The Economics of Radiator Springs: Industry Dynamics, Sunk Costs, and Spatial Demand Shifts

The construction of the Interstate Highway System in the United States and its impact on local industries continues to be part of American folklore and popular culture, over 50 years after construction started and over 25 years after it was essentially completed. The plot of Disney/Pixar’s 2005 animated feature "Cars" concerns a town ("Radiator Springs") whose population had severely declined after it was bypassed by an Interstate highway. Radiator Springs is nearly empty and devoid of through tra¢ c, and had been so for years. However, several local businesses had yet to exit the market, including a gas station and an auto repair shop. For economists interested in industry dynamics, the construction of Interstate Highways o¤ers an interesting opportunity: completion of highways is observable, and represents permanent demand shifts for highway-related services. They increase the growth rate of tra¢ c along a corridor and shift tra¢ c spatially. The spatial shift is small when the new highway is right next to the old route –tra¢ c clusters more around exits –but large when it is located miles away. From the perspective of local businesses that serve highway travelers such as gas stations (and potential entrants), the opening of a highway is an observable, anticipated change in the level of demand and sometimes demanders’ locational tastes. Casual empiricism indicates obvious changes in industry structure that are associated with such changes: many highway exits have nearby service stations whose location can clearly be explained by the highway’s presence. The industry dynamics, however, are less clear: how large are the supply-side changes, along what margins do these changes take place, and what is the timing of these changes? These questions are the topic of this paper. We examine how industry structure adjusts to anticipated permanent demand shocks, and how the adjustment di¤ers depending on the extent to which locational tastes shift, by examining how the number and size distribution of service stations changes in hundreds of counties during the time surrounding