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Title: Dynamic Investment and Deterrence in the U.S. Cement Industry
Citation Type: Miscellaneous
Publication Year: 2012
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Abstract: Many industries experience periods of excess capacity. Explanations include firms deterring rivals, anticipating future demand, or the lumpiness of investment. This paper identifies capacity investment intended to deter rivals separately from investment driven by other factors. To achieve this goal, I estimate a new model of spatial price competition and embed it in a dynamic game of investment. The dynamic game captures a crucial trade-o . In the short run, excess capacity induces lower prices and profi ts, while in the long run, investment may deter rivals or accommodate growing demand. Market outcomes reflect the interplay of various incentives, and I separate the effects by comparing investment under two distinct equilibrium concepts: one which allows firms to deter rivals, and one which does not. I apply my model to the United States Portland cement industry from 1949 to 1969, a period of considerable investment and growth. During this time, capacity utilization dropped from 94% to 71% nationally. I simulate equilibrium investment strategies in a number of market settings that capture actual costs, demand, and lumpiness. I find that deterrence explains almost all of the industry's excess capacity.
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Authors: Chicu, Mark
Publisher: Northwestern University
Data Collections: IPUMS NHGIS
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