Inferring Market Power Under the Threat of Entry: The Case of the Brazilian Cement Industry

42 Pages Posted: 3 Aug 2006 Last revised: 27 Oct 2012

See all articles by Alberto Salvo

Alberto Salvo

National University of Singapore (NUS) - Department of Economics; National University of Singapore (NUS) - Sustainable & Green Finance Institute (SGFIN)

Date Written: 2010

Abstract

Consider a setting where threatened rather than actual import competition restrains a domestic oligopoly's prices. I show that not modeling the entry threat may underestimate the true degree of market power, as incumbents' blunted price responses to demand shocks resemble perfectly-competitive behavior. Evidence from Brazilian cement markets points to an important role for imports in determining domestic cement prices, despite the near absence of imports. On assuming autarky, models with market power are rejected in favor of competition among incumbents. However, allowing a role for imports rejects the autarky assumption and precludes one from rejecting the presence of market power.

Keywords: Market power, price-cost margins, model selection, entry threat, international competition, imports discipline, price ceiling, mixture model, regime switching model

JEL Classification: D43, L13, L41, F14

Suggested Citation

Salvo, Alberto, Inferring Market Power Under the Threat of Entry: The Case of the Brazilian Cement Industry (2010). RAND Journal of Economics, Vol. 41, No. 2, 2010, Available at SSRN: https://ssrn.com/abstract=868543 or http://dx.doi.org/10.2139/ssrn.868543

Alberto Salvo (Contact Author)

National University of Singapore (NUS) - Department of Economics ( email )

1 Arts Link, AS2 #06-02
Singapore 117570, Singapore 119077
Singapore

National University of Singapore (NUS) - Sustainable & Green Finance Institute (SGFIN) ( email )

Singapore

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