On a Three-Level Competitive Pricing Problem with Uniform and Mill Pricing Strategies

Abstract

Under study is a three-level pricing problem formulated as a Stackelberg game in which the two companies, the Leader and the Follower, compete with each other for customers demand by setting prices for homogeneous products on their facilities. The first decision is made by the Leader. Then, having full information about the Leader’s choice, the Follower makes his own decision.After that each customer chooses the facilitywithminimal service costs to be serviced from. The Leader and the Follower use different pricing strategies: uniform and mill pricing respectively. We study the behavior of company revenues depending on the number of facilities. For this, an exact decomposition type algorithm is proposed. Moreover, we developed a hybrid approximation algorithm that is based on the variable neighborhood descent and coordinate descent.