Firm Entry Deterrence Behaviour in the Cement Industry in Cambodia

Abstract

The study empirically analyzes whether the existing firm in the cement industry in Cambodia exhibits entry deterrence behaviour and also whether this threat is credible. Basic game theory and pure strategy Nash equilibrium were deployed in analyzing the behaviour of both firms. The framework in this study considered the payoff between two firms which act in different ways. The new firm is considered as 'entrant' and the other firm already established in Cambodia as 'incumbent'. The study modeled the cost function to consist of fixed setup cost, constant cost per unit of capacity and constant average variable cost in estimating the total cost of production. The price of cement was estimated using the inverse demand function. The total revenue is estimated as the product of the price and the total supply of cement on the market. The payoff is the revenue less the total cost of production of each firm. The unique Nash equilibrium of the game, is, new investment, No new investment in both the short and long run by both firms. The study concludes that the threat of the incumbent in the cement market in Cambodia to deter the entrant is not credible.