Network Effects in Alternative Fuel Adoption: Empirical Analysis of the Market for Ethanol

Scott K. Shriver
2010 Social Science Research Network  
This paper investigates the importance of network e¤ects in the demand for ethanol-compatible vehicles and the supply of ethanol fuel retailers. An indirect network e¤ect, 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 e¤ects exist, and if so, how policy might accelerate adoption of the ethanol
more » ... l standard within a targeted population. To measure these feedback e¤ects, 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 ‡eet 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 ...nd the network e¤ect to be highly signi...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. Counterfactual simulations indicate that subsidizing fuel retailers to o¤er ethanol can be an e¤ective policy to indirectly increase ethanol-compatible vehicle sales.
doi:10.2139/ssrn.1694391 fatcat:5t6wltyrpvc5bmvzbjesvinfka