Competition Among Spatially Differentiated Firms: An Empirical Model with an Application to Cement

45 Pages Posted: 9 May 2010

See all articles by Nathan Miller

Nathan Miller

Georgetown University - Robert Emmett McDonough School of Business

Matthew Osborne

University of Toronto at Mississauga - Department of Management

Date Written: March 2010

Abstract

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

Miller, Nathan and Osborne, Matthew, Competition Among Spatially Differentiated Firms: An Empirical Model with an Application to Cement (March 2010). Available at SSRN: https://ssrn.com/abstract=1600746 or http://dx.doi.org/10.2139/ssrn.1600746

Nathan Miller (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

Matthew Osborne

University of Toronto at Mississauga - Department of Management ( email )


Canada

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