Discussion Papers 2017

CIRJE-F-1073	"Excess Capacity and Effectiveness of Policy Interventions: Evidence from the Cement Industry"
Author Name	Okazaki, Tetsuji, Ken Onishi and Naoki Wakamori
Date	December 2017
Full Paper	PDF file
Remarks	Revised in December 2018 and May 2021.

Abstract
Strategic interaction among firms may hinder the reduction of excess capacity in a declining industry. Policy interventions that attempt to reduce excess capacity may increase efficiencyby accelerating the capital adjustment butmaydecrease efficiency by increasing the market power of firms and/or by distorting firms' divestment decisions. We study capacity coordination policies—forcing firms to reduce their capacity simultaneously—applied to the Japanese cement industry. Estimation results suggest that these interventions did not increase market power because reduction in capacity resulted in higher utilization of the remaining plants, and did not distort firms' scrappage decisions.
Keywords: Excess Capacity, Capacity Coordination, Cartels, Cement.

Abstract

Strategic interaction among firms may hinder the reduction of excess capacity in a declining industry. Policy interventions that attempt to reduce excess capacity may increase efficiencyby accelerating the capital adjustment butmaydecrease efficiency by increasing the market power of firms and/or by distorting firms' divestment decisions. We study capacity coordination policies—forcing firms to reduce their capacity simultaneously—applied to the Japanese cement industry. Estimation results suggest that these interventions did not increase market power because reduction in capacity resulted in higher utilization of the remaining plants, and did not distort firms' scrappage decisions.

Keywords: Excess Capacity, Capacity Coordination, Cartels, Cement.