Effects of Market Concentration and Competition in the Paving Sector

Abstract

Planning agencies are searching for innovative techniques to cost effectively preserve their existing infrastructure systems. In this study, we investigate the effects of two indicators of increased competition in the paving market as a mechanism to reduce roadway construction costs. The highway construction sector makes for a unique case study due to a rich dataset that allows for the simultaneous consideration of two indicators of competitive intensity: number of bidders on a project (an indicator of intra-industry competition – between firms who pave with the same material) and market concentration (an indicator of inter-industry competition – between firms who pave with material substitutes). To evaluate the relationship among these indicators and pricing, we develop panel data regression models using bid data that spans 10 years for 47 states within the United States. The models embed several covariates that account for cross-sectional and time-varying heterogeneity. Results from the analyses indicate both that a) the paving market functions as a private value auction, in which an increase in bidders reduces construction prices and b) states with more uniform market shares among pavement materials pay lower prices for all materials. For a “typical” roadway project, the parameterized model indicates that states that with the lowest quartile of market concentration pay at least 7% less than states with the highest quartile of market concentration. These findings support the notion that policies that reduce material market concentration have the potential to reduce an agency’s costs, allowing it to be more efficient with its limited resources.