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

Scott K. Shriver ()
Additional contact information
Scott K. Shriver: Stanford University Graduate School of Business, http://www.stanford.edu/people/scott.shriver

No 10-20, Working Papers from NET Institute

Abstract: This paper investigates the importance of network effects in the demand for ethanol-compatible vehicles and the supply of ethanol fuel retailers. 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. I propose new estimators that address the endogeneity induced by the co-determination of alternative fuel vehicle demand and alternative fuel supply. I estimate the model using zip code level panel data from six states over a six year period. I find the network effect to be highly significant, both statistically and economically. Under typical market conditions, entry of an additional ethanol fuel retailer leads to a 12% increase in consumer demand for ethanol-compatible vehicles. The entry model estimates imply that a monopolist requires a local installed base of at least 204 ethanol-compatible vehicles to be profitable. As an application, I demonstrate how the model estimates can inform the promotional strategy of a vehicle manufacturer. Counterfactual simulations indicate that subsidizing fuel retailers to offer ethanol can be an effective policy to indirectly increase ethanol-compatible vehicle sales.

Keywords: ethanol; flex-fuel vehicles; indirect network e¤ects; market entry (search for similar items in EconPapers)
JEL-codes: C33 C73 D12 D22 L11 L14 L91 M31 O32 Q21 Q42 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2010-10
New Economics Papers: this item is included in nep-ene and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.netinst.org/Shriver_10-20.pdf (application/pdf)
no

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:net:wpaper:1020

Access Statistics for this paper

More papers in Working Papers from NET Institute
Bibliographic data for series maintained by Nicholas Economides ().