Competitive Location Models - Location Science - page 356

14.3 Consumer Behavior in Competitive Location Models

Consumer behavior is one of the most important aspects in any user-focused models,
yet it is crucial to many such models. Some references are Raiport and Sviokla
( 1994 ), who identified content, context, and infrastructure as major determinants
of customer behavior, Song et al. ( 2001 ) and Giudici and Passerone ( 2002 ), who
use data mining in their analyses of identifying changes in consumer behavior, and
Liou ( 2009 ), who presents decision rules that foster customer retention in the airline
industry.
The three-stage process below presents a decision-making framework that
customers use when making their choices. We will discuss the individual stages
and demonstrate how they encompass the rules and assumptions made in the
literature.
Stage 1 is the evaluation stage . In it, customers determine utilities to each of
the stores. For the purpose of this paper, we assume that customers actually have
complete and correct information, an assumption that may be justified by Internet
searches or similar fact-finding processes, together with past experience with the
facilities. The utilities created in this stage will be based on all components that
typical customers deem important. In the retail context, this may include, but not be
restricted to, the price charged at the facility, the distance to the facility, the parking
at the facility, the friendliness of the staff, and others. Formally, we can define u ij as
the utility a customer at site i has (for simplicity, we will refer to “customer i ”) for
goods or purchased at a facility at site j (called “facility j ” for short). Furthermore,
we define d ij as the distance between customer i and facility j , while t denotes the
unit transportation cost, i.e., the conversion from distance to money. We also need to
define p j as the price charged by facility j , and the basic attractiveness A j of facility j .
The basic attractiveness is a composite parameter that includes different measures,
such as floor space of a retail establishment (as a proxy expression for variety), the
quality of service, and other features. It is not important to find an exact aggregate
measure, it is only important to find an expression that captures the differences
between facilities. For simplicity, we will restrict ourselves to a single homogeneous
product, such as a brand that can easily be compared between facilities. As an
aside, some firms make such comparisons difficult by assigning different model
numbers to the same product, one for department stores, and a different number to
the product, when it is sold through specialty retail outlets.
The simplest (deterministic) utility function is

￿ UD1a: u ij D - td ij ,
i.e., the utility of customer i regarding facility j equals the negative distance between
them. Hence, maximizing the utility, such a customer will patronize the facility
closest to him. Such a utility function has been used by early contributors, such
as Lerner and Singer ( 1937 ), Eaton and Lipsey ( 1975 ), and later by operations
researchers such as Hakimi ( 1983 ), ReVelle ( 1986 ), Serra et al. ( 1999 ).