This paper introduces the joint problem of locating hubs on a network and determining transportation prices between the hubs. The objective of the transportation provider is to maximize the revenue collected over the arcs between the hubs, whereas the customers aim to send their commodities over the network with minimum cost. The problem is modelled as a nonlinear bilevel programming formulation, which is in turn linearized, and strengthened through variable reductions as well as valid inequalities. The extension of the problem to mill pricing, where the price of each hub arc is determined by scaling down its cost by the same factor, is also studied. Computational results of traditional branch-and-cut and Benders based branch-and-cut algorithms are presented. Managerial insights about the interaction between the location and pricing decisions are provided.
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