Evolutionary location and pricing strategies in competitive hierarchical distribution systems: A spatial agent-based model

Facing horizontal channel competition in a hierarchical distribution system, independent intermediaries such as wholesalers and retailers are keen to find the optimal location and pricing strategies that enable them to adapt to the increasingly competitive business environment. To help market intermediaries to address their challenges, we propose in this paper a spatial agent-based model (SAM), grounded in complex adaptive systems, which comprises four types of agents, namely the world, the manufacturer, firms, and consumers. We derive the firms' optimal behaviors in response to competition by evaluating the evolutionary location and pricing strategies using a genetic algorithm. We observe that a pyramid structure and the bullwhip effect in demand emerge from the evolutionary behavior of the SAM. We also find that buyers' searching ability enhanced by information technology has a significant effect on the degree of competition in a hierarchical distribution system. In addition, we find that firms that distribute elastic goods are likely to lower their prices to attract more buyers and move closer to their suppliers to save transport costs. In the case that the product demand is inelastic, intermediaries will move as close to their buyers as possible because they can maximize their profits in the SAM.