PhD candidate, Department of Economics, University of Chicago

Job market paper: "Building New Plants or Entering by Acquisition? Estimation of an Entry Model for the US Cement Industry"

CONTACT INFO:

Address: University of Chicago, Department of Economics 1126 E. 59th Street. Chicago, IL 60637. USA

EMAIL: hector1@uchicago.edu

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 an antitrust policy that creates barriers to entry by acquisition. In the U.S. cement industry, the comparative advantage (e.g., TFP or size) of entrants versus incumbents and the environmental regulatory entry barriers to the construction of new plants 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 of complete information to a rich database of the US Census of Manufactures for the years 1963-2002. In my counterfactual analyses, I find that if there is an increase of approximately 25% in the entry barriers to construction of new plants, the number of acquired plants increases by 11.8%. Also, a similar increase in the barriers to entry by acquisition increases greenfield entry by 25%. Additionally, I demonstrate how my estimates change when I apply the approach in the entry literature where entry by acquisition is not considered. Finally, I consider how my estimates change when using a simple OLS estimation.