The retail space-exchange problem with pricing and space allocation decisions

Abstract

We consider retail space-exchange problems where two retailers exchange shelf space to increase accessibility to more of their consumers in more locations without opening new stores. Using the Hotelling model, we find two retailers’ optimal prices, given their host and guest space in two stores under the space-exchange strategy. Next, using the optimal space-dependent prices, we analyze a non-cooperative game, where each retailer makes a space allocation decision for the retailer\u27s own store. We show that the two retailers will implement such a strategy in the game, if and only if their stores are large enough to serve more than one-half of their consumers. Nash equilibrium for the game exists, and its value depends on consumers’ utilities and trip costs as well as the total available space in each retailer\u27s store. Moreover, as a result of the space-exchange strategy, each retailer\u27s prices in two stores are both higher than the retailer\u27s price before the space exchange, but they may or may not be identical