Customer-Related Uncertainties in Facility Location Problems

In many situations, customers choose the facilities they want to interact with. One possible objective of the facility managers is to maximize the number of customers who use their facilities. In order to achieve this objective, they will need to make decisions regarding the features of their facilities, such as product variety, parking space, ambiance, prices, and, not least, the location of these facilities, particularly relative to the location of customers and possible competitors. To make their facilities attract as many customers as possible, the firms need to know what makes customers behave the way they do. Unfortunately for the firms, customer behavior is uncertain. This chapter examines the sources of customer-related uncertainty. These include the occurrence of unplanned purchases, the taste for variety—given product heterogeneity, imperfect information available to the customers about product and store features, and imperfect information on customers available to decision-makers. The effects of these uncertainties on customers’ behavior are also described: purchases distributed among all competitors, comparison shopping, multipurpose trips, and price and feature search. This behavior results in facility locations different from those obtained using models that do not consider uncertainty. In particular, we do see more agglomeration. The chapter then describes some models that include customer probabilistic choice rules and demonstrates how these rules can be integrated into facility location models.