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Prices, Spatial Competition, and Heterogeneous Producers: An Empirical Test

  • Chad Syverson

In markets where spatial competition is important, many models predict that average prices are lower in denser markets (i.e., those with more producers per unit area). Homogeneous-producer models attribute this effect solely to lower optimal markups. However, when producers instead differ in their production costs, a second mechanism also acts to lower equilibrium prices: competition-driven selection on costs. Consumers’ greater substitution possibilities in denser markets make it more difficult for high-cost firms to profitably operate, truncating the equilibrium cost (and price) distributions from above. This selection process can be empirically distinguished from the homogenous-producer case because it implies that not only do average prices fall as density rises, but that upper-bound prices and price dispersion should also decline as well. I find empirical support for this process using a rich set of price data from U.S. ready-mixed concrete plants. Features of the industry offer an arguably exogenous source of producer density variation with which to identify these effects. I also show that the findings do not simply result from lower factor prices in dense markets, but rather because dense-market producers are low-cost because they are more efficient.

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File URL: ftp://ftp2.census.gov/ces/wp/2004/CES-WP-04-16.pdf
File Function: First version, 2004
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Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 04-16.

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Length: 31 pages
Date of creation: Aug 2004
Date of revision:
Handle: RePEc:cen:wpaper:04-16
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