An iterative two-stage heuristic algorithm for a bilevel service network design and pricing model

Abstract Building upon earlier research, we revisit a bilevel formulation of service design and pricing for freight networks, with the aim of investigating its algorithmic aspects. The model adds substantial computational challenges to the existing literature, as it deals with general integer network design variables. An iterative heuristic algorithm is introduced, based on the concepts of inverse optimization and neighbourhood search. The procedure alternates between two versions of restricted formulations of the model while inducing promising changes into the service assignments. The approach has proven a high performance for all of the considered real-world instances. Its efficiency rests on its ability to deliver results within a close proximity to those obtained by the exact solver in terms of quality, yet within a significantly smaller amount of time, and to land feasible solutions for the large-sized instances that could not be previously solved. In line with the sustainable transport goals, a deeper observation of the transport management side highlights the strategy of the algorithm favouring freight consolidation and achieving high load factors.