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http://hdl.handle.net/2451/29872
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| Title: | Network Effects in Alternative Fuel Adoption: Empirical Analysis of the
Market for Ethanol |
| Authors: | Shriver, Scott K. - Stanford University |
| Keywords: | ethanol, flex-fuel vehicles, indirect network effects, market entry |
| Issue Date: | 2010 |
| Series/Report no.: | Net Institute Working Paper;10-20 |
| Abstract: | This paper investigates the importance of network effects in the demand
for ethanol-compatible vehicles and the supply of ethanol fuel
retailers. An indirect network effect, or positive feedback loop, arises
in this context due to spatially-dependent complementarities in the
availability of ethanol fuel and the installed base of
ethanol-compatible vehicles. Marketers and social planners are
interested in whether these effects exist, and if so, how policy might
accelerate adoption of the ethanol fuel standard within a targeted
population. To measure these feedback effects, I develop an econometric
framework that considers the simultaneous determination of
ethanol-compatible vehicle demand and ethanol fuel supply in local
markets. The demand-side of the model considers the automobile purchase
decisions of consumers and fleet operators, and the supply-side model
considers the ethanol market entry decisions of competing fuel
retailers. I propose new estimators that address the endogeneity induced
by the co-determination of alternative fuel vehicle demand and
alternative fuel supply. I estimate the model using zip code level panel
data from six states over a six year period. I find the network effect
to be highly signifi cant, both statistically and economically. Under
typical market conditions, entry of an additional ethanol fuel retailer
leads to a 12% increase in consumer demand for ethanol-compatible
vehicles. The entry model estimates imply that a monopolist requires a
local installed base of at least 204 ethanol-compatible vehicles to be
pro table. As an application, I demonstrate how the model estimates can
inform the promotional strategy of a vehicle manufacturer.
Counter-factual simulations indicate that subsidizing fuel retailers to
offer ethanol can be an effective policy to indirectly increase
ethanol-compatible vehicle sales. |
| URI: | http://hdl.handle.net/2451/29872 |
| Appears in Collections: | NET Institute Working Papers Series
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