Countervailing Power in the Icelandic Cement Industry

The Icelandic Competition Council recently ruled that a cement supplier with 75% market share did not enjoy a dominant position. The ruling was based on countervailing power of local concrete producers. To test whether there are economic arguments for the ruling, we present a simplified model of the industry and apply and adapt some recent work on bilateral oligopoly. We show that, in equilibrium, it may be rational for buyers, given that some buying firms have switched to an entrant, to stay with a less efficient incumbent. The latter buyers negotiate contracts with the incumbent that are not as advantageous as those the entrant offers, but better than those that would prevail in monopoly of the entrant. This version: October 15 2003 ∗ Corresponding author: Fridrik M. Baldursson, Department of Economics, University of Iceland, 101 Reykjavik; [email protected] , tel. +354 5255273, fax +354 5526806.