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Market Structure and Productivity: A Concrete Example

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  • Chad Syverson

Abstract

This paper shows that imperfect output substitutability explains part of the observed persistent plant-level productivity dispersion. Specifically, as substitutability in a market increases, the market’s productivity distribution exhibits falling dispersion and higher central tendency. The proposed mechanism behind this result is truncation of the distribution from below as increased substitutability shifts demand to lower-cost plants and drives inefficient plants out of business. In a case study of the ready-mixed concrete industry, I examine the impact of one manifestation of this effect, driven by geographic market segmentation resulting from transport costs. A theoretical foundation is presented characterizing how differences in the density of local demand impact the number of producers and the ability of customers to choose between suppliers, and through this, the equilibrium productivity and output levels across regions. I also introduce a new method of obtaining plant-level productivity estimates that is well suited to this application and avoids potential shortfalls of commonly used procedures. I use these estimates to empirically test the presented theory, and the results support the predictions of the model. Local demand density has a significant influence on the shape of plant-level productivity distributions, and accounts for part of the observed intra-industry variation in productivity, both between and within given market areas.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 112 (2004)
Issue (Month): 6 (December)
Pages: 1181-1222

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Handle: RePEc:ucp:jpolec:v:112:y:2004:i:6:p:1181-1222

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  1. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  2. Chad Syverson, 2001. "Market Structure and Productivity: A Concrete Example," Working Papers 01-06, Center for Economic Studies, U.S. Census Bureau.
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