Consumers In Competitive Location Models

1. Consumers In Competitive Location Models Chapter 5 - Facility Location: Applications & Theory IE 2079 - Summer 2009 7/20/2009 Peter Bianco

2. Why Do We Care?!?! • Improved Coverage of Consumer-Based Demand • Market Penetration

3. Plan of Attack • Model the Consumer’s Decision • Determine the Role of the Facility in Consumer’s Decision • Adjust the Consumer’s Decision to Reflect Reality • Consider Complexities in Consumer Behavior • Conclusion & Useful Application

4. I. Model the Consumer’s Decision • Demand Assignment Rules • Consumer Characteristics • Consumer Questions • Decision Making Process • Rational Consumer Assumption • Basic Model

5. Demand Assignment Rules • Allocation vs. Choice • Allocation - Customers are assigned to a facility location • Choice - Customers are free to choose a facility location Competitive Location = Consumer Choice

6. Consumer Characteristics • Disposable Income • Age • Level of Education • Preference for Consumption • General Lifestyle Characteristics

7. Consumer Quesions • What to Buy? • How Much to Buy? • Where to Buy It?

8. Decision Making Process:Consumer Choice How Much to Buy? Pleasure of shopping Store Location Quick Need, Extra Trip NO Purchase Is Primary Motivation Motivation to shop Basic need for goods Bundle Purchase LONG STORE CHOICE YES Time Requirement Utility Function (uij) SHORT Information gathering Purchase In Route; Not Primary Motivation for Trip Internal Factors: Size / Selection, Personnel, Pricing Where to Buy? What to Buy?

9. Rational Consumer:An Individual Who… • Has full / accurate information about all alternatives • Constructs a rational utility function about each alternative • Optimizes that function by considering their expected satisfaction with each alternative • Acts according to the rational thought process

10. The Basic Model uij = f (Ci, dij, Fj) uij = The utility function used to evaluate potential locations Ci = Rational consumer at location “j“ and all factors associated with that consumer dij = Distance between Ci and Fj; Distance always diminishes the utility function (Typically measured in travel time) Fj = Facility at location “i“ and all factors associated with that facility

11. II. The Role of the Facility in Consumer Decision Making • Equivalent Facilities • Facilities Attributes • Types • Evaluation • Multiplicative • Additive • Retail Gravitation & Distance Decay

12. Equivalent Facilities • Facilities whose function makes them equivalent • The only relevant factor is distance • Newspaper Stands; Post Office; Etc.

13. Facility Attributes: Types • Those things which differentiate one facility from another • Service • Cleanliness • Pricing • Parking • Convenience • Distance • Selection • Etc.

14. Facility Attributes: Evaluation • Multiplicative vs. Additive • Additive • The practice of summing attributes to determine the utility function • Each attribute has a relatively small impact on the function • EX: uij = (Selection + Service) - Distance • Either Selection or service could be lacking slightly and not significantly effect the utility • Multiplicative • The practice of multiplying attributes to determine the utility function • Each attribute has a relatively large impact on the function • EX: uij = (Selection x Service) / Distance • Either Selection or service could be lacking slightly and significantly effect the utility • This determination is made on a case by case basis • EX: The restaurant industry would place a multiplicative weight on cleanliness

15. Retail Gravitation & Distance Decay uij = wi / dij2 wi = the attractiveness index based on the consumer and the jth facility. • The utility of an item diminishes inversely proportional to the square of the distance in the same way as gravity, acoustics, optics, etc. • This only applies in situations where the model is 2-Dimensional (Planer, Network, Etc) • The power of k=2 is the average of all facility types and may vary slightly from facility to facility (Furniture - k=2.723; Cloths - k=3.191) • The variable k is referred to as the Distance Decay

16. EXAMPLE *This example is non-planer and therefore Retail Gravitation does not apply uij = (q+s)*c / d u(A) = (2+3)*1/2 = 2.5 u(B) = (4+2)*1/5 = 1.2 u(C) = (3+4)*0/1 = 0 u(D) = (1+1)*1/3 = .67

17. III. Adjusting Consumer Rationality to Reflect Reality • Bounded Rationality - Consumers have incomplete information and irrational reasons for patronage. • Store Loyalty • Category-Specific Store Loyalty

18. III. Adjusting Consumer Rationality to Reflect Reality • Cognitive Map • Cognitive vs. Objective • Perceived Distance • Directional Bias • Toward City vs. Away From City • Wedged Bias

19. Consider Complexities in Consumer Behavior • Socioeconomic Considerations • Nonhomogenious Product Selection • Multipurpose Shopping • Patronization Basis

20. Conclusions / Useful Applications • The overriding and most constant factor is distance all other considerations act to overcome the negative effects of the fact that a consumer must travel some distance to meet his/her needs. • Improved Coverage of Consumer-Based Demand • Market Penetration