This article is based on my PhD thesis at the London School of Economics. A longer version circulated under the title “Inferring Conduct under the Threat of Entry.” I am very grateful to Peter Davis and John Sutton for their valuable advice. I thank Fernanda Lima, Cristian Huse, Thomas Buettner and Bernardo Guimarães for their encouragement. I also thank Judy Chevalier, Allan Collard-Wexler, Ken Corts, George Deltas, Igal Hendel, Tom Hubbard, Mike Mazzeo, Aviv Nevo, Rob Porter, David Prentice, Margaret Slade, Scott Stern, Andrew Sweeting, and Tommaso Valletti, as well as numerous seminar participants, for comments. In particular, I thank Mark Roberts for his discussion at the 2007 NBER I.O. Summer Institute in Boston, Yongbae Lee for superb research assistance, and the editor, Ariel Pakes, and anonymous referees for making this a better article. Financial support from CAPES and from the LSE, and the provision of research facilities by STICERD, are gratefully acknowledged. An earlier version received an award from the Brazilian Antitrust Authorities in 2007. A separate online appendix, detailing the sources and treatment of the data used, and presenting further robustness checks, is available from the author's website. The usual disclaimer applies.
Inferring market power under the threat of entry: the case of the Brazilian cement industry
Article first published online: 3 MAY 2010
© 2010, RAND
The RAND Journal of Economics
Volume 41, Issue 2, pages 326–350, Summer 2010
How to Cite
Salvo, A. (2010), Inferring market power under the threat of entry: the case of the Brazilian cement industry. The RAND Journal of Economics, 41: 326–350. doi: 10.1111/j.1756-2171.2010.00102.x
- Issue published online: 3 MAY 2010
- Article first published online: 3 MAY 2010
Consider a setting where threatened rather than actual import competition restrains a domestic oligopoly's prices. I show that not modelling the entry threat may underestimate the true degree of market power, as incumbents' blunted price responses to demand shocks resemble perfectly competitive behavior. Evidence from Brazilian cement markets points to an important role for imports in determining domestic cement prices, despite the near absence of imports. On assuming autarky, models with market power are rejected in favor of competition among incumbents. However, allowing a role for imports rejects the autarky assumption and precludes one from rejecting the presence of market power.