Prices and Production Cost in Aluminium Smelting in the Short and the Long run

Abstract

The main objective of this work is to reflect the structural changes that have characterized the aluminium industry over the last few decades. I order to capture the changes in competition I have estimated cost and related it to output prices by illustrating the effect of the prevalent industry risk sharing agreements. I argue that, contrary to what the microeconomic paradigm envisages, in the short run prices mainly determine costs as the consequence of a an exchange pricing system involving contractual risk-sharing arrangements. Costs determine prices only in the long run through investment in new smelting capacity. Previous studies of the aluminium industry had often used unreliable measures of weighted average variable cost. The main contribution of this work lies on the estimation of cost applying the flexible translog framework to a unique set of proprietary data.