Firm Location Problem with Spatial Price Equilibrium Considering Tax Incentives and Transportation Costs

Firm location in manufacturing supply chain networks is shaped by regional tax policies and network equilibrium responses. This study examines the spatial price equilibrium associated with alternative locations for an entrant manufacturer and evaluates how regional tax incentives affect firm profit and location choice. A bi-level programming model is developed. The upper-level model selects the location that maximizes after-tax profit, while the lower-level model solves the corresponding spatial price equilibrium to obtain the equilibrium transaction flows, market prices, and composite unit costs. Each composite unit cost comprises a flow-dependent transaction cost and a shortest-path transportation cost determined by the selected location. The upper-level problem is solved by complete enumeration, while the lower-level spatial price equilibrium is computed using a projection method. Numerical results show that firm profit is jointly determined by transaction volumes, equilibrium prices, transportation costs and production costs, fixed investment costs, and regional tax rates. Uniform tax-rate reductions increase profit without changing the location ranking, whereas sufficiently large location-specific reductions can reverse the ranking and alter the optimal location. The effectiveness of these incentives depends on location-specific equilibrium revenues and initial profit differences. By integrating firm location, regional tax incentives, and spatial price equilibrium within a unified bi-level framework, this study provides analytical support for manufacturing location decisions and regional investment-incentive design.