The retail space-exchange problem with pricing and space allocation decisions

Mingming LENG, Mahmut PARLAR, Dengfeng ZHANG

Research output: Journal PublicationsJournal Article (refereed)

1 Scopus Citations

Abstract

We consider retail space-exchange problems where two retailers exchange shelf space to increase accessibility to more of their consumers in more locations without opening new stores. Using the Hotelling model, we find two retailers’ optimal prices, given their host and guest space in two stores under the space-exchange strategy. Next, using the optimal space-dependent prices, we analyze a non-cooperative game, where each retailer makes a space allocation decision for the retailer's own store. We show that the two retailers will implement such a strategy in the game, if and only if their stores are large enough to serve more than one-half of their consumers. Nash equilibrium for the game exists, and its value depends on consumers’ utilities and trip costs as well as the total available space in each retailer's store. Moreover, as a result of the space-exchange strategy, each retailer's prices in two stores are both higher than the retailer's price before the space exchange, but they may or may not be identical.
Original languageEnglish
Pages (from-to)189-202
Number of pages14
JournalProduction and Operations Management
Volume22
Issue number1
Early online date11 Mar 2012
DOIs
Publication statusPublished - Jan 2013

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Bibliographical note

For this research, the first author (Mingming Leng) is supported by the General Research Fund of the Hong Kong Research Grants Council under Research Project No. LU340810, and the second author (Mahmut Parlar) is supported by the Natural Sciences and Engineering Research Council of Canada. The authors thank the Senior Editor and two anonymous referees for their insightful comments that helped improve the article.

Keywords

  • retail space‐exchange
  • price
  • space allocation
  • Hotelling model
  • Nash equilibrium

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