Inferring conduct under the threat of entry: the case of the Brazilian cement industry

Alberto Salvo

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: 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.

Keywords: Conduct; Multimarket competition; Market division; Limit pricing; Cement (search for similar items in EconPapers)
JEL-codes: F14 L13 L41 L70 (search for similar items in EconPapers)
Pages: 74 pages
Date: 2004-10
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http://eprints.lse.ac.uk/6728/ Open access version. (application/pdf)

Related works:
Working Paper: Inferring Conduct under the Threat of Entry: The Case of the Brazilian Cement Industry (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:6728

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