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

Nathan Miller () and Matthew Osborne ()
Additional contact information
Nathan Miller: Economic Analysis Group, Antitrust Division, U.S. Department of Justice
Matthew Osborne: Bureau of Economic Analysis

No 201002, EAG Discussions Papers from Department of Justice, Antitrust Division

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.

Pages: 45 pages
Date: 2010-03
New Economics Papers: this item is included in nep-com, nep-geo, nep-ind and nep-mic
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:doj:eagpap:201002

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