Designing a hub location and pricing network in a competitive environment

This paper models a novel mixed hub location and pricing problem in a network consists of two competitive firms with different economic positions (Stackelberg-game). The flow that reflects demand of each firm directly depends on its price (Bernard's model). The flow of each firm directly depends on both firms' prices simultaneously (Bernard's model). The firm with higher position (the leader) chooses its potential hubs while the firm in lower position (the follower) may choose either its own hub locations or the other firm's existing hub locations (the competitor's hub) through two real contracts; the airlines own and the long term usage contracts. Firms have to make decision on both the location-allocation and the price determination problems through maximizing their own profits. Moreover, firms make decisions for extending hub coverage through establishing new airline bands, gates and other infrastructures by considering extra cost. In order to evaluate the proposed model, an example derived from the CAB dataset has been solved using Imperialist Competitive Algorithm (ICA) and closed expression, respectively for the hub location-allocation and pricing decisions. Finally, a sensitivity analysis of the model is conducted to show the effect of each firm's share of fixed costs on the contract type selection.