INFORMATION PROVISION: Market Definition

Posted by Kathryn Schwartz on July 19, 2014
INFORMATION PROVISION

As described in Section 2, the quality and price of child care varies markedly from provider to provider and parents often incur substantial search costs to obtain the care they want for their children. Over half of the counties in our sample are served by a R&R, providing a centralized source of information on the price, quality and location of child care providers. Our model indicates generally that markets with R&Rs should have prices that are less disperse than markets without R&Rs. If parents who highly value quality care have greater willingness to search than parents with lower valuations for child care quality, then markets with R&Rs may also have lower maximum and average prices. To empirically determine the effect of R&Rs on the distribution of equilibrium market prices, we need to define child care markets and we need to specify an empirical model that incorporates other determinants of observed price distributions.

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Market Definition

The data on center location allows us to define local child care markets. We partition our centers into geographic markets based on proximity to other centers in the sample. Using the five-digit zip code location of each center, we determine the distance in miles between centers. We define centers as belonging in the same market if a center is within a three-mile base radius of at least one other center in the market. A base radius of 3 divides our sample of centers into 225 geographic markets, with an average number of 4 firms that are on average 2 miles apart. Since these firms are randomly drawn for each market, they should represent the distribution of prices and qualities available in the market.

We experimented with various market definitions from 3 miles to 20 miles. We also considered counties as possibly defining markets. We report results with base radii of 3 miles, which provide a sensible partition of our data in which large metropolitan counties are over-sampled. However, our results are robust to changes in market definition. Table 2 describes price distributions and Table 3 describes staff/child ratio distributions, across child age groups and for markets with and without R&Rs.

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