Network Effects in Alternative Fuel Adoption: Empirical Analysis of the Market for Ethanol

40 Pages Posted: 7 Aug 2014

See all articles by Scott Shriver

Scott Shriver

University of Colorado at Boulder - Department of Marketing

Date Written: July 10, 2014

Abstract

This paper investigates the importance of network effects in the demand for ethanol-compatible vehicles and the supply of ethanol fuel. An indirect network effect, or positive feedback loop, arises in this context due to spatially-dependent complementarities in the availability of ethanol fuel and the installed base of ethanol-compatible vehicles. Marketers and social planners are interested in whether these effects exist, and if so, how policy might accelerate adoption of the ethanol fuel standard within a targeted population. To measure these feedback effects, I develop an econometric framework that considers the simultaneous determination of ethanol-compatible vehicle demand and ethanol fuel supply in local markets. The demand-side of the model considers the automobile purchase decisions of consumers and fleet operators, and the supply-side model considers the ethanol market entry decisions of competing fuel retailers. The framework extends extant market entry models by endogenizing the market size shifting fuel retailer profits. I estimate the model using zip code panel data from four states over a nine year period. The model estimates provide evidence of a network effect. Under typical market conditions, entry of an additional ethanol fuel retailer leads to a 6% increase in the probability of ethanol-compatible vehicle purchase. The entry model estimates imply that the first entrant requires a local installed base of approximately 300 ethanol-compatible vehicles to be profitable. As an application, I demonstrate that subsidizing fuel retailers to offer ethanol in selective geographic markets can be an effective policy to indirectly increase ethanol-compatible vehicle sales.

Suggested Citation

Shriver, Scott, Network Effects in Alternative Fuel Adoption: Empirical Analysis of the Market for Ethanol (July 10, 2014). Columbia Business School Research Paper No. 14-34, Available at SSRN: https://ssrn.com/abstract=2476828 or http://dx.doi.org/10.2139/ssrn.2476828

Scott Shriver (Contact Author)

University of Colorado at Boulder - Department of Marketing ( email )

995 Regent Dr
Boulder, CO 80309
United States

HOME PAGE: http://https://www.colorado.edu/business/scott-shriver

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