Network production-location problems under price uncertainty

The scope of the network plant location problem is extended in three significant ways: (i) The ‘design’ of the facility, including consideration of input substitution and the level of output, is combined with the location decision; (ii) input and output prices are treated as random variables, and (iii) the risk preferences of the decision maker are considered explicitly in the decision making process. Node optimality properties are developed for several model variations. An elimination-by-bound solution algorithm is presented along with suggested upper and lower bounds and methods of simplification. Under certain conditions, the optimal input ratios and plant locations are shown to be invariant with some parametric changes. The potential for influencing the location decisions of firms, depending upon the characteristics of their risk preferences, production functions, and the demand functions for their input, through manipulation of the risk they face, is illustrated.