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Competition Among Spatially Differentiated Firms: An Empirical Model with an Application to Cement

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Author Info

  • Nathan Miller

    ()
    (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)

  • Matthew Osborne

    ()
    (Bureau of Economic Analysis)

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    Abstract

    The 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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    File URL: http://www.justice.gov/atr/public/eag/257581.pdf
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    Bibliographic Info

    Paper provided by Department of Justice, Antitrust Division in its series EAG Discussions Papers with number 201002.

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    Length: 45 pages
    Date of creation: Mar 2010
    Date of revision:
    Handle: RePEc:doj:eagpap:201002

    Contact details of provider:
    Postal: Department of Justice Antitrust Division 450 Fifth Street NW Washington, DC 20530
    Email:
    Web page: http://www.justice.gov/atr/
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    Cited by:
    1. 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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