The Economics of 'Radiator Springs:' Industry Dynamics, Sunk Costs, and Spatial Demand Shifts

61 Pages Posted: 11 Dec 2009

See all articles by Jeffrey R. Campbell

Jeffrey R. Campbell

University of Notre Dame; Tilburg University

Thomas N. Hubbard

Northwestern University - Department of Management & Strategy; National Bureau of Economic Research (NBER)

Date Written: May 2016

Abstract

Interstate highway openings were permanent, anticipated demand shocks that increased gasoline demand and sometimes shifted it spatially. We investigate supply responses to these demand shocks, using county-level observations of service station counts and employment and data on highway openings’ timing and locations. When the new highway was close to the old route, average producer size increased, beginning one year before it opened. If instead the interstate substantially displaced traffic, the number of producers increased, beginning only after it opened. These dynamics are consistent with Hotelling-style oligopolistic competition with free entry and sunk costs and inconsistent with textbook perfect competition.

Keywords: Interstate Highway System, Entry, Exit, Preemption

JEL Classification: L11, L81

Suggested Citation

Campbell, Jeffrey R. and Hubbard, Thomas N., The Economics of 'Radiator Springs:' Industry Dynamics, Sunk Costs, and Spatial Demand Shifts (May 2016). FRB of Chicago Working Paper No. 2009-24, Available at SSRN: https://ssrn.com/abstract=1521151 or http://dx.doi.org/10.2139/ssrn.1521151

Jeffrey R. Campbell (Contact Author)

University of Notre Dame ( email )

United States

Tilburg University ( email )

Tilburg, 5000 LE
Netherlands

Thomas N. Hubbard

Northwestern University - Department of Management & Strategy ( email )

Kellogg School of Management
2001 Sheridan Road
Evanston, IL 60208
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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