Alternative fuel station location model with demand learning

In this paper, we study the optimal location decision for a network of alternative fuel stations (AFS) servicing a new market where the demand rate for the refueling service can be learned over time. In the presence of demand learning, the firm needs to make a decision, whether to actively learn the market through a greater initial investment in the AFS network or defer the commitment since an overly-aggressive investment often results in sub-optimal AFS locations. To illustrate this trade-off, we introduce a two-stage location model, in which the service provider enters the market by deploying a set of stations in the first stage under uncertainty, and has the option to add more stations in the second stage after it learns the demand. The demand learning time (length of the first stage) is endogenously determined by the service provider’s action in the first stage. To solve this problem, we develop an efficient solution method that provides a framework to achieve a desired error rate of accuracy in the optimal solution. Using numerical experiment, we study the tradeoff between active learning and deferred commitment in AFS deployment strategy under different market characteristics. Further, we find that the lack of planning foresight typically results in an over-commitment in facility investment while the service provider earns a lower expected profit.