Competition among Spatially Differentiated Firms: An Estimator with an Application to Cement
We develop an estimator for models of competition among spatially differentiated firms. In contrast to existing methods (e.g., Houde (2009)), the estimator has flexible data requirements and is implementable with data that are observed at any level of aggregation. Further, the estimator is the first to be applicable to models in which firms price discriminate among consumers based on location. We apply the estimator to the portland cement industry in the U.S. Southwest over 1983-2003. We estimate transportation costs to be $0.30 per tonne-mile and show that, given the topology of the U.S. Southwest, these transportation costs permit more geographically isolated plants to discriminate among consumers. We conduct a counterfactual experiment and determine that disallowing this spatial price discrimination would increase consumer surplus by $12 million annually, relative to a volume of commerce of $1.3 billion. Heretofore it has not been possible examine the surplus implications of spatial price discrimination in specific, real-world settings; these implications have been known to be ambiguous theoretically since at least Gronberg and Meyer (1982) and Katz (1984). Additionally, our methodology can be used to construct transportation margins, which are an important component of input-output tables.
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