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

59 Pages Posted: 28 May 2011

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: April 1, 2011

Abstract

We develop an estimator for models of competition among spatially differentiated firms. In contrast to existing methods (e.g., Houde (2009)), the estimator has flexible data requirements and is implementable with data that are observed at any level of aggregation. Further, the estimator is the first to be applicable to models in which firms price discriminate among consumers based on location. We apply the estimator to the Portland cement industry in the U.S. Southwest over 1983-2003. We estimate transportation costs to be $0.30 per tonne-mile and show that, given the topology of the U.S. Southwest, these transportation costs permit more geographically isolated plants to discriminate among consumers. We conduct a counterfactual experiment and determine that disallowing this spatial price discrimination would increase consumer surplus by $12 million annually, relative to a volume of commerce of $1.3 billion. Heretofore it has not been possible examine the surplus implications of spatial price discrimination in specific, real-world settings; these implications have been known to be ambiguous theoretically since at least Gronberg and Meyer (1982) and Katz (1984). Additionally, our methodology can be used to construct transportation margins, which are an important component of input-output tables.

Keywords: spatial differentiation, price discrimination, transportation costs, cement

JEL Classification: C51, L11, L40, L61

Suggested Citation

Miller, Nathan and Osborne, Matthew, Competition Among Spatially Differentiated Firms: An Estimator with an Application to Cement (April 1, 2011). Available at SSRN: https://ssrn.com/abstract=1853545 or http://dx.doi.org/10.2139/ssrn.1853545

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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