Competition Among Spatially Differentiated Firms: An Empirical Model with an Application to Cement
AbstractThe theoretical literature of industrial organization shows that the distances between consumers and firms have first-order implications for competitive outcomes whenever transportation costs are large. To assess these effects empirically, we develop a structural model of competition among spatially differentiated firms and introduce a GMM estimator that recovers the structural parameters with only regional-level data. We apply the model and estimator to the portland cement industry. The estimation fits, both in-sample and out-of-sample, demonstrate that the framework explains well the salient features of competition. We estimate transportation costs to be $0.30 per tonne-mile, given diesel prices at the 2000 level, and show that these costs constrain shipping distances and provide firms with localized market power. To demonstrate policy-relevance, we conduct counter-factual simulations that quantify competitive harm from a hypothetical merger. We are able to map the distribution of harm over geographic space and identify the divestiture that best mitigates harm.
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Bibliographic InfoPaper provided by Department of Justice, Antitrust Division in its series EAG Discussions Papers with number 201002.
Length: 45 pages
Date of creation: Mar 2010
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-05-22 (All new papers)
- NEP-COM-2010-05-22 (Industrial Competition)
- NEP-GEO-2010-05-22 (Economic Geography)
- NEP-IND-2010-05-22 (Industrial Organization)
- NEP-MIC-2010-05-22 (Microeconomics)
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- Ken Heyer & Carl Shapiro, 2010. "The Year in Review: Economics at the Antitrust Division, 2009–2010," Review of Industrial Organization, Springer, vol. 37(4), pages 291-307, December.
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