Inferring Market Power under the Threat of Entry: The Case of the Brazilian Cement Industry

This paper considers a setting where import competition, in the form of threatened rather than actual trade flows, restrains a domestic oligopoly's prices in a subset of realized markets, say temporal markets in which the domestic currency is strong. I show that not modeling the entry threat may lead researchers to underestimate the true degree of market power, as the threat blunts incumbents' price responses to demand shocks in a way that resembles the pricing behavior of more competitive market structures. In the Brazilian cement industry, institutional and econometric evidence point to an important role for imports in determining the domestic price of cement, despite the near absence of imports. On assuming autarky, models with market power are rejected in favor of perfect competition among incumbents. However, making an allowance for the role of imports leads to the rejection of the autarky assumption and precludes one from rejecting the presence of market power.