¹California State University-Fullerton, Fullerton, CA, USA

Correspondence: T Drezner, College of Business and Economics, California State University-Fullerton, Fullerton, CA 92834, USA. E-mail: tdrezner@fullerton.edu

Received March 2006; Accepted August 2006; Published online 29 November 2006.

Abstract

In most analyses performed on consumer behaviour in a competitive environment, it is assumed that discretionary buying power devoted to a certain product category exists in a trade area. The goal is to estimate how this buying power is distributed among competing retail facilities in the area. In this paper, we assume that in many competitive situations not all the buying power is spent at the competing facilities because there are other facilities that offer substitute products. These substitute products are not as desirable as the product in question, but customers will purchase the less desirable substitutes if they are more conveniently available. We construct a model that considers a decline in demand as a function of the distance to competing facilities. If the competing facilities are close to the customers, a larger portion of the buying power will be spent at these facilities. Two objectives are considered. One is the maximization of the buying power spent at all competing facilities, and the second is the maximization of the buying power captured by one's chain of retail facilities. Solution methods for the location of one facility are proposed and computational experiments with these methods are reported.