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Network Effects in Alternative Fuel Adoption: Empirical Analysis of the Market for Ethanol

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  • Scott K. Shriver

    () (Columbia Business School, New York, New York 10027)

Abstract

This paper investigates the importance of network effects in the demand for ethanol-compatible vehicles and the supply of ethanol fuel. An indirect network effect, or positive feedback loop, arises in this context due to spatially-dependent complementarities in the availability of ethanol fuel and the installed base of ethanol-compatible vehicles. Marketers and social planners are interested in whether these effects exist, and if so, how policy might accelerate adoption of the ethanol fuel standard within a targeted population. To measure these feedback effects, I develop an econometric framework that considers the simultaneous determination of ethanol-compatible vehicle demand and ethanol fuel supply in local markets. The demand-side model considers the automobile purchase decisions of consumers and fleet operators; the supply-side model considers the ethanol market entry decisions of competing fuel retailers. The framework extends extant market entry models by endogenizing the market size shifting fuel retailer profits. I estimate the model using zip code panel data from four states over a nine-year period. The model estimates provide evidence of a network effect. Under typical market conditions, entry of an additional ethanol fuel retailer leads to a 6% increase in the probability of ethanol-compatible vehicle purchase. The entry model estimates imply that the first entrant requires a local installed base of approximately 300 ethanol-compatible vehicles to be profitable. As an application, I demonstrate that subsidizing fuel retailers to offer ethanol in selective geographic markets can be an effective policy to indirectly increase ethanol-compatible vehicle sales.

Suggested Citation

  • Scott K. Shriver, 2015. "Network Effects in Alternative Fuel Adoption: Empirical Analysis of the Market for Ethanol," Marketing Science, INFORMS, vol. 34(1), pages 78-97, January.
  • Handle: RePEc:inm:ormksc:v:34:y:2015:i:1:p:78-97
    DOI: 10.1287/mksc.2014.0881
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    File URL: http://dx.doi.org/10.1287/mksc.2014.0881
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