A Two-Stage Stochastic Facility Location Problem with Endogenous Demand Learning

Abstract

In facility location problems, planners can reduce demand uncertainty by collecting data, but these actions are costly. In this paper, we ask how a planner should jointly decide where to open facilities and invest in demand learning, which comes with a cost. The challenge is that learning changes how future random costs should be evaluated, creating a model that is both endogenous and nonlinear in location decisions. We model this problem within a two-stage stochastic framework, where both location and learning decisions have to be made here-and-now. Under some mild assumptions, we obtain a closed-form reformulation, which further enables a theoretical analysis of the sensitivity of learning decisions to model parameters and design of convergent solution algorithms that alternate between updating location and learning decisions. Numerical experiments on benchmark instances show that learning is most valuable when initial demand uncertainty is high, learning is effective, and learning costs are low. Moreover, the proposed solution algorithms find high-quality solutions much faster than exhaustive search and a standard commercial nonlinear solver. These findings show how information-acquisition decisions can be built directly into strategic facility planning. They help decision makers target limited learning resources where better demand information has the greatest value.