Building New Plants or Entering by Acquisition? Estimation of an Entry Model for the U.S. Cement Industry
AbstractIn many industries, firms usually have two choices when expanding into new markets: They can either build a new plant (greenfield entry) or they can acquire an existing incumbent. The U.S. cement industry is a clear example. For this industry, I study the effect of two policies on the entry behavior and industry equilibrium: An asymmetric environmental policy that creates barriers to greenfield entry and a policy that creates barriers to entry by acquisition (like an antitrust policy). In the U.S. cement industry, the comparative advantage (e.g., TFP or size) of entrants versus incumbents and the regulatory entry barriers are important factors that determine the means of expansion. To model this industry, I use a perfect information static entry game. To estimate the supply and demand primitives of my model, I apply a recent estimator of discrete games to a rich database of the U.S. Census of Manufactures for the years 1963-2002. In my counterfactual analyses, I find that a less favorable environment for mergers during the Reagan-Bush administration would decrease the acquired plants by 70% and increase the new plants by 20%. Also, I find that the Clean Air Act Amendments of 1990 increased the number of acquisitions by 7.8%. Furthermore, my simulations suggest that regulations that create barriers to greenfield entry are less favorable in terms of welfare than regulations that create barriers to entry by acquisition. Finally, I demonstrate how my parameter estimates change when I apply the traditional approach in the entry literature where entry by acquisition is not considered, and when using a simple OLS estimation.
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Bibliographic InfoPaper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 10-08.
Length: 57 pages
Date of creation: Apr 2010
Date of revision:
Other versions of this item:
- Hector Perez-Saiz, 2011. "Building New Plants or Entering by Acquisition? Estimation of an Entry Model for the U.S. Cement Industry," Working Papers, Bank of Canada 11-1, Bank of Canada.
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
- L61 - Industrial Organization - - Industry Studies: Manufacturing - - - Metals and Metal Products; Cement; Glass; Ceramics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-04-24 (All new papers)
- NEP-COM-2010-04-24 (Industrial Competition)
- NEP-ENT-2010-04-24 (Entrepreneurship)
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- Timothy Dunne & Shawn Klimek & James Schmitz, Jr., 2010. "Competition and Productivity: Evidence from the Post WWII U.S. Cement Industry," Working Papers, Center for Economic Studies, U.S. Census Bureau 10-29, Center for Economic Studies, U.S. Census Bureau.
- Guy Meunier & Jean-Pierre Ponssard & Catherine Thomas, 2013. "Capacity Investment under Demand Uncertainty: The Role of Imports in the U.S. Cement Industry," Working Papers hal-00816410, HAL.
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