Borders, Geography, and Oligopoly: Evidence from the Wind Turbine Industry

Abstract

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.

Keywords: Borders, Home-Bias, Transport Costs, Oligopoly, Wind Energy, Trade

JEL Classification: C35, D43, F14, F15, L13, L64