The Economics of 'Radiator Springs:' Industry Dynamics, Sunk Costs, and Spatial Demand Shifts
Jeffrey R. Campbell
Federal Reserve Bank of Chicago
Thomas N. Hubbard
Northwestern University - Department of Management & Strategy; National Bureau of Economic Research (NBER)
November 30, 2009
FRB of Chicago Working Paper No. 2009-24
We measure industry evolution following permanent changes in the level and location of demand for gasoline in hundreds of counties during the time surrounding the completion of Interstate Highway segments. We find that the timing and margin of adjustment depends on whether the new highway is located close to or far from the old route. When the new highway is close to the old one, there is no evidence that the number of stations changes around the time it opens.
However, average station size increases by 6% before the highway is completed. When the new highway is far from the old one (say, 5-10 miles), the number of stations increases by 8% and average station size remains unchanged. Unlike the station size adjustment when the new highway is close, the entire increase takes place after construction. These results provide evidence on how this industry, which is characterized by high location-specific sunk costs, adjusts to demand changes. Our results are consistent with theories in which firms have strategic investment incentives to preempt competitors.
Number of Pages in PDF File: 63
Keywords: Interstate Highway System, Entry, Exit, Preemption
JEL Classification: L11, L81
Date posted: December 11, 2009
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