The Economics Of The Brick Cycle and Its Effects on Firm and Industry Structure
The brick industry uses certain types of clay to produce weather and pressure resistant rectangular prisms. The water-soluble clays undergo a chemical change when exposed to high temperatures that exist in kilns, and this makes them insoluble and therefore extremely useful as building materials. It is this chemical change that is the heart of the brickmaking process.
With levels of imports and exports running at extremely low levels, 1 almost all bricks produced in the U.K. are used by the U.K. construction industry, and more specifically, by the house building section of that industry. Indeed, in 1983, around 70% of all bricks produced were used in housing. 2 This is an important feature of the brick industry because activity levels in U.K. house building fluctuate widely in short periods of time. What is more, the demand for bricks for housing is a derived demand, as the cost of bricks used to build a house represents only 2% to 3% of its total cost. 3 For this reason, the brick industry cannot easily influence levels of demand through changes in the price of bricks. The industry is therefore faced with the problem of having to adjust production quickly to fluctuations in demand that it can neither influence nor confidently predict.
The other important feature of the brick industry is its moderate to high level of market concentration, which has steadily increased since the war. The market share of the five largest firms in the industry (its CR5) has increased from 40% to over 66% in 1983. 4 The influence of the largest firm also increased to relatively high levels; from 24.1% in 1950 to 39% of the market in 1982. This domination has since increased further, to nearly 50% of the market after the recent acquisition of the London Brick Company (LBC) by Hanson Trust PLC which already had other brick-making activities. These rises in concentration levels have occurred in an industry which, as already mentioned, is not influenced by international competition and one that has not undergone any particularly rapid technological changes, which have been the most prevalent causes of mergers in other industries.
This dissertation investigates the degree to which the increases in market concentration in the brick industry, and changes in ownership of the firms in the industry, can instead, be explained by the effects of fluctuating demand for bricks. The history and causes of this cyclical demand are looked at in Chapter 2. Chapter 3 looks at the economics of brick production and in particular at the problems associated with adjusting the levels of production quickly. Chapter 4 then brings the two together to show what extent individual firms may gain from mergers (both within, and the firms outside the industry) as a direct result of the brick cycle, and how much is gained from them as a result of other features (e.g. through greater market power).
1. Census Of Production. Structural Clay Products. Pa241. 1980 onwards.
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