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Spatial differentiation and price discrimination in the cement industry: evidence from a structural model.

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...

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Published in:RAND Journal of Economics (Wiley-Blackwell) Vol. 45; no. 2; pp. 221 - 248
Main Authors: Miller, Nathan H., Osborne, Matthew
Format: Article
Published: Wiley-Blackwell Summer2014
Subjects:
United States
Economic competition
Cement industries
Price discrimination
Structural frame models
Transportation costs
Direct costing
Online Access:View this record in EBSCOhost
Summary: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.