Institut Teknologi Sepuluh Nopember www its ac id

Institut Teknologi Sepuluh Nopember www. its. ac. id HOTELLING THEORY (Subject: Location and Spatial Analysis) Belinda Ulfa Aulia, ST, MSc DEPARTMENT OF URBAN AND REGIONAL PLANNING 2018 Institut Teknologi Sepuluh Nopember www. its. ac. id

Other Location Models Weber’s Model Manufacturing plants will locate where costs are the least (least cost theory) Theory: Least Cost Theory Costs: Transportation, Labor, Agglomeration Losch’s Model Manufacturing plants choose locations where they can maximize profit. Theory: Zone of Profitability Hotelling’s Model Location of an industry cannot be understood without reference to other industries of the same kind. Theory: Locational interdependence Institut Teknologi Sepuluh Nopember www. its. ac. id

Hotelling Theory • Hotelling’s linear city model was developed by Harold Hotelling in his article “Stability in Competition”, in 1929. • In this model he introduced the notions of locational equilibrium in a duopoly in which two firms have to choose their location taking into consideration consumers’ distribution and transportation costs. Institut Teknologi Sepuluh Nopember www. its. ac. id

“Initially the model was developed as a game in which firms first chose a location and after a selling price for their products. In order to set their business in the best location to maximize profits, the firms will have to evaluate three key variables: competitors’ location, customers’ distribution and transportation costs” Institut Teknologi Sepuluh Nopember www. its. ac. id

Assumption • Product was uniform so customers would buy from the most convenient location (nearest seller) and that the friction of distance was linear and isotropic. • The total price for the customer is thus the market price plus the transport price (time or effort spent to go to the market). Institut Teknologi Sepuluh Nopember www. its. ac. id

Hotelling Model • • • The model is usually based on two ice-cream salesmen, A and B, on a mile of beach. The cost and choice of ice-cream is the same for each distributor. Buyers are evenly distributed along the beach. The first pattern of market share has the two salesmen positioned so that each is at the centre of his half of the beach and the market is split up evenly. If A now moves nearer to the middle of the beach, he will increase his market share. The logical outcome of this will have both salesmen back to back at the centre of the beach, as long as some customers are willing to walk nearly half a mile for an ice-cream, i. e. that the consumer provides the transport. This analogy indicates that locational decisions are not made independently but are influenced by the actions of others. Institut Teknologi Sepuluh Nopember www. its. ac. id

Hotelling's Principle of Market Competition • • • Two competitors will select locations A and B for optimal market coverage. With P 1 being the market price, the market boundary would be F 1 (point of cost indifference) since right of F 1, customers would get a lower price at location B instead of at location A and left of F 1, customers would get a lower price at location A. If for any reasons, location A is able to lower the market price from P 1 to P 2, then its market area would expand at the expense of location B, from F 1 to F 2. Institut Teknologi Sepuluh Nopember www. its. ac. id

Hotelling Model… Price xm marks the location of marginal buyer— Assumethe that What if one who is indifferent shop 1 sets shop 1 raises between buying Price either price p 1 and shop 2 its price? firm’s good sets price p 2 p’ 1 p 2 p 1 x’m Shop 1 xm All consumers to the xm moves to the And all consumers Shop 2 left of xm buy from left: some to the right buy from shop 1 consumers switch to shop 2 2 Institut Teknologi Sepuluh Nopember www. its. ac. id

FOR INELASTIC MARKET Locational Interdependence • A Industry first entered the market, then the B industry compete with A • If both located in Institut Teknologi Sepuluh Nopember www. its. ac. id

Locational Interdependence • If B moves to the right, price lower at the right than the price in the middle • If, demand was inelastic (buy the product at any price) then B does not benefit from this location changes Institut Teknologi Sepuluh Nopember www. its. ac. id

Locational Interdependence. FOR ELASTIC MARKET • A and B are two industry colluded to monopolize the market and is located at the position quartile • Both divide the market area coextensive comparison with Institut Teknologi Sepuluh Nopember www. its. ac. id

Locational Interdependence • Advantages located in the quartile exceed the range of possible alternatives • Thought Hotteling criticized by Devletoglou (1965) that market area are separated by a line of indifference is unrealistic. Institut Teknologi Sepuluh Nopember www. its. ac. id

Kesimpulan • Persaingan antar produsen dalam memperoleh lokasi dengan laba maksimum adalah inti dari Teori Hotteling (Ketergantungan Lokasi) • Produsen dalam memilih lokasi industri berprilaku untuk menguasai ‘Market area’ seluas -luasnya yang dipengaruhi oleh perilaku konsumen dan keputusan berlokasi produsen lainnya Institut Teknologi Sepuluh Nopember www. its. ac. id

Institut Teknologi Sepuluh Nopember www. its. ac. id Thank you Institut Teknologi Sepuluh Nopember www. its. ac. id