Borders, Geography, and Oligopoly: Evidence from the Wind Turbine Industry
A. Kerem Cosar
University of Chicago - Booth School of Business
Paul L.E. Grieco
Pennsylvania State University - Department of Economics
Penn State University
August 18, 2011
Using a micro-level dataset of Danish and German wind turbine installations, we estimate a structural oligopoly model with cross-border trade and heterogeneous firms. Our approach allows us to separately identify border-related variable costs from distance-related variable costs, and to put bounds on fixed costs of exporting. We find that the variable border costs are large, equivalent to 400 kilometers (250 miles) in transport costs. Counterfactual analysis shows that the fixed costs are also important; removal of fixed border costs would increase German market share in Denmark from 2 to 12 percent. Our analysis illustrates how border frictions affect firm profits and consumer surplus on each side of the border. The results indicate that a complete elimination of border frictions would increase total welfare in the wind turbine industry by 5 percent in Denmark and 10 percent in Germany.
Number of Pages in PDF File: 32
Keywords: Borders, Home-Bias, Transport Costs, Oligopoly, Wind Energy, Trade
JEL Classification: C35, D43, F14, F15, L13, L64working papers series
Date posted: August 17, 2011 ; Last revised: August 19, 2011
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