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The Geography of Market Power: Firm Location, Spatial Rents, and Their Social Costs
This paper studies spatial rents in markets where firm location determines competitive advantage. Using the London bus market - where operators maintain proprietary garage networks and bid for route contracts - we develop a structural model linking garage value to procurement profits through transportation (dead-mile) costs, local monopoly rents, and economies of density. Exploiting the exclusive use of garages, we recast the location problem as one where garages choose operators, yielding a tractable discrete choice estimator. Model estimates and simulations reveal a clear tension between minimising dead-mile costs and maintaining spatial isolation from competitors to protect local monopoly rents. A social planner reassigning garage ownership can recover up to 24.3% in welfare gains through reduced spatial isolation alone. In addition, adding a Pigouvian correction for dead-mile externalities contributes 2.0% through a channel that does not require displacing incumbents. Sizeable gains remain un- der short-run fleet constraints and under conservative assumptions about the social cost of disrupting incumbent-specific investments.
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