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Building New Plants or Entering by Acquisition? Estimation of an Entry Model for the U.S. Cement Industry

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April 2010

Written by: Hector Perez-Saiz

Working Paper Number:

CES-10-08

Abstract

In many industries, firms usually have two choices when expanding into new markets: They can either build a new plant (greenfield entry) or they can acquire an existing incumbent. The U.S. cement industry is a clear example. For this industry, I study the effect of two policies on the entry behavior and industry equilibrium: An asymmetric environmental policy that creates barriers to greenfield entry and a policy that creates barriers to entry by acquisition (like an antitrust policy). In the U.S. cement industry, the comparative advantage (e.g., TFP or size) of entrants versus incumbents and the regulatory entry barriers are important factors that determine the means of expansion. To model this industry, I use a perfect information static entry game. To estimate the supply and demand primitives of my model, I apply a recent estimator of discrete games to a rich database of the U.S. Census of Manufactures for the years 1963-2002. In my counterfactual analyses, I find that a less favorable environment for mergers during the Reagan-Bush administration would decrease the acquired plants by 70% and increase the new plants by 20%. Also, I find that the Clean Air Act Amendments of 1990 increased the number of acquisitions by 7.8%. Furthermore, my simulations suggest that regulations that create barriers to greenfield entry are less favorable in terms of welfare than regulations that create barriers to entry by acquisition. Finally, I demonstrate how my parameter estimates change when I apply the traditional approach in the entry literature where entry by acquisition is not considered, and when using a simple OLS estimation.

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Keywords Keywords are automatically generated using KeyBERT, a powerful and innovative keyword extraction tool that utilizes BERT embeddings to ensure high-quality and contextually relevant keywords.

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investment, market, econometric, macroeconomic, estimating, merger, acquisition, acquirer, strategic, oligopoly, competitor, incentive, unobserved, econometrician, externality

Tags Tags are automatically generated using a pretrained language model from spaCy, which excels at several tasks, including entity tagging.

The model is able to label words and phrases by part-of-speech, including "organizations." By filtering for frequent words and phrases labeled as "organizations", papers are identified to contain references to specific institutions, datasets, and other organizations. :
Longitudinal Research Database, National Science Foundation, Total Factor Productivity, Bureau of Economic Analysis, Permanent Plant Number, Federal Trade Commission, Chicago Census Research Data Center, Department of Justice, Generalized Method of Moments, Regional Economic Information System, Chicago RDC, Commodity Flow Survey

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