Capacity Investment Under Demand Uncertainty: The Role of Imports in the U.S. Cement Industry

32 Pages Posted: 28 Apr 2016

See all articles by Guy Meunier

Guy Meunier

INRA - UR1303 ALISS

Jean Pierre Ponssard

Ecole Polytechnique, Paris - Laboratoire d'Econometrie

Catherine Thomas

London School of Economics & Political Science (LSE)

Date Written: Summer 2016

Abstract

Demand uncertainty is thought to influence irreversible capacity decisions. Suppose that local demand can be sourced from domestic (rigid) production or from (flexible) imports. This paper shows that the optimal domestic capacity is either increasing or decreasing with demand uncertainty, depending on the relative level of the costs of domestic production and imports. We test this relationship with data from the U.S. cement industry, in which the difference in marginal cost between domestic production and imports varies across local U.S. markets because cement is costly to transport over land. Industry data for 1999 to 2010 are consistent with the predictions of the model. The introduction of two technologies to the production set—one rigid and one flexible—is crucial to understanding the relationship between capacity choice and uncertainty in this industry because there is no relationship between these two variables in aggregated U.S. data. Our analysis reveals that the relationship is negative in coastal districts, and significantly more positive in landlocked districts.

Suggested Citation

Meunier, Guy and Ponssard, Jean Pierre and Thomas, Catherine, Capacity Investment Under Demand Uncertainty: The Role of Imports in the U.S. Cement Industry (Summer 2016). Journal of Economics & Management Strategy, Vol. 25, Issue 2, pp. 455-486, 2016. Available at SSRN: https://ssrn.com/abstract=2771435 or http://dx.doi.org/10.1111/jems.12135

Guy Meunier (Contact Author)

INRA - UR1303 ALISS ( email )

65 Boulevard Brandenburg
Ivry-sur-Seine Cedex, 94205
France

Jean Pierre Ponssard

Ecole Polytechnique, Paris - Laboratoire d'Econometrie ( email )

1 rue Descartes
Paris, 75005
France

Catherine Thomas

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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