Inferring Conduct under the Threat of Entry: The Case of the Brazilian Cement Industry

76 Pages Posted: 11 Jul 2008

See all articles by Alberto Salvo

Alberto Salvo

affiliation not provided to SSRN

Date Written: October 2004

Abstract

This paper demonstrates that when an industry faces potential entry and this threat of entry constrains pre-entry prices, cost and conduct are not identified from the comparative statics of equilibrium. In such a setting, the identifying assumption behind the well-established technique of relying on exogenous demand perturbations to empirically distinguish between alternative hypotheses of conduct is shown to fail. The Brazilian cement industry, where the threat of imports restrains market outcomes, provides an empirical illustration. In particular, price-cost margins estimated using this established technique are considerably biased downward, underestimating the degree of market power. A test of conduct is proposed, adapted to this constrained setting, which suggests that outcomes in the industry are collusive and characterised by market division.

JEL Classification: L13, L41, L70, F14

Suggested Citation

Salvo, Alberto, Inferring Conduct under the Threat of Entry: The Case of the Brazilian Cement Industry (October 2004). LSE STICERD Research Paper No. EI38, Available at SSRN: https://ssrn.com/abstract=1158315

Alberto Salvo (Contact Author)

affiliation not provided to SSRN