• *An early version of this paper was titled, ‘Price Dispersion: The Role of Product Substitutability and Productivity.’ I thank John Haltiwanger, Saul Lach, Aviv Nevo, Julio Rotemberg, Ken Troske, the editor, three anonymous referees and participants at various seminars for helpful comments. Mark Roberts and Lucia Foster offered generous help in identifying imputed quantity data in the Census of Manufactures. The research in this paper was conducted while the author was a research associate at the Center for Economic Studies, U.S. Bureau of the Census. Research results and conclusions expressed are those of the author and do not necessarily indicate concurrence by the Bureau of the Census or the Center for Economic Studies. This paper has been screened to ensure that no confidential information is released. Support for research at the Chicago RDC from NSF (awards no. SES-0004335 and ITR-0427889) is also gratefully acknowledged.


Homogeneous-producer models attribute lower prices in denser markets solely to lower optimal markups. I argue here that when producers have different production costs, competition-driven selection on costs also reduces prices. This selection mechanism can be distinguished from the homogenous-producer case because it implies that higher density leads not only to lower average prices, but to declines in upper-bound prices and price dispersion as well. I find empirical support for this mechanism in the prices of ready-mixed concrete plants. I also show these findings do not simply reflect lower factor prices in dense markets, but result instead because dense-market producers are more efficient.