Dynamic Investment and Deterrence in the U.S. Cement Industry

Abstract

Many industries experience periods of excess capacity. Explanations include firms deterring rivals, anticipating future demand, or the lumpiness of investment. This paper identifies capacity investment intended to deter rivals separately from investment driven by other factors. To achieve this goal, I estimate a new model of spatial price competition and embed it in a dynamic game of investment. I apply my model to the United States portland cement industry from 1949 to 1969, a period over which capacity utilization dropped 23% nationally. I find that deterrence explains almost all of the industry's excess capacity.

Keywords: dynamic investment, spatial demand, portland cement

JEL Classification: L1, L11, L13, L61, D24