Optimum location of hierarchical production units with respect to price-elastic demand

In this study, a model is designed to determine the optimum location of a hierarchical production system on a nonhomogeneous plane. The main objective of the study is to consider explicitly the ways in which alternative spatial pricing policies will affect location choice. The maximum-profit location is obtained by balancing price, demand, production cost, and transportation cost of interdependent production units. A stepwise heuristic approach is used for the solution. The solution procedure starts with the choice of the number of plants for each level of the hierarchy. The optimum set of markets is determined by the use of a minimum-distance criterion, and the demand of each market is calculated with respect to a chosen uniform price. Then the optimum location of plants is determined for each market. This procedure is repeated by using different uniform prices and by changing the number of plants until the maximum profit for the whole system is obtained.