Firms will enter the industry as long as the

market price exceeds Pentry, the minimum level of average total costs. Firms will exit the industry

only if price falls below Pexit, the minimum level of average variable costs.

Average total cost

Marginal cost Average total cost

Pexit

Q

Like many developing nations, Brazil produces and uses a lot of cement. The 57 plants operated by Brazil’s 12 cement-producing firms output over 40 million tons per annum, making Brazil the world’s sixth leading cement maker. Each of the 57 plants dominates its local market and makes virtually no shipments to adjacent markets. This could be explained by a combination of competitive pricing and high shipping costs. After all, if cement was priced near cost, then only local producers could afford to sell it. But Brazilian cement is priced well above costs—price–cost margins often exceed 50 percent. This is more than enough to cover transportation costs.

Despite the lure of high profit margins, few firms attempt to ship cement across regions. The main exception is when a firm ships cement from a plant in one region into another region dominated by one of its own plants. This provides compelling evidence that it is economically feasible to transport cement across regions. Yet aside from these “friendly” shipments, cross-region shipping almost never occurs. The absence of substantial cross-region shipping is strong evidence that the Brazilian cement makers are tacitly dividing the market.

There is one group of cement makers that may not be willing to go along with this tacit

agreement—foreign producers. Thanks to reductions in shipping costs, cement makers in Asia have successfully increased their exports to the Americas—the foreign share of cement in the United States is nearly 20 percent. But in Brazil, that share is at most 2 percent. Part of the difference between the United States and Brazil may be due to shipping costs—shipments to Brazil must pass through the Panama Canal. But economist Alberto Salvo believes that the main reason for the near complete absence of exports to Brazil is that the Brazilian cement makers are limit pricing.12

Salvo argues that Brazil’s firms have successfully colluded in two ways. The first is by dividing the market. The second is by setting a monopoly price that deters entry by firms with higher costs. This argument is consistent with the facts about market shares. Salvo offers even more confirming evidence. He observes that during periods of high demand for cement in Brazil the price does not rise. A cartel that is not worried about entry would normally increase price during such boom times. But a cartel determined to deter entry by higher cost rivals would hold the line on price. This is exactly what Brazilian firms have been doing.

The limit-pricing equilibrium is shown by the dashed line. The incumbent selects Pb, and the potential entrant stays out. This is not a subgame perfect Nash equilibrium because if the potential entrant goes in, the incumbent will select the accommodating price Pc in the second period. The subgame perfect Nash equilibrium is depicted by the heavy line. The incumbent knows that it cannot credibly prevent entry, so it sets Pm in the first period.

The Japanese market for beer is enormous, with per-capita consumption of around 60 liters per year. Four firms—Kirin, Asahi, Sapporo, and Suntory—dominate the market. The leaders, Asahi and Kirin, each have nearly 40 percent market share, and their annual sales rival those of Anheuser-Busch, the leading U.S. brewery. All four firms have been profitable for decades.

A profitable industry normally attracts entrants. Even so, Suntory is the only brewery to gain significant market share in Japan in the last 20 years, and its market share is only about 10 percent. (The fifth largest seller, Orion, has a market share below 1 percent.) Profitable incumbents combined with minimal entry usually indicate the presence of entry barriers. Japanese brewers are protected by the high costs of establishing a brand identity, and brands like Kirin’s Ichibanshibori and Asahi’s Super Dry have loyal followings. But Japanese brewers also enjoy two additional entry barriers. Entry was historically restricted by the Japanese government, and the dominance of “Ma-and-Pa” retail stores complicates access to distribution channels.

Breweries in Japan must have a license from the Ministry of Finance (MOF). Before 1994, the MOF would not issue a license to any brewery producing fewer than 2 million liters annually, creating an imposing hurdle for a start-up firm without an established brand name. In 1994, the MOF reduced the license threshold to 60,000 liters. In the wake of this change, existing small brewers formed the Japan Craft Beer Association. Many microbreweries opened, and new “craft beer bars” emerged. The number of microbreweries peaked at 310 in 1999, but dozens have subsequently closed due to a lack of differentiation

(most were poor imitations of German-style beers, though Taisetsu is an award-winning brew), entry by overseas microbreweries, the growing popularity of low-malt (and low-tax) Happoshu beer, and vigorous competition from the big four breweries. The four incumbents responded to the microbrewery movement by offering their own “gourmet” brews (e.g., Kirin’s Heartland) and seasonal beers (e.g., Kirin’s “Aki Aji” or Fall Taste) and by opening “brew pubs” (e.g., Kirin City). Restaurant owners and bar owners appreciated being able to sell gourmet beers that patrons could not find in retail stores but naturally objected to the direct competition from the breweries. Today, microbreweries still command less than 1 percent of the market.

Japanese brewers have also enjoyed protection from foreign imports, which represent less than 2 percent of the market. Nearby Korea’s local brews have failed to catch on in Japan due to an allegedly watery taste, while U.S. and European breweries must pay modest import duties and somewhat more substantial shipping costs. Most critically, distribution in Japan is difficult due to the lack of large-scale storage facilities, requiring exporters to make many small-scale shipments.

Ironically, though protected from entry in their home country, the big Japanese breweries have aggressively expanded overseas. Asahi began producing beer in China in 1994 and now has at least six plants. It also has a joint venture with Chinese brewer Tsingtao to produce and sell beer in Third World nations. Kirin is produced in the UK, Sapporo and Asahi are produced in Canada, and Suntory is produced at an Anheuser-Busch facility in Los Angeles.