Excess Capacity And Effectiveness Of Policy Interventions: Evidence From The Cement Industry

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 efficiency by accelerating the capital adjustment but may decrease 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.