Talking trash: The impact of geographic differentiation and municipal ownership on competition in solid waste disposal

This dissertation empirically examines the impact of geographic differentiation and municipal ownership on competition in the solid waste disposal industry. Demand is estimated under a discrete choice model using a unique data set on waste disposal in Illinois. While others have examined the role of geographic differentiation, the richness of this data allows for greater flexibility in estimating demand. Moreover, the solid waste disposal industry lends itself quite naturally to a discrete choice framework. The results suggest an average landfill own-price elasticity of approximately -3.5 and a transportation cost of ;The demand estimates are used to construct tests of municipal landfill conduct following a New Empirical Industrial Organization (NEIO) approach. I find evidence that municipal landfills may behave differently than their private counterparts; tests reject profit-maximization but cannot reject municipalities setting prices equal to marginal costs. The finding that municipalities appear to behave differently than private firms has implications for several policy applications. Under the assumption that the appropriate model of behavior is one in which municipal landfills set prices equal to marginal costs, I empirically examine the impact of municipal behavior by simulating mergers, privatizations, and exits. Results from the merger simulations indicate that the model of municipal ownership has a limited impact on post-merger predictions. Results from the privatization simulations suggest that the average price increase of municipal landfills, if no reduction in marginal costs is assumed, ranges between 24 to 33 percent. When a ten percent reduction in marginal costs is assumed, municipal price increases are lower although the cost reduction is not fully passed on. The reactions of private landfills to the newly privatized facilities are generally modest. Similarly, the price increases following exits tend to be quite small. The finding that municipal landfills would charge substantial margins under profit-maximization but have little impact on the behavior of their private counterparts is consistent with the idea that municipal landfills tend not to be close competitors to other landfills. In other words, the cross-price elasticities between municipal and private landfills tend to be small. I conclude that municipal landfills appear to have considerable market power, and that the primary role of municipal ownership appears to be keeping municipal prices low rather than restraining the prices of others.