The Economics of 'Radiator Springs:' Industry Dynamics, Sunk Costs, and Spatial Demand Shifts

Abstract

Interstate highway openings were permanent, anticipated demand shocks that increased gasoline demand and sometimes shifted it spatially. We investigate supply responses to these demand shocks, using county-level observations of service station counts and employment and data on highway openings’ timing and locations. When the new highway was close to the old route, average producer size increased, beginning one year before it opened. If instead the interstate substantially displaced traffic, the number of producers increased, beginning only after it opened. These dynamics are consistent with Hotelling-style oligopolistic competition with free entry and sunk costs and inconsistent with textbook perfect competition.

Keywords: Interstate Highway System, Entry, Exit, Preemption

JEL Classification: L11, L81