The Geography of Market Power: Firm Location, Spatial Rents, and Their Social Costs

This paper studies spatial rents in markets where firm location determines competitive advantage. Using the London bus market—where operators maintain proprietary garage networks and bid for route contracts—we develop a structural model linking garage value to procurement profits through transportation (dead-mile) costs, local monopoly rents, and economies of density. Exploiting the exclusive use of garages, we recast the location prob- lem as one where garages choose operators, yielding a tractable discrete choice estimator. Model estimates and simulations reveal a clear tension between minimising dead-mile costs and maintaining spatial isolation from competitors to protect local monopoly rents. A so- cial planner reassigning garage ownership can recover up to 24.3% in welfare gains through reduced spatial isolation alone. In addition, adding a Pigouvian correction for dead-mile ex- ternalities contributes 2.0% through a channel that does not require displacing incumbents. Sizeable gains remain un- der short-run fleet constraints and under conservative assumptions about the social cost of disrupting incumbent-specific investments.