The Geography of Market Power: Firm Location, Spatial Rents, and Their Social Costs

Marleen Marra and Florian Oswald

No 21636, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper studies spatial rents in markets where firm location determines competitive advantage. Using the London bus market—where operators maintain proprietary garage networks and bid for route contracts—we develop a structural model linking garage value to procurement profits through transportation (dead-mile) costs, local monopoly rents, and economies of density. Exploiting the exclusive use of garages, we recast the location prob- lem as one where garages choose operators, yielding a tractable discrete choice estimator. Model estimates and simulations reveal a clear tension between minimising dead-mile costs and maintaining spatial isolation from competitors to protect local monopoly rents. A so- cial planner reassigning garage ownership can recover up to 24.3% in welfare gains through reduced spatial isolation alone. In addition, adding a Pigouvian correction for dead-mile ex- ternalities contributes 2.0% through a channel that does not require displacing incumbents. Sizeable gains remain un- der short-run fleet constraints and under conservative assumptions about the social cost of disrupting incumbent-specific investments.

Keywords: Urban; economics (search for similar items in EconPapers)
JEL-codes: D44 L41 R12 R41 (search for similar items in EconPapers)
Date: 2026-06
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