Prices, Spatial Competition and Heterogeneous Producers: An Empirical Test

Abstract

Homogeneous-producer models attribute lower prices in denser markets solely to lower optimal markups. I argue here that when producers have different production costs, competition-driven selection on costs also reduces prices. This selection mechanism can be distinguished from the homogenous-producer case because it implies that higher density leads not only to lower average prices, but to declines in upper-bound prices and price dispersion as well. I find empirical support for this mechanism in the prices of ready-mixed concrete plants. I also show these findings do not simply reflect lower factor prices in dense markets, but result instead because dense-market producers are more efficient.