Competition Among Spatially Differentiated Firms: An Empirical Model with an Application to Cement
45 Pages Posted: 9 May 2010
Date Written: March 2010
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.
Keywords: transportation costs, spatial differentiation, market definition, cement
JEL Classification: C51, L11, L40, L61
Suggested Citation: Suggested Citation