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Competition Among Spatially Differentiated Firms: An Empirical Model with an Application to Cement

Author

Listed:
  • Nathan Miller

    () (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)

  • Matthew Osborne

    () (Bureau of Economic Analysis)

Abstract

The theoretical literature of industrial organization shows that the distances between consumers and firms have first-order implications for competitive outcomes whenever transportation costs are large. To assess these effects empirically, we develop a structural model of competition among spatially differentiated firms and introduce a GMM estimator that recovers the structural parameters with only regional-level data. We apply the model and estimator to the portland cement industry. The estimation fits, both in-sample and out-of-sample, demonstrate that the framework explains well the salient features of competition. We estimate transportation costs to be $0.30 per tonne-mile, given diesel prices at the 2000 level, and show that these costs constrain shipping distances and provide firms with localized market power. To demonstrate policy-relevance, we conduct counter-factual simulations that quantify competitive harm from a hypothetical merger. We are able to map the distribution of harm over geographic space and identify the divestiture that best mitigates harm.

Suggested Citation

  • Nathan Miller & Matthew Osborne, 2010. "Competition Among Spatially Differentiated Firms: An Empirical Model with an Application to Cement," EAG Discussions Papers 201002, Department of Justice, Antitrust Division.
  • Handle: RePEc:doj:eagpap:201002
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    File URL: https://www.justice.gov/atr/public/eag/257581.pdf
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    Cited by:

    1. Ken Heyer & Carl Shapiro, 2010. "The Year in Review: Economics at the Antitrust Division, 2009–2010," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 37(4), pages 291-307, December.

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