the case of price-dependent demand. It is assumed that the source determining the number of hubs is endogenous. Two variants of the considered problem are addressed: deterministic and robust. For the initial non-linear model, we show how the deterministic variant can be reformulated as a mixed-integer linear program, excluding the price variables. In the robust counterpart case, the quantity of commodity flows between the pairs of customers is of stochastic nature. The goal of the robust variant is to design a hub and spoke network, together with the pricing structure, that would be immune to small perturbations of demand. Starting from the original model for the robust case, we have shown how to formulate an equivalent mixed-integer conic-quadratic program. In addition, we have proposed a 2-phase matheuristic approach for the robust variant. A computational study was conducted on the set of hub instances from the literature using the commercial state-of-the-art solver. The obtained computational results are thoroughly discussed, location patterns are analyzed and some managerial insights are provided. The experimental study also showed that the proposed matheuristic approach for the robust variant performs better compared to the commercial solver.