Demand Fluctuations and Plant Turnover in the Ready-Mix Concrete Industry

Abstract

Fluctuations in demand cause some plants to exit a market and other to enter.Would eliminating these fluctuations reduce plant turnover? A structural model of entry and exit in concentrated markets is estimated for the ready-mix concrete industry, using plant level data from the U.S. Census. The Nested Pseudo-Likelihood algorithm is used to find parameters which rationalize behavior of firms involved in repeated competition. Due to high sunk costs, turnover rates would only be reduced by 3% by eliminating demand fluctuations at the county level, saving around 20 million dollars a year in scrapped capital. However, demand fluctuations blunt firms’ incentive to invest, reducing the number of large plants by more than 50%.