Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

A Member of the Law Professor Blogs Network

Thursday, November 11, 2010

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

Posted by D. Daniel Sokol

Scott K. Shriver (Stanford - Graduate School of Business) discusses Network Effects in Alternative Fuel Adoption: Empirical Analysis of the Market for Ethanol.

ABSTRACT: This paper investigates the importance of network e¤ects in the demand for ethanol-compatible vehicles and the supply of ethanol fuel retailers. An indirect network effect, or positive feed- back 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 e¤ects, 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. Counter-factual simulations indicate that subsidizing fuel retailers to offer ethanol can be an effective policy to indirectly increase ethanol-compatible vehicle sales.

http://lawprofessors.typepad.com/antitrustprof_blog/2010/11/network-effects-in-alternative-fuel-adoption-empirical-analysis-of-the-market-for-ethanol.html

| Permalink

TrackBack URL for this entry:

http://www.typepad.com/services/trackback/6a00d8341bfae553ef0133f5488c09970b

Listed below are links to weblogs that reference Network Effects in Alternative Fuel Adoption: Empirical Analysis of the Market for Ethanol:

Comments

Post a comment