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Micro-Economics: Cement Industry

  393 Downloads   |   4 Pages 944 Words   |   Published Date: 14/10/2016

Question:

1. What type of market structure in your opinion rules de market or have ruled the market in the past 5 years or so?

2. In what type of evidence or assumption do you support your inference ?

3. In the case of an industrial structure with market power, has the participant(s) exercise such power in the market place?
 
 

Answer:

1. What type of market structure in your opinion rules de market or have ruled the market in the past 5 years or so?

The cement industry is the best example of the oligopoly market structure. Cement is the homogeneous product, in which price elasticity of the demand is quite weak, and the production needs to have the heavy instruments and distribution includes the high cost of transportation. Consequently, there are few local competitors, who are subject to competitive pressure from the outside through different companies that try to sell cement at the marginal cost (Van Oss and Padovani 2002). Cement cost more in transportation by road, and the entry barriers are high. But the industry tends towards the oligopoly that even attracts the stakeholders and investors.

The seaborne market offers the high competition (Van Oss and Padovani 2002). But it’s noted that around 3% of the international production is traded all across the borders. Countries having the high excess capacity for building the supply home markets could easily dump their spare outputs in the nearby coastal regions. Prices are also more and profits often get flatter in the regions where there are big exporters such as Japan, China, as well as Turkey (Van Oss and Padovani 2002). As the cement trade is not international, consumption goes on the same path and more hugely traded commodities had the close correlation with the expansion of economy (Foster, Haltiwanger and Syverson 2008).

In the current years, demand of cement within the emerging countries has increased, as they get industrialized and urbanized. They even consume around 90% of the total global outcome, and this figure is still growing. In the different rich countries, there are very less buildings as well as bridges; therefore, the demand for cement is declining for long term.

 

2. In what type of evidence or assumption do you support your inference?

Cement is actually cheap as well as bulky, and there is actually no sense to produce the vast plants, which are close to the limestone quarries that offer the important raw material and the consumers. The cost of cement is so high for transportation that it could rarely travel around the 320 kilometers through the road; therefore, its market is often local (Van Oss and Padovani 2003). Its noted that the barriers to entry is often high, when the new cement work is producing around 1 tones within a year, and the smallest worth of any building is around $200m.

It’s noted that it’s much cheaper for this industry to expand. It all means that this industry tends towards the oligopoly market structure that often attracts the regulators (Van Oss and Padovani 2003). It is researched that the industry often faces the threat from the import competition. The imports of the cement also amount to around 2-3% of the cements total consumption.

This fact was quite striking, when Brazil was compared with the US, where the imports are high around 30% of the total coastal market consumption. This reduced level of imports has marked towards the actual disciplining power, which is priced within the Brazilian market (Van Oss and Padovani 2003). The oligopoly of local cement is actually set with high prices, but not that high, in which imports are priced out of the market.

3. In the case of an industrial structure with market power, has the participants exercise such power in the market place?

Distortion often relates with the exercise of the market power in the local markets that is manifested in two different ways. First relates with the local firms, which restrict the output for the purpose of driving the price equilibrium (van Oss 2005). Next is the production, which is not optimally allocated all across the local as well as overseas producers, and the marginal prices are also differ across the local and overseas producers (Ebert 1992). Along with this, in cement industry, exercise of market power, emissions leakage, and rent are reduced, as the subsidy act could improve the trade.

In both the dynamic as well as static simulations, the prices of cement enhanced and are pronounced under the tax regime, which could incorporate the adjustment of border tax (van Oss 2005). Under this policy, overseas and local companies easily bear the entry compliance cost. The prices of cement are also increased within the dynamic simulations (Ericson and Pakes 1995). As the companies decrease the capacity of production by divestment in response to the induced policy, it raise the operational cost, regional market of cement also gets concentrated, and distortions related to the exercise of market power is more easily pronounced.

 

References

Ebert, U. 1992. Pigouvian tax and market structure: The case of oligopoly and different abatement technologies. FinanzArchiv / Public Finance Analysis, 49(2), pp. 154–166.

Ericson, R. and Pakes, A. 1995. Markov perfect industry dynamics: A framework for empirical work. Review of Economic Studies, 62(1), pp. 53–82.

Foster, L., Haltiwanger, J., and Syverson, C. 2008. Reallocation, firm turnover, and efficiency: Selection on productivity or profitability? American Economic Review, 98(1), pp. 394–425.

Van Oss, H. and Padovani, A. 2002. Cement manufacture and the environment. Journal of Industrial Ecology, 6(1), pp. 89–106.

Van Oss, H. and Padovani, A. 2003. Cement manufacture and the environment, part ii: Environmental challenges and opportunities. Journal of Industrial Ecology, 7(1), pp. 93–126.

van Oss, H. G. 2005. Background facts and issues concerning cement and cement data. Technical report, U.S. Department of the Interior, U.S. Geological Survey

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