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

Abstract

Harold Demsetz famously emphasized that the relationship between industry structure and competition runs in both directions. Competition thus can lead industries to adjust to demand increases through larger firms rather than more firms. We investigate this insight empirically by examining how local gasoline retail markets adjusted to interstate highway openings. We find that when a new highway was close to a previous route, average producer size increased beginning 1 year before it opened. If instead the interstate substantially displaced traffic, the number of producers increased beginning only after it opened. These results empirically illustrate how the role of entry in the competitive process depends on whether entry makes product space more crowded.