Investment and Growth in an Oligopoly: the Case of Aluminum. (Volumes I and II).

Abstract

The primary purpose of this study is to determine whether the neoclassical microeconomic approach or one of two more recent approaches, the evolutionary and the strategic, best explains the capacity expansion behavior by firms in an oligopoly. A second task is to examine the growth of an industry generally considered to be an oligopoly to see if there are any connections between growth and oligopolistic behavior. The world primary aluminum industry is the focus of the study. The growth of the industry from its inception to the mid-1980's is investigated by exploiting a database consisting of input and output prices, geographically disaggregated production and consumption figures, and information on each aluminum smelter built in the non-Communist world. This database is used to estimate an econometric model which addreses the issues of investment and growth in an oligopoly. The competing theories of firm capacity expansion are tested for Alcoa, Alcan, Reynold, Kaiser, and a "U.S. Fringe" category in North America, and for Showa Denko, Sumitomo, Nippon Light Metals, and the combined Mitsui and Mitsubishi category in Japan. The nature of the dependent variable requires that Tobit analysis be used and the "Rainbow" specification error test is performed for each equation estimated. Thirteen consumption equations, sixteen production equations, and one price equation are estimated and the RESET and "Rainbow" specification error tests are performed. The results of the study indicate that no one theory can explain the capacity expansion process of firms in the primary aluminum industry. More specifically, the neoclassical approach appears to provide the best results for Kaiser and Nippon Light Metals while the strategic approach appears best for Alcoa, Alcan, Reynolds, and Showa Denko; the evolutionary approach appears best for the "U.S. Fringe" and Sumitomo; and no theory explains capacity expansion for Mitsui and Mitsubishi. A second conclusion is that firms in the aluminum industry had a strategy to promote the growth of the industry against competing materials and to promote the growth of the individual firms within the industry against potential entrants.