Enhancing transportation service management with bi-level optimization: Competitive pricing and hub location

This paper highlights the importance of efficient service network design through hub management in reducing transportation costs and offering competitive service prices. For this, it addresses the problem of how a new entrant in the transportation market can design its hub network and set competitive prices. Meanwhile, the incumbent can react to new market conditions by revising its service prices. We develop a new bi-level mathematical model within a Stackelberg game competition framework. Using logit model, we examine customer preferences. A novel decomposition-based solution technique is proposed which transforms the original model into a tri-level structure by separating the hub location and pricing decisions for the entrant. The Lambert-W function is employed to reduce this tri-level problem to a new bi-level format, which effectively splits the hub location and pricing tasks. Additionally, we implement a new hybrid hyper-heuristic and a modified learning-based tabu search meta-heuristic method for pricing and hub location, respectively. The results show that fewer hubs from the incumbent increase the entrant's competitive advantage, allowing it to improve market share and profit by strategically differentiating its network. Also, the difference in discount rates between the hubs of the two competitors is an important factor in shaping their competitive advantage in capturing market share. This advantage becomes more significant as customer sensitivity to service price increases.