Spatial Differentiation and Market Power in Input Procurement: Evidence from the Corn Market

We estimate the degree of spatial differentiation among downstream firms that buy corn from upstream farmers and examine whether such differentiation confers market power upon buyers, defined as the ability to pay a price for corn that is below its marginal value product. We estimate a structural model of spatial competition using corn procurement data from the U.S. State of Indiana over 2004-2014. We adopt a strategy that allows us to estimate firmlevel structural parameters while using aggregate data. Our results return a transportation cost of 0.12 cents per bushel per mile (5% of the corn price under average distance traveled), which provides evidence of spatial differentiation among buyers. The estimated average markdown is $0.80 per bushel (16% of average corn price in the sample), of which $0.35 is explained by spatial differentiation and the rest by the fact that firms operated under binding capacity constraints. We also find that corn prices paid to farmers at the mill gate are independent of distance between the plant and the farm, indicating that firms do not engage spatial price discrimination. Finally, we evaluate the effect of a hypothetical merger on input markets and farm surplus. A merger between nearby ethanol producers eases competition and increases markdowns by $0.14 or 20% and triggers a sizable reduction in farm surplus. In contrast, a merger between distant procurers has little effect on competition and markdowns.