A Structural Estimation of Spatial Differentiation and Market Power in Input ProcurementJEL codes

We estimate the degree of spatial differentiation-primarily driven by transportation costs-among downstream firms that buy corn from upstream farmers and examine whether such differentiation softens competition enabling buyers to exert market power (defined as the ability to pay a price for corn that is below its marginal value product net of processing cost). We estimate a structural model of spatial competition using corn procurement data from the U.S. state of Indiana from 2004 to 2014. We adopt a strategy that allows us to estimate firm-level structural parameters while using aggregate data. Our results return a transportation cost of 0.5 cents per bushel per mile (10% of the corn price under average conditions), which provides evidence of spatial differentiation among buyers. The estimated average markdown is $0.67 per bushel (13% of the average corn price in the sample), of which $0.49 is explained by spatial differentiation and the rest by the fact that firms operated under binding capacity constraints. Finally, we evaluate the effect of hypothetical mergers on input markets and farm surplus. A merger between nearby ethanol producers eases competition, increases markdowns by 18%, and triggers a sizable reduction in farm surplus. In contrast, a merger between distant buyers has negligible effects on competition and markdowns.