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Capacity investment under demand uncertainty: the role of imports in the U.S. cement industry

Meunier, Guy, Ponssard, Jean-Pierre and Thomas, Catherine (2016) Capacity investment under demand uncertainty: the role of imports in the U.S. cement industry. Journal of Economics and Management Strategy, 25 (2). pp. 455-486. ISSN 1058-6407

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Identification Number: 10.1111/jems.12135

Abstract

Demand uncertainty is thought to influence irreversible capacity decisions. Suppose that local demand can be sourced from domestic (rigid) production or from (flexible) imports. This paper shows that the optimal domestic capacity is either increasing or decreasing with demand uncertainty, depending on the relative level of the costs of domestic production and imports. We test this relationship with data from the U.S. cement industry, in which the difference in marginal cost between domestic production and imports varies across local U.S. markets because cement is costly to transport over land. Industry data for 1999 to 2010 are consistent with the predictions of the model. The introduction of two technologies to the production set—one rigid and one flexible—is crucial to understanding the relationship between capacity choice and uncertainty in this industry because there is no relationship between these two variables in aggregated U.S. data. Our analysis reveals that the relationship is negative in coastal districts, and significantly more positive in landlocked districts.

Item Type: Article
Official URL: http://onlinelibrary.wiley.com/journal/10.1111/(IS...
Additional Information: © 2015 Wiley Periodicals
Divisions: Management
Subjects: H Social Sciences > HD Industries. Land use. Labor
H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
Sets: Departments > Management
Date Deposited: 27 Jan 2016 10:47
Last Modified: 20 Mar 2019 02:53
URI: http://eprints.lse.ac.uk/id/eprint/65161

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