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Borders, Geography, and Oligopoly: Evidence from the Wind Turbine Industry

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Author Info

  • A. Kerem Cosar

    ()
    (The University of Chicago Booth School of Business)

  • Paul L. E. Grieco

    ()
    (The Pennsylvania State University)

  • Felix Tintelnot

    ()
    (The Pennsylvania State University)

Abstract

Using a micro-level dataset of wind turbine installations in Denmark and Germany, we estimate a structural oligopoly model with cross-border trade and heterogeneous firms. Our approach separately identifies border-related from distance-related variable costs and bounds the fixed cost of exporting for each firm. Variable border costs are large: equivalent to roughly 400 kilometers (250 miles) in distance costs, which represents 40 to 50 percent of the average exporter's total delivery costs. Fixed costs are also important; removing them would increase German firms' market share in Denmark by 10 percentage points. Counterfactual analysis indicates that completely eliminating border frictions would increase total welfare in the wind turbine industry by 5 percent in Denmark and 10 percent in Germany.

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Bibliographic Info

Paper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 1228.

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Length: 47 pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:koc:wpaper:1228

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Keywords: Trade costs; oligopoly; spatial competition; constrained MLE.;

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  1. Thomas J. Holmes & John J. Stevens, 2010. "Exports, Borders, Distance, and Plant Size," Working Papers 10-13, Center for Economic Studies, U.S. Census Bureau.
  2. Russell H. Hillberry, 2002. "Aggregation bias, compositional change, and the border effect," Canadian Journal of Economics, Canadian Economics Association, vol. 35(3), pages 517-530, August.
  3. Hillberry, Russell & Hummels, David, 2008. "Trade responses to geographic frictions: A decomposition using micro-data," European Economic Review, Elsevier, vol. 52(3), pages 527-550, April.
  4. Yuriy Gorodnichenko & Linda L. Tesar, 2009. "Border Effect or Country Effect? Seattle May Not Be So Far from Vancouver After All," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 219-41, January.
  5. Bresnahan, Timothy F. & Reiss, Peter C., 1991. "Empirical models of discrete games," Journal of Econometrics, Elsevier, vol. 48(1-2), pages 57-81.
  6. Balistreri, Edward J. & Hillberry, Russell H., 2007. "Structural estimation and the border puzzle," Journal of International Economics, Elsevier, vol. 72(2), pages 451-463, July.
  7. Elie Tamer & Federico Ciliberto, 2004. "Market Structure and Multiple Equilibria in Airline Markets," Econometric Society 2004 North American Winter Meetings 517, Econometric Society.
  8. Alberto Salvo, 2010. "Trade flows in a spatial oligopoly: gravity fits well, but what does it explain?," Canadian Journal of Economics, Canadian Economics Association, vol. 43(1), pages 63-96, February.
  9. Fernando Borraz & Alberto Cavallo & Roberto Rigobon & Leandro Zipitría, 2012. "Distance and Political Boundaries: Estimating Border Effects under Inequality Constraints," NBER Working Papers 18122, National Bureau of Economic Research, Inc.
  10. Pinkse, Joris & Slade, Margaret E., 1998. "Contracting in space: An application of spatial statistics to discrete-choice models," Journal of Econometrics, Elsevier, vol. 85(1), pages 125-154, July.
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