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Inferring Conduct under the Threat of Entry: The Case of the Brazilian Cement Industry

  • Alberto Salvo

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.

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File URL: http://sticerd.lse.ac.uk/dps/EI/EI38.pdf
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Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Economics of Industry Papers with number 38.

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Date of creation: Oct 2004
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Handle: RePEc:cep:stieip:38
Contact details of provider: Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp

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