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Spatial differentiation and price discrimination in the cement industry: evidence from a structural model
Author(s) -
Miller Nathan H.,
Osborne Matthew
Publication year - 2014
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12049
Subject(s) - leverage (statistics) , price discrimination , economic surplus , econometrics , economics , product differentiation , mile , industrial organization , divestment , microeconomics , statistics , market economy , geography , mathematics , geodesy , cournot competition , welfare , finance
We estimate a structural model of the cement industry that incorporates spatial differentiation and price discrimination, focusing on the US Southwest over 1983–2003. We leverage the structure of the model to obtain consistent estimates of the underlying parameters using data on market outcomes that are substantially aggregated. Our results indicate that transportation costs around $0.46 per tonne‐mile rationalize the data. This friction enables relatively isolated plants to obtain higher prices from nearby customers. We further find that disallowing price discrimination would create $30 million in consumer surplus annually and show how the model can identify suitable divestitures in merger analysis.