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Abstract:

Economics of Industry Paper
'Inferring Conduct under the Threat of Entry: The Case of the Brazilian Cement Industry.'
Alberto Salvo
October 2004
Paper No' EI 38:
Full Paper (pdf)

JEL Classification: L13; L41; L70; F14


Tags: conduct; multimarket competition; market division; limit pricing; cement

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.