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CHAPTER I

INTRODUCTION

1.1 Background
Hotelling theory has many practices in this world. We can find the practices of the
competition around us, such as in Indonesia, there are KFC with McDonald’s, Indomaret
with Alfamart, and also what are starting now for the interdependency between merchants
are Shell with Pertamina and Teapresso with Chatime. Eventhough Hotelling Theory is a
classic theory, in this modern world, where Industrial Revolution 4.0 is starting, this theory
is still relevant until today.

Beside there are so many practices we can easily find, many researchers trying to
elaborate this theory to be better to implement for location analysis in this world. One of
the elaboration is The CG Model, which is written on “A Hotelling Style Model of Spatial
Competition for Convenience Goods” by B. Curtis Eaton and Jesse Tweedle.

1.2 Purpose
The purpose of this paper is to write the try of the application of CG Model as the
elaboration of Hotelling Model

1.3 Writing System


Writing system of this paper as follows.
Chapter I INTRODUCTION
This chapter contains of background, purpose of the paper, and writing system of the
paper
Chapter II METHODS
This chapter contains of journal review about the model, which is CG Model or NTP Model,
and a little bit critics of the journal.
Chapter III STUDY AREA
In this chapter, there will be an explanation about the study area and the reason why it is
chosen.
Chapter IV ANALYSIS
This chapter will contain the application of CG Model process and also the result of it.
Chapter V LESSON LEARNED
In this chapter, there will be an explanantion what are lessons that I learned from applying
the model into chosen study area and what I learned from learning this journal and
Hotelling Theory.
CHAPTER II
METHODS

This paper is based on a journal, titled “A Hotelling Style Model of Spatial Competition for
Convenience Goods” by B. Curtis Eaton and Jesse Tweedle from Department of Economics,
The Uiversity of Calgary, that has been revised on February 2011.

The journal is an explanation of a model that they create from the elaboration of Hotelling
theory. The model is called Convenience Goods Model, or CG Model, or in the last part of the
paper, they called it as NTP Model, or Not Too Picky Model.

The CG Model

For clarity, they made us imagine a small town with a highway of unit length that runs east and
west through it, a residential area north of the highway, an industrial area south of the highway,
and a dense network of secondary streets that run north and south, and east and west. I have
simplified their explanation by the picture below.

Where, 𝑦1 ∈ [0,1] and 𝑦2 ∈ [0,1] and the density of customers D(y1, y2) is uniform:

D (y1, y2) = d > 0.

Travel cost on the highway ar lower than those on the secondary street, so to minimize the
cost of their daily commute, people maximize their use of highway. People’s back home way
is the reverse of her journey to work.

Two firms that retail the convenience good are located on the highway. Their locations are x
= (x1, x2), where 0 ≤ x1 ≤ x2 ≤ 1, and price is p = (p1, p2), where 0 ≤ p1 and 0 ≤ p2. Firms buy
the convenience good at a constant wholesale price c and they incur no other costs. There is
incremental distance that a person must travel to get to firm i by di. Obviously, di is 0 for
anyone who passes firm i on her daily commute and is positive for anyone who does not. For
person y, di is the following :

di = | y1 – xi | + | y2 – xi | - | y1 – y2 |

The Differences between CG Model and Hotelling Model

1. CG Model offers more realistic perspective about customer (customer could be from
the north to the south and vice versa), where Hotelling just explained about horizontal
distribution of customer (from point 0 to 1 and vice versa).
2. CG model also explain the incremental distance, which is a new variable to consider,
where Hotelling more explained about a monopoly of a firm’s market area.
3. In the “A Hotelling Style Model of Spatial Competition for Convenience Goods”, they
also stated the plus of CG Model by their analysis, which are :
 The plus of the CG Model is, there is a discontinuity in the demand function of
either firm at the point where its price is equal to that of its competitor, and also
that there is no such discontinuity in the Hotelling model. They did analysis by
comparing their analysis of demand function of non-convenience good using
CG Model and Hotelling Model.
 In the Profit Function analysis using CG Model, the graph result could explained
clearer and could explained what Hotelling Model couldn’t explained before.
 In the Price Equilibrium analysis part, they stated based on D'Aspremont,
Gabszewicz and Thisse (1979), that in the original Hotelling model, for certain
locational configurations there is no Nash equilibrium in pure price
strategies.They also did analysis using CG Model and the result is the same.

Critics

Beside the lack of the CG Model the writers stated before, that in the CG Model there is no
Nash Equillibrium in pure price strategies, I think that the journal also could not answer the
possibility of people that has different way for go to work and for go back home, because like
in Indonesia, there is different traffic arrangements in different time, and also, people may go
to work not in the rush hour and go back home in the rush hour, which is make a different
choice of way and distance.
On the writing aspects, I think it will be better if the writers only stated again what they have
discussed before on the conclusion part. Based on the current journal, they adding many
things in the conclusion part, and it would make it not a conclusion.
CHAPTER III
STUDY AREA

The study area of this paper is KFC and McDonald’s Darmo, which are shown on the map
below.

I choose those places because I think, those places are


 0 the most matching characteristics with the criteria of
CG Model, which are :

1. Located on the highway


KFC and McDonald’s Darmo are located in Jalan
Darmo, which is one of highway in Surabaya.
Eventhough Jalan Darmo is not connecting West and
East of Surabaya, It is connecting South and North of
Surabaya, and also surrounded by secondary road that
connecting West and East part of Surabaya.
2. People commute from secondary road to the
other side secondary road.
Jalan Darmo is surrounded by many secondary roads,
as shown by map before.
3. Located between [0,1]
4. Convenience Goods
 1 A convenience good is a consumer item that is widely
available and purchased frequently with minimal effort. Because a convenience good
can be found readily, it does not typically involve an intensive decision-making process.
Convenience goods, such as newspapers and candy, are different than specialty
goods, such as cars, which are more expensive and often carry a greater opportunity
cost for the consumer. Convenience goods are often purchased through habit or
impulse because they are easily obtained by consumers and relatively inexpensive
(Kenton, 2019).
Based on what Kenton said, KFC and McDonald’s I think can be classified into
convenience goods. It is because canbe found readily ( many franchises of KFC and
McDonald’s in Surabaya), they sell similar goods (fried chicken, which is the main
reason why most people go there ), and also purchased through habit (KFC’s and
McDonald’s fried chicken is not a special goods for most people in Surabaya, those
are goods for them when they have daily lunch or dinner).
CHAPTER IV
ANALYSIS

The analysis that I did, using mode by foot to show the best distance they need to go to the destination.
I use three ideal assumptions based on CG Model.

1. 0 ≤ x1 ≤ Y1, Y2 ≤ x2 ≤ 1
Home (Y1) = Jalan Tumapel No. 43
Work (Y2) = Metro TV Jawa Timur

a. Go to McDonald’s (x1) on the way to work

The picture is shown the total distance, which is 1.4 km or 1,400 m, so the incremental
distance is 800 m.

b. Go to KFC (x2) on the way to work


The picture is shown the total distance, which is 1.4 km or 1,400 m, which has same
distance as the route when going to McDonald’s, so the incremental distance is 300 m.

The higher the incremental distance, causing the higher price, especially for
transportation that they do not usually do in daily route.

So, for this case, it will be the same. KFC and McDonald’s has same chances to be the
option for buying goods.

2. 0 ≤ Y1, Y2 ≤ x1 ≤ x2 ≤ 1
Home (Y1) = Jl. Dr. Soetomo No. 31
Work (Y2) = Bank Jatim Capem Darmo

a. Original Distance

The Picture is shown the original distance, which is 160 m.

b. Go to McDonald’s (x1) on the way to work


The picture is shown the total distance if they go to McDonald’s first, which is 300 m, so
the incremental distance is 140 m.

c. Go to KFC (x2) on the way to work

The picture is shown that the total distance is 2.1 km or 2,100 m, so the incremental
distance is 1,940 m.

So, from the experiment above, McDonald’s has the higher chance as an option to go
buy the goods.

3. 0 ≤ x1 ≤ x2 ≤ Y1, Y2 ≤ 1
Home (Y1) : Jalan Taman Bungkul No. 17
Work (Y2) : Bala Keselamatan Rumah Sakit William

a. Original Distance
The picture is shown that the original distance, which is 450 m.
b. Go to McDonald’s (x1) on the way to work

The picture is shown the total distance, which is 2.2 km or 2,200 m, so the incremental
distance is 1,750 m.

c. Go to KFC (x2) on the way to work


The picture is shown the total distance, which is 750 m, so the incremental distance is
300 m.

Therefore, from the experiment above, KFC has higher chance as an option to go buy
goods.
CHAPTER V
LESSON LEARNED

From the experiment of the CG Model Application as the elaboration of Hotelling Model, I
have learned that :

 Location is one of crucial factors that we have consider for placing building.
 We have to consider human behavior, such as the home and the work place for
locating something.
 By considering the human behavior, we can approximating the affect of the place for
the future.
 It is better to agglomerate with other same purpose of building for the best advantages
 We have to consider other factors, not only what it is stated on the theory, because
urban and regional planning is a very complex thing to do.
REFERENCES

Eaton, B. C. & Tweedle, J., 2011. A Hotelling Style Model of Spatial Competition for Convenience
Goods. Journal of Economics, p. 28.

Hotelling, H., 1929. Stability in Competition. The Economic Journal, 39(153), pp. 41-57.

Kenton, W., 2019. Investopedia. [Online]


Available at: https://www.investopedia.com/terms/c/convenience-good.asp
[Accessed 19 May 2019].