DDBA 8161 Week 2 Industry Structure Discussion Example

Week 2 Discussion: Industry Structure and the Limits of Price

Hot Mix Cools on the Road: Arguing That Idle Plant Capacity Within Haul Range Caps the Price of Asphalt Paving Mix, and Asking What a Rival Would Build First if Margins Rose

The Claim

In regional hot-mix asphalt, the price a producer can charge is capped by the spare capacity of any rival plant within hauling range. Hot mix must be laid while it is still hot, usually within about an hour of leaving the plant, so a paving contractor can only buy from plants close enough to the job. Within that radius, any plant with idle capacity in a slow week can undercut a higher price, and contractors know it. I am using the market around a composite three-plant producer in central Ohio as my example; its plants serve state highway work, county roads and private paving within about 35 miles of each site.

Ranking the Forces

Porter (1980) argued that industry profitability depends on five forces, but they do not weigh equally in every industry. Here, rivalry and the threat of entry dominate. Rivalry is intense inside each haul radius because the product is nearly identical between plants that meet the same state specifications, and fixed costs are high, so a plant with idle capacity will cut price to cover them. Entry is a real threat because a new plant, or a portable one, can be set up within a season. Buyer power ranks lower than it might seem: the state transportation department is a large buyer, but it awards by sealed low bid, which turns buyer power back into rivalry among producers. Syverson (2004), studying ready-mixed concrete, another product that cannot travel far, found that local market density shaped productivity and survival, with low-productivity plants struggling to last in dense markets. Asphalt behaves the same way.

The Imitation Test

Suppose my example producer earned a premium on county work for two seasons. A rival's first move would not be to copy its service or its brand. It would be to put a portable plant within range of the premium jobs. Portable plants can be permitted and running in a few months. Second, the rival would bid aggressively on the next state contract in that area to fill the new plant. Any premium in this industry invites capacity, and capacity erodes the premium.

The Concession

Rumelt (1991) found that differences between firms often explain more of profitability than the industry they compete in. That holds here too: some asphalt producers earn steadily better returns than others in the same markets. In my example, the better producers own their quarries, so their aggregate costs less, or they hold the only permitted plant site near a growing suburb. So the industry caps price, but firm-level assets decide who can live under the cap.

Question for Classmates

In your industry, what physical or legal limit sets how far a competitor's reach extends?

Reply to Hannah

Hannah, you rank buyer power highest for school bus contractors because districts bid out routes. Districts also rarely switch mid-contract. Does the contract length shift power back to the contractor between bids?

Reply to Victor

Victor, your claim that brand protects premium coffee roasters runs into the imitation test: what would a grocery chain's private label copy first, the beans or the story? If the story, how long would that take?

References

Porter, M. E. (1980). Competitive strategy: Techniques for analyzing industries and competitors. Free Press.

Rumelt, R. P. (1991). How much does industry matter? Strategic Management Journal, 12(3), 167-185. https://doi.org/10.1002/smj.4250120302

Syverson, C. (2004). Market structure and productivity: A concrete example. Journal of Political Economy, 112(6), 1181-1222. https://doi.org/10.1086/424743