Capacity Investment under Demand Uncertainty: The Role of Imports in the U.S. Cement Industry
AbstractDemand uncertainty is thought to influence irreversible capacity decisions. This paper examines the nature of this relationship in the U.S. cement industry. Firms in this sector deliver cement for local markets either from domestic plants or from imports. Since cement is costly to transport over land, the diff erence in marginal cost between local production and imports varies across markets. In the presence of uncertain demand, capacity choices are shown theoretically to depend on whether firms are located on the coast or inland. Industry data from 1994 to 2006 are consistent with the predictions of the model. There is a positive relationship between capacity investment and demand uncertainty only for landlocked areas. The results provide a new rationale to explain the coexistence of home production and imports in the U.S. cement market for large multinational fi rms, even in the long run.
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