1. business and industrial
2. agriculture and forestry
3. forestry

MARKET STRUCTURE AND
MARKET POWER
The Case of the Swedish Forest Sector
by
Mats À. Bergman
Umeå Economic Studies No. 296
UNIVERSITY OF UMEÅ 1993
MARKET STRUCTURE AND
MARKET POWER
The Case of the Swedish Forest Sector
A KAD EM ISK A VHANDLING
Som, med vederbörligt tillstånd av rektorsämbetet vid
Umeå universitet för vinnande av filosofie doktorsexamen
framlägges till offentlig granskning vid
institutionen för nationalekonomi
HÖRSAL C, SamhäUsvetarhuset, Umeå universitet
Fredagen den 26 februari 1993, kl 10.15
av
Mats A. Bergman
Fil. kand.
Author and title
Bergman Mats A. (1993)
Market Structure and Market Power: The Case of the Swedish Forest Sector.
Umeå Economic Studies No. 296,140 pages.
Abstract
The Swedish forest sector is analyzed, using methods drawing on traditional
(forest) market analysis and industrial organization literature. Models based on
economic theory are tested empirically with time-6eries data.
Paper [1] deals with how the pulp and paper industry manages wood supply risk. It
appears as if the import of wood is not counter-cyclical to the domestic supplies of
wood. Instead, the inventory is used to absorb unexpected shifts in supply.
In paper [2], the supply behaviour is compared between different categories of
forest owners. The supply elasticities with respect to prices are found to be much
smaller in this study, which is based on quantities of thinning wood and final
felling wood, than in other studies using pulpwood and sawtimber quantities. Only
small differences are found between owner categories.
Paper [3] attempts to estimate parametrically the market power (the ‘markdown’)
of the assumedlv monopsonistic pulp and paper industry, using a restricted Gene­
ralized Leontief (GL) profit function to model the production structure. The
hypothesis of a competitive market can be rejected, when the alternative hypothe­
sis is a variable degree of market power.
Paper [4] clarifies some notions raised by the use of the restricted GL profit func­
tion. A specification of the profit fuction is proposed, where linear homogeneity in
the fixed factor is nested in the non-homogeneous case.
The final paper [5] explores the weakening of a natural resource monopsony’s
market power, if time-consistency (or subgame-perfection) is required in a twoperiod model. The analysis resembles that of a monopoly selling a durable good
(Coase conjecture). The monopsony does loose market power, but its position is
strengthened if the resource is renewable or if it grows between periods.
Keywords: Swedish forest industry, market form, industrial organization, oligopso­
ny, monopsony, time consistency, natural resources, supply risk, restricted Genera­
lized Leontief, profit function, roundwood, pulpwood, Coase conjecture.
Distribution and author’s address: Department of Economics, University of Umeå,
S-401 87 Umeå, Sweden.
ISSN: 0348—1018
ISBN: 91-7174-755-9
MARKET STRUCTURE AND
MARKET POWER
The Case of the Swedish Forest Sector
by
Mats A. Bergman
Umeå Economic Studies No. 296
UNIVERSITY OF UMEÅ 1993
Copyright Mats A. Bergman
Department of Economics
University of Umeå
1993
ISSN: 0348-1018
ISBN: 91-7174-755-9
UmU Tryckeri, Umeå 1993
Abstract
The Swedish forest sector is analyzed, using methods drawing on traditional
(forest) market analysis and industrial organization literature. Models based on
economic theory are tested empirically with time-series data.
Paper [1] deals with how the pulp and paper industry manages wood supply risk. It
appears as if the import of wood is not counter-cyclical to the domestic supplies of
wood. Instead, the inventory is used to absorb unexpected shifts in supply.
In paper [2], the supply behaviour is compared between different categories of
forest owners. The supply elasticities with respect to prices are found to be much
smaller in this study, which is based on quantities of thinning wood and final
felling wood, than in other studies using pulpwood and sawtimber quantities. Only
sitiall differences are found between owner categories.
Paper [3] attempts to estimate parametrically the market power (the ‘markdown’)
oft the assumedly monopsonistic pulp and paper industry, using a restricted Gene­
ralized Leontief (GL) profit function to model the production structure. The
hypothesis of a competitive market can be rejected, when the alternative hypothe­
sis is a variable degree of market power.
Paper [4] clarifies some notions raised by the use of the restricted GL profit func­
tion. A specification of the profit fuction is proposed, where linear homogeneity in
the fixed factor is nested in the non-homogeneous case.
The final paper [5] explores the weakening of a natural resource monopsony’s
market power, if time-consistency (or subgame-perfection) is required in a twoperiod model. The analysis resembles that of a monopoly selling a durable good
(Coase conjecture). The monopsony does loose market power, but its position is
strengthened if the resource is renewable or if it grows between periods.
Keywords: Swedish forest industry, market form, industrial organization, oligopso­
ny, monopsony, time consistency, natural resources, supply risk, restricted Genera­
lised Leontief, profit function, roundwood, pulpwood, Coase conjecture.
Acknowledgements
Random events often seem to govern our choices. In the Fall of 1987, I was asked
to work in the project ‘The Swedish Roundwood Market*, led by my advisor
K arl-G ustaf Löfgren. At that time, I had not finished my B. Sc., and Karl-Gustaf
was visiting Berkeley, so it was a slow start.
A single phrase of the instructions I was first given, stuck in my mind: I was asked
to ”extend and improve” Runar Brännlund’s analysis of the Swedish roundwood
market. That analysis constituted Runar*s thesis, which was due to be published in
less than a year. The task seemed almost insurmountable at that time, although I
now realize that the intention was not that I should write a better thesis than
Runar. The idea must have been to indicate where I should direct my efforts, while
underlining the obvious: that I must do something at least slightly different from
what had previously been done. I think that those few words have, to some extent,
determined the path of my work on this thesis. Maybe as a consequence of my
aiming for a ‘deepened and extended* analysis, the thesis is a rather eclectic collec­
tion of papers, rather than a comprehensive analysis of (some aspect of) the round­
wood market, as most of the theses in this field are.
To the extent I have managed to see further than my predecessors, it is only
because I have stood on their shoulders. The most solid and invaluable support in
my work has been given by Karl-Gustaf. He has guided me around many of the
pitfalls of science, always encouraging. Karl-Gustaf, Thomas Aronsson, Runar
Brännlund and Lars Hultkrantz have, with their research, provided me with a
paradigm from which to learn. The many discussions I have had with them over
the past five years, their numerous suggestions for improvements to my own work
and the fruitful cooperation with Karl-Gustaf and Runar in three of the papers
have made this thesis much better. Also, I wish to thank Kurt Brännas, Tönu
Puu, Lars Westin and Magnus Wikström among others at the Department of
Economics, University of Umeå, my colleges at the Department of Forest Econo­
mics, Swedish University of Agricultural Sciences, Jörgen W. Weibull at the
A ckn ow ledgem ents
Department of Economics, University of Stockholm and participants in the semi­
nars I have given over the years. Their suggestions and advice have greatly im­
proved the quality of my thesis. Chris Hudson at the Department of Political
Science, University of Umeå, has meant a lot for my English. The esthetic qualities
of the layout of this thesis are due to Ing-Marie Nilsson.
Financial support from the Non-Industrial Private Forest Owner’s Fund for Forest
Research and from the Swedish Council for Forestry and Agricultural Research are
gratefully acknowledged. Finally, the strong support of my wife and my family
was, of course, a necessary condition for this thesis ever to be written.
Umeå, January 1993
Mats A. Bergman
The thesis consists of this summary and the following papers:
[1]
Bergman, M.A. and Löfgren, K.G. (1991), Supply Risk Management
Under Imperfect Competition — Empirical Applications to the Swedish
Pulp and Paper Industry, Empirical Economics 16, 447-464.
[2]
Bergman, M.A. (1992), Differences in Final Felling and Thinning Beha­
viour Between Owner Categories in Sweden, Scandinavian Journal o f
Forest Research 7, 269—283.
[3]
Bergman, M.A. and Brännlund, R. (1992), Measuring Oligopsony Power.
An Application to the Swedish Pulp and Paper Industry, Umeå Econo­
mic Studies No. 285, University of Umeå.
[4]
Bergman, M.A. and Brännlund, R. (1992), A Note on the Application of
the Restricted Generalized Leontief Profit Function, revised version
forthcoming in Economics Letters.
[5]
Bergman, M.A. (1992), Natural Resource Monopsony in a Two-Period
Model, Umeå Economic Studies No. 266, University of Umeå. Revised
version.
I am indebted to Physica-Verlag and Scandinavian University Press for permission
to include Paper [1] and Paper [2] respectively in the thesis.
M arket S tru ctu re and M arket P o w er
1
The Swedish Forest Sector
The importance of the forest sector can be underlined by the fact that forestry and
the forest industry directly employ close to four percent of the Swedish labour
force. The export of forest products accounts for almost a fifth of the total value of
the Swedish export. The purpose of the present thesis is to study some specific
aspects of the wood market, concerning the supply behaviour of the forest owners,
the purchasing policy of the buyers and the balance of market power between the
buyers and sellers.
The sawmills and the pulp and paper industry are quite evenly distributed over
the country, with the exception that the pulp and paper industry in the northern
half of Sweden is concentrated on the east coast. Three fifths of the land area is
covered with forests. The forest inventories by cubic meters in the four regions
Götaland, Svealand and Southern and Northern Norrland are of approximately the
same size. Spruce and pine account for 85 percent of the inventory. A little less
than half of the forest land and a little more than half of the forest inventory are
owned by a quarter of a million private forest owners. (A greater proportion of the
forest land is privately owned in the southern part of Sweden, where soil fertility is
higher.) The public sector and the forest industry, in particular the pulp and paper
industry, own approximately a quarter of the forest land each.
In the first half of the 20th century, fellings averaged around 50 million cubic
meters (standing volume) per year. The volumes increased in the 1950s and 1960s,
to a peak of 70 million cubic meters in the first half of the 1970s. Since the re­
cession of 1976-77, fellings have averaged around 60 million cubic meters, with a
slight tendency to increase. The value of the fellings measured at the roadside was,
in the cutting year 1989/90, almost 19 billion SEK. In the last decades, the annual
increments have outgrown fellings by up to 30 million cubic meters per year,
resulting in a forest inventory that is 35 percent larger than 40 years ago. In the
1970s there were worries that the forests would be depleted; in the early 1980s the
debate was dominated by the (buyers’) opinion that the private forest owners’
unwillingness to fell caused an unwarranted wood shortage and excessive prices;
today the problem seems to be to find an outlet for all the wood available.
Most wood is either used by the pulp and paper industry (pulpwood) or by the
sawmill industry (sawtimber). The two industries use roughly the same amount of
‘fresh’ wood. In addition, the pulp and paper industry buys waste products from
2
M arket S tru ctu re and M arket P ow er
the sawmill industry, amounting to 40 percent of the wood input of the latter. A
third of the trees (by volume) can be used either as pulpwood or sawtimber, which
allows for competition between the two industries. However, it appears as if the
pulp and paper industry has a much stronger position. Its value added is almost
four times that of the sawmill industry. It owns a quarter of the forest land, where­
as the sawmill companies own almost no land. The seven largest firms use more
than 90 percent, and the three largest more than three fifths of the pulpwood. The
third largest firm is partly owned by the second largest. The sawmill industry is
much less concentrated, with almost 2500 sawmills scattered throughout Sweden.
Nevertheless, 10 percent of the sawmills account for 90 percent of the production.
The market power of the pulp and paper industry is further strengthened by the
fact that five of the largest firms, including the three largest, only buy pulpwood
through commonly owned regional purchasing companies (in northern Sweden, a
purchasing cartel). This cartelisation of pulpwood purchases is not considered
illegal, on the grounds that it cannot be shown that the consumers of the final
products are hurt by higher prices!1 The sawmill industry does have organizations
that coordinate price and purchasing policies, although these are apparently less
successful in reducing internal competition.
In order to strengthen their position v is-a -v is the buyers, the forest owners
organized in forest owners associations. By the mid-1970s, more than half of the
forest owners had become members. In the aftermath of some quite unsuccessful
attempts to integrate forward, i.e., to acquire a cooperatively owned pulp and
paper industry, many of the members left the Forest Owners Association. Today, a
third of the private forest owners are organized. Considering that two thirds of the
private forest owners receive less than 10 percent of their income from forestry, it
is understandable if their loyalty to their organization is limited.
Wood can be bought in two distinct markets, or according to two types of con­
tracts. The first is the market for delivered wood. The price in this market is
governed by annual agreements, which are typically settled in the autumn, after
negotiations between the buyers’ and the sellers’ organizations. If no agreement
can be reached —as is quite often the case —either one
or other of the price prop
sals will become dominant, depending on the market situation. The price is paid
according to volume and quality, and includes the felling cost and the cost of
1
However, the relevant Act has been revised. When the new Act comes into
force, purchasing cartels will no longer be legal (SOU 1992:76).
M arket S tru ctu re and M arket P ow er
3
transporting the logs to a road. In the second market, the market for standing
timber, the price does not include felling and transportation to a road —these costs
must be met by the buyer. In contrast to the market for delivered wood, the price
must be settled in every individual transaction and the price is negotiated per
stand, not per cubic meter. Unfortunately, reliable data is available neither for
prices nor for quantities in this market. It is claimed that prices are often higher in
the market for standing timber. The market for standing timber is the smaller of
the two —accounting for approximately one third of the total.
The price lists used in the market for delivered wood should be regarded as a price
offer by the seller, valid for one year. The market for standing timber adds flexibi­
lity, as prices can be adjusted anytime.
More details on the institutional arrangements of the Swedish roundwood market
and the forest industry can be found in, e.g., Wiberg (1987), Bergman (1988),
Bergfors, Bergman and Hultkrantz (1988), Brännlund (1988), Aronsson (1990),
Carlén (1990) and in the Statistical Yearbook of Forestry.
Introduction
The forest sector is important to Sweden. Therefore, it deserves to be studied, in
its own right. However, this is not the sole aim of this thesis. Another ambition is
to demonstrate, and to some extent develop, methods that can be used to study
markets in general.
The approach of this thesis is eclectic, rather than comprehensive. The aim is not a
unified, multi-purpose model of the forest sector, but a deepened understanding of
some specific issues. Therefore, the papers build on earlier work by other authors,
extending their analyses in some directions. As the wood market has been the
subject of a number of studies, this appears to be an appropriate method.
The organization of forestry and the pulp and paper industry in Sweden is ana­
lyzed from basically four aspects. The first is: how does the monopsonistic2 pulp
and paper industry manage the risk associated with a stochastic supply of pulpwood? Secondly, do the different types of forest owners differ in their behaviour,
2
A monopsony is a single buyer of a certain good (in a certain market), just as
a monopoly is a single seller of a certain good.
4
M arket S tru ctu re and M arket P ow er
i.e., in their responses to changing prices, forest inventory et cetera? This could
perhaps be expected if the pulp and paper industry used its own forests to
counteract the stochastic fluctuations in the supply from the other forest owners.
Both of these questions are analyzed given an assumption used in many earlier
studies of the forest sector: that the pulp and paper industry is monopsonistic.
Although firmly based on observations of the actual wood market, it became
increasingly unsatisfying to assume that the market was monopsonistic, without
actually testing the hypothesis of competitive behaviour. This is the third aspect
analyzed. The outcome of the analysis gave rise to yet another question: given the
institutional set up of the pulpwood market, which strongly suggests a monopso­
nistic market, why is the empirical evidence of the buyer's market power so weak?
The final paper develops ideas originating from Coase (1973), suggesting that in a
multi-period market exchange, a durable-good monopoly may in fact be unable to
exploit its market power. If the consumers are rational, they will foresee that the
price will be lowered in the future. In effect, the monopoly competes with itself. In
the pulpwood monopsony problem, the situation is similar: if the pulpwood buyers
offer too low a price, the forest owners may well postpone fellings, anticipating a
higher future price.
Analyzing the Organization of an Industry
The first two papers, [1] and [2], are empirical market analyses of a few aspects of
the Swedish pulpwood market. The methodology is a straightforward application
of traditional economics, but the models used are developed to address the specific
questions at hand. The papers are written in the same spirit as a large part of the
modern empirically oriented literature on forest economics, e.g., Binkley (1979),
Dasgupta and Heal (1979), Brännlund, Johansson and Löfgren (1985), Johansson
and Löfgren (1985), Brännlund (1988), Kuuluvainen (1989), and Aronsson (1990).
The short note [3] and the two concluding papers [4] and [5] have been influenced
by the industrial organization literature, as well as the above mentioned sources of
inspiration. The empirical study of industries with market power dates back to
Bain (1951). Following his pioneering work, the prevalent ‘structure-conductperformance paradigm' focused on cross-section studies of firms and industries.
The profit, as reported in the accounting data, was modelled as a function of such
structural measures as industry concentration indices.
M arket S tru ctu re and M arket P o w er
5
More recently, a new line of research has developed, that recognizes the difficulties
of observing marginal costs and of comparing profitability between industries or
firms. Instead, the production structure of a single industry is estimated from
aggregated time-series data on prices and quantities. This method makes it possi­
ble to test the hypothesis of competitive behaviour directly. A survey of this
literature has been made by Bresnahan (1989). Appelbaum (1979 and 1982) and
Atkinson and Kerkvliet (1990) are good examples of empirical applications, as well
as theoretical developments.
The final Paper [5] is inspired by the more purely theoretical industrial organiza­
tion literature, as it can be found in, e.g., Tirole (1988). This literature relies, to a
large extent, on game theoretical methods. The problem must often be formulated
simply — sometimes over-simply — for a solution to be possible, because of the
complex analysis required in game theory. This is reflected in the models used in
industrial organization —they are often so simplified that they cannot seriously be
thought of as representing reality. Instead, their purpose is to illustrate and exem­
plify specific aspects of real life, that have yet to be incorporated in more general
models of, e.g., a market such as the pulpwood market. The aspect brought into
the analysis by the final paper is the complication of time-consistency.
Method
In Papers [1] to [3], formal models based on economic theory are developed, which
are then subjected to empirical testing. The aim of each paper is to answer a
question, concerning a specific aspect of the roundwood market. Ideally, the prob­
lem is formulated so that the question at hand corresponds to an hypothesis, which
can be tested with the model and the empirical data. The hypothesis may be
rejected, meaning that we can eliminate a specific answer to the question we
posed. For example, in the fairly clear cut case of Paper [3], we wish to evaluate
how much market power the pulp and paper industry has in the market for pulpwood. The hypothesis we try to reject is that the market is competitive. In reduc­
ing the problem to the testing of such a hypotheses, the degree of abstraction
becomes high. Many aspects of the real world are disregarded in order for the
model to be manageable, and much of the relevant (qualitative) data must be left
unused, as it can not be fitted into the model. The data we did not use in this
particular case ranges from anecdotal reports of collusive behaviour to annual
industry profits and rates of return to total capital, as found in the Official Statis­
6
M arket S tru ctu re and M arket P ow er
tics of Sweden. This amounts to a huge loss of information, which, however, must
be traded off against the virtue of a sound basis in economic theory and an objec­
tive statistical test (as long as the assumptions incorporated in the model are
true). In many circumstances, it might be wiser to use all the data available, in a
more pragmatic approach, especially if the single desideratum is an answer to the
question posed. On the other hand, one option does not preclude the other. Using
the more formal approach, we know something of the extent to which we can trust
the answer: at which confidence level we can reject the hypothesis, given our
assumptions. The rigor imposed by the formal models forces one to be very exact
about assumptions and conclusions, and may therefore lead to a better understand­
ing of the problem. Bartholomew (1982) argues, in favour of simple mathematical
models, that
"Social phenomena are often exceedingly complex and our models are bound
to be simplifications. Even if it is allowed that our model need only repro­
duce the relevant features of the real process the problem remains formi­
dable. However, we would argue that there is no alternative to simlification.
The basic limiting factor is not the mathematical apparatus available but the
ability of the human mind to grasp a complex situation. There is no point in
building models whose ramifications are beyond our comprehension. Perhaps
the only safeguard against oversimplification is to use a battery of models
instead of a single one."3
There is also a value in the theoretical exercise: many of the advances in economic
theory are the results of problems encountered in empirical research.4 This brings
us to another line of demarcation: that towards more theoretically oriented econo­
mics. Only the final paper can be said to belong to this tradition. A purely theore­
tical analysis can give valuable insights into very practical problems, but just as in
the pragmatic, descriptive approach, we do not test our hypotheses against empiri­
cal data.
Malinvaud (1981), on the contrary, considers the predominance of simple and
schematic representations of complex issues in the (macro) economics litera­
ture the cause of many unfounded conclusions. This argument is not taken to
imply that mathematical modelling should be abandoned. Rather, according
to Malinvaud, the models should be made more realistic (and thus more
complex), while being subjected to scrutinous empirical testing. However, as
a first and often enlightening approximation, Malinvaud considers the simple
models quite acceptable.
Besides, abstract modelling is what we economists are taught to love.
M arket S tru ctu re and M arket P ow er
7
In contrast, the textbook piece of science includes theory formulation, the deriva­
tion of testable hypotheses and testing against data. The hypothesis —and thus the
theory —can be rejected by the data, but not confirmed. Only through a series of
failed attempts to reject the theory, either directly or through its implications, can
we become more confident that our theory reflects some aspect of the real world.
Nevertheless —even if we do not subject our theory to empirical testing —we may
still gain in understanding from it.
The level of aggregation should also be mentioned. The data is aggregated to
industry level. The theory starts from the behaviour of a single firm or forest
owner, but the aggregation is raised to industry level by the assumption of a
representative forest owner or firm, or by the assumption of monopsony. The level
of analysis is motivated partly by the set of questions posed and partly by the
availability of data. The use of industry-wide price and quantity data, rather than
firm accounting data, can also be justified by a scepticism regarding the latter’s
ability to measure true costs.
A time-series study has both advantages and disadvantages, compared with a
cross-section study. If we are more interested in how behaviour varies between
different agents at a given moment in time, a cross-section study should be chosen.
If our concern is with the development of behaviour over time, and with dynamics,
time-series data is more appropriate.5 The choice of this thesis, the time-series
approach, is not based on the belief that this method is superior. It merely reflects
the necessity to choose one of two paths.
Finally, the models are set in a partial equilibrium framework, rather than in
general equilibrium. This appears to be the most natural, when studying a single
industry. The level of abstraction and aggregation necessary for the models to be
general equilibrium would presumably cost more in terms of simplifications, than
the gain in completeness would be worth.
If we want all of these qualities, panel data is a good choice, although data
gathering may be costly in terms of time and effort.
8
M arket S tru ctu re and M arket P o w er
Summary of the papers6
Paper [1]
Supply Risk Management Under Imperfect Competition — Empiri­
cal Applications to the Swedish Pulp and Paper Industry
The decision problem of a firm facing an uncertain demand has been studied by
Baron (1971), Leland (1972) and Weitzman (1974). The firm can either choose a
price, and sell an uncertain quantity, or it can choose to produce a certain quanti­
ty, to be sold at an uncertain price. Lim (1980 and 1981), Sengupta (1986) and
Löfgren and Ranneby (1987) analyse under which conditions one of the strategies
is preferable to the other; the last of the three deals with the problem of uncertain
supply.
The Swedish pulp and paper industry is subject to uncertainty concerning its
pulpwood supply. It buys approximately three quarters of its pulpwood from
domestic sources (including residues/waste products from the sawmill industry);
the remaining part is either imported or supplied from the industry’s own forests.
The special characteristics of the domestic market aggravate the supply risk: as
the price in the largest part of the domestic market (the market for delivered
wood) is annually set in advance, there is no guarantee that the supplied volume
equals the demanded volume. Presumably, the pulp and paper industry takes
action to prevent the wood inventory from running out completely or piling up
indefinitely.
This could be done in either of two ways (or a combination of both). First, the
representative firm could use one or more of the other markets, i.e., the market for
standing timber, the import market or its own forests (where price does not need
to be set in advance) as ‘backstop markets’. Second, the firm could let the (posi­
tive or negative) unexpected component of the supply be absorbed by the invento­
ry, and only the next year try to restore the inventory to its optimal level by
adjusting the price in the market for delivered wood.
In order to shed some light on how the pulp and paper industry actually manages
this supply risk, a monopsony model is formulated, in which the firm first sets the
domestic price and receives a quantity determined by the price and a random
No alterations have been made in the two published papers, [1] and [2].
Instead, an errata and some more extensive comments are found in the
Appendix of this summary.
9
M arket S tru ctu re and M arket P o w er
element. In the next stage, the firm chooses a quantity in the international market,
the price of which is determined by the supply curve and a random element7.
Furthermore, the firm is assumed to aim for an optimal inventory level. The
deviation from the optimal level enters the firm’s wood demand function additively, so that the estimated coefficient (between 50 and 80 percent in our model) is
the share of the inventory surplus/deficit that it wants to eliminate in one year.
The empirical results show that the pulp and paper industry does not, in fact,
appear to use imports as a backstop for the domestic market. Presumably, imports
are made throughout the whole year. Instead, it seems as if the inventory is used
to absorb the fluctuations in wood supply; the error term in our wood supply
model and the change in inventory follow each other closely. Unfortunately, there
is no data on the inventory of bought, but not yet cut, standing timber — this
inventory is reported to be of approximately the same size as the inventory of cut
pulp wood. Had such data been available, the model fit would possibly have been
even better.
Paper [2]
Differences in Final Felling and Thinning Behaviour Between
Owner Categories in Sweden
Timber and/or pulpwood supply, i.e., the question of how forest owners felling
decisions respond to prices and other economic variables, has been studied in a
number of scientific works,
such
as
Binkley
(1979),
Brännlund
(1988),
Kuuluvainen (1989), Hultkrantz and Aronsson (1989), Aronsson (1990), Carlén
(1990) and Hetemäki and Kuuluvainen (1990). The cited authors have used either
timenseries or cross-section data in two-period models. Typically, the supply prob­
lem is modelled as either a choice of total wood supply, or as a choice between
supplying pulpwood and sawtimber. Furthermore, they focus on either private or
aggregate wood supply.
A number of studies have addressed the problem of how thinnings are used to
increase future growth more theoretically, using multiperiod or continuous time
models, e.g., Näslund (1969), Kilkki and Väisänen (1970), Wernerheim (1989) and
Ideally, we would like to estimate a model, in which the firm also uses the
market for standing timber as a backstop market. However, it is not possible
to obtain data on quantities in this market.
10
M arket S tru ctu re and M arket P ow er
Clark (1990). Lohmander (1987), Clarke and Reed (1988) and Reed and Clarke
(1990) study the supply decision under price uncertainty.
Paper [2] explicitly considers thinnings and final fellings — the actions the forest
owner actually takes —while still retaining the simple structure of the two-period
models of wood supply. The behaviour of the forest owners is allowed to differ
between private persons, the public sector and companies. To simplify the analy­
sis, the endowment of the representative forest owner is split into two unrelated
classes of wood: thinning wood and final felling wood. This means that the effect of
thinnings on future final felling is disregarded.
The model is confronted with Swedish time series data. In particular, the data on
felling quantities are based on the Swedish National Forest Survey’s stump enume­
ration, as are the, in this context previously unused, data on forest inventories by
owner category and maturity class. From the data, it can be seen that thinnings
have decreased and final fellings have increased during the period of study (1955 to
1987). It is also notable that while the private forest owners have increased the
level of thinning relative to their stock of thinning wood, the companies have
reduced theirs. Each year, approximately two percent of the volume in the thinn­
ing woods is harvested. All owner categories have reduced their final fellings rela­
tive to their stock of final felling wood by approximately one percentage point over
the period of study. The companies now cut three percent of their final felling
stock each year, while the private and the public owners only cut around two
percent.
The forest owner chooses between final felling and thinning, but the result of the
action taken, if any, is a mixture of pulpwood and final felling. Therefore, a simple
transformation function is formulated, where it is assumed that pulpwood and
sawtimber make up fixed shares of the final felling wood, and of the thinning
wood. It can be conjectured that the shares should be dependent on the relative
prices of pulpwood and sawtimber. However, the assumption of fixed shares
appears to be supported by the data.
A surprising result of the model estimation is that the price appears to have a very
small effect on wood supply, if any. This contradicts the results of all the empiri­
cally oriented work cited above, where the own price elasticity ranges from 0.4 to
M arket S tru ctu re and M arket P o w er
11
over 2.8 On the other hand, the supply elasticity with respect to inventory is
found to be, on average, a little less than unity, which is higher than most of the
corresponding estimates reported in the literature. A partial reconciliation can be
made between the results of this paper and those of, e.g., Brännlund (1988): the
elasticities reported by Brännlund include fairly high negative cross price elastici­
ties between pulpwood and sawtimber. Thus, the total supply price elasticity with
respect to a uniform price increase is virtually the same in both studies.
Only small differences are found between the supply behaviour of different owner
types: the private forest owners appear to respond more strongly to cutting cost
changes and less strongly to inventory changes than do the others.
Paper [3]
Measuring Oligopsony Power. An application to the Swedish Pulp
and Paper Industry
A shortcoming Papers [1] and [2] share with many other studies of the Swedish
pulpwood market, is that they are based on the assumption that the market can be
characterized as monopsonistic.9 There is indeed much evidence to support such
an argument: for example, the number of independent firms in the pulp and paper
industry has shrunk dramatically, leaving Sweden with only three major firms
(Stora, SCA and MoDo). Furthermore, the users of more than 75 percent of the
pulpwood, including the three major firms, buy through common purchasing
companies.
The aim of Paper [3] is to develop an empirical test that addresses the question of
the market form, and to apply the test to the Swedish pulpwood market. Two
pioneering papers in this area are Appelbaum (1979) and (1982). Bresnahan (1989)
provides a survey of the literature. Naturally, most studies concentrate on the
monopsony/oligopsony problem. One exception is Atkinson and Kerkvliet (1990),
who estimate both monopoly and monopsony power, using a dual representation of
the production structure. As in much of the literature, they do not simultaneously
estimate the demand for the output (or the supply of the input). Therefore, they
This means that when the price of wood increases with 1 per cent, the supply
of wood increases with between 0.4 and 2 per cent.
Brännlund (1989), for example, estimates the welfare loss due to monopsony,
conditioned on the assumption that the roundwood market is monopsonistic.
12
M arket S tru ctu re and M arket P o w er
cannot separate the slopes of the demand and supply curves from the respective
conjectural elasticities10 terms. This means that if they, for example, fail to find
monopoly power, this could be due either to competition in the market, or to a
very elastic demand curve.
A conjectural variation model is formulated, where all firms are assumed to have
identical production functions. From this, it follows that the conjectural elastici­
ties are equal. We adopt the dual representation of the production structure. Thus,
we start with a profit function, specified as a Generalized Leontief function, i.e., a
flexible form profit function. The properties of this function are further developed
in Paper [4]. It can be noted that we use a specification that allows the profit
function to be either homogeneous of degree 1 or non-homogeneous in the fixed
input (capital), with the homogeneous case nested in the non-homogeneous case.
Using Hotelling’s lemma, the supply and demand functions can be derived from
the profit function. These functions are estimated with three stage least squares
and full information maximum likelihood, yielding estimates of the parameters of
the profit function.
In the empirical section, we are able to test the hypothesis that the conjectural
elasticity is zero, i.e., that the market is competitive, independently from the
pulpwood supply elasticity. The evidence is somewhat inconclusive. The null
hypothesis of competitive behaviour cannot be rejected, when tested against an
hypothesis of a constant degree of oligopsony power. However, when tested against
an hypothesis of a variable degree of market power, it can be rejected. This can be
interpreted as support for the notion that there have been periods of fairly strong
oligopsony power, as well as competitive periods. Such a pattern is compatible
with a cartel, which, during some periods, manages to restrict competition, but at
others is unable to prevent the firms from competing intensely.
Paper [4]
A Note on the Application of the Restricted Generalized Leontief
Profit Function
Diewert (1973) proposed a modification of the Leontief (profit) function: the
Generalized Leontief (GL) function, with the attractive property that it is a
second order approximation to an arbitrary function in a given point. This funcThe elasticities of market demand/supply with respect to firm demand for
the input/supply of the output.
M arket S tru ctu re and M arket P ow er
13
tion has been widely used in the economics literature. Diewert also proposed a
profit function specification in the case where one or more of the inputs is fixed;
the restricted GL profit function.
If the profit function is homogeneous of degree 1 in the fixed inputs, we must have
constant returns to scale in all inputs. This restriction is assumed to hold in the
specifications proposed by Diewert. However, when the restricted GL profit func­
tion is applied in studies of monopoly/oligopoly behaviour, homogeneity in the
fixed factor is not obvious (see e.g., Lopez (1984) and Wear and Newman (1991)).
In Paper [4], we propose a general specification, where homogeneity is a special
case of the non-homogeneous restricted GL profit function. We also clarify the
conditions under which a profit function is a second order approximation to an
arbitrary function, while still satisfying the necessary conditions of a profit func­
tion. The drawbacks of the papers by Lopez and Wear and Newman are briefly
discussed.
Paper [5]
Natural Resource Monopsony in a Two-Period Model
The final paper of the thesis addresses the paradox left by the somewhat inconclu­
sive evidence of Paper [3]: if the number of firms in the Swedish pulp and paper
industry is so small, and if they cooperate so closely, why is the statistical evidence
of monopsonistic or oligopsonistic behaviour so weak? When our casual observa­
tions so strongly suggest collusion, we would expect a high and significant degree
of market power throughout the whole period, not just intermittently. A very
similar conclusion was reached in an earlier, more pragmatic paper (Bergfors,
Bergman and Hultkrantz (1988)).
Coase (1973) conjectured that a monopoly selling a durable good, when facing
rational consumers, would be forced to sell the good at marginal cost. The argu­
ment goes as follows: assume that consumers with a high valuation buy quickly at
a high price. Once these consumers have bought, the monopoly has an incentive to
lower the price and sell to consumers with a low valuation. If the monopoly cannot
commit itself to sustain the high price, all consumers will predict that the price
will be lowered. Therefore, no buyer will buy at the initial high price — they will
wait for the price to be lowered. According to Coase’s conjecture, the only stable
(time-consistent or subgame-perfect) equilibrium is one where the price equals the
marginal cost all along. This conjecture has subsequently been proved for certain
14
M arket S tru ctu re and M arket P ow er
cases by Stokey (1981), Gul, Sonnenschein and Wilson (1986) and Ausubel and
Deneckere (1989). However, the latter, as well as Bulow (1982) and Bagnoli,
Salant and Swierzbinski (1989) showed that the results are sensitive to the
assumptions. Given a slightly different set of assumptions, Coase’s conjecture does
not hold.
Almost nothing can be found in the economics literature concerning the problem of
a monopsonist facing many small sellers of a (before extraction) ‘durable* input,
such as wood, minerals or fossil fuels. Paper [5] uses a two-period model, resem­
bling the monopoly model of Bulow, to explore whether a monopsonist can be the
subject of a similar weakening of its market power. It is found that the loss of
market power is of approximately the same magnitude as in the monopoly case.
The basic model is extended in two ways: new forest land is allowed to enter the
market in the second period, and the standing trees are allowed to grow between
periods. It is found that both extensions strengthen the position of the buyer.
Nevertheless, the time-consistency requirement does weaken the market power of
the monopsonist. It is possible that some of the explanation of the discrepancy
between expected and empirically observed market power lies in the dynamic
nature of the wood market, and in the pulp and paper industry’s inability to
commit.
Further research
Paper [1] could be improved by including data on the supply of wood from the
pulp and paper industry’s own forests in the model. The production structure of
the industry could be represented by a flexible function model, similar to the one
used in Paper [3].
The conclusion reached in Paper [2] — that the price of wood has no significant
effect on wood supply — must be viewed as tentative, considering that almost all
earlier studies have found significantly positive price effects. Thus, more research
on this question, and on the issue of negative cross price elasticities between pulpwood and sawtimber supply, would be valuable.
In Paper [3], we test the market power of the buyers of wood, conditional on the
assumption that all firms are alike. A more realistic model of the Swedish round-
M arket S tru ctu re and, M arket P ow er
15
wood market would allow for some heterogeneity between firms. A possible set up
is a cartel —the large firms that buy through purchasing companies — competing
against a fringe of small competitive firms. Using the dual approach of Paper [3],
the conjectural elasticities and the size of the cartel could perhaps be estimated.
Paper [5] could be elaborated in many ways. The two-period model could be ex­
tended to a multi-period, infinité-horizon model. Within the two-period context,
capacity restrictions in the pulp production (wood consumption) could be imposed.
The assumption of no capacity restrictions is of course a simplification. The indus­
try cannot buy more wood than it can use, given its production capacity. Thus,
the capacity decision serves as a commitment not to buy more than a maximum
amount. If the investment decision was explicitly modelled within the game, the
dynamic interplay between the single buyer and the many sellers would be en­
riched and would gain in realism.
M arket Stru ctu re and M arket P o w er
Appendix: Corrections and comments
Paper [1]
Supply Risk Management Under Imperfect Competition —
Empirical Applications to the Swedish Pulp and Paper Industry
Misprintings et cetera
Page
Row(Eqv.)
Stands
Should be
448
10
volume at a
volume differs
certain price
differs
450
452
453
32
14
interprete
as assumed
interpret
23
support [c,d]
support [e,d]
(8)
d
“ Cl/ r i(
—Cl(-)/ r l(
16
domestric
domestic
( 12)
+ « 1( 7)
where
+ 61
where
14
e
is assumed
e
is a measurement and/or
optimization error and where
16
we would
and
c( • )
is
the
estimated
domestic volume, we would
454
Excess inventory, i
(Table 1)
Total dis­
15
preceeding
preceding
3
total dis­
excess inventory
placement
455
placement from
the optimal level
(1 —o ) 0 l+ 0 2
459
Ì2 — (1—0)01+02
(14)
AIt=odt -i+
(Referring to row in Table 2.)
Alt = —odt-1 +
9
7.02
7.02*
13
14
(3.70)
-2
(-3.70)
20
(The + in the D- -W column should be in the Cu-i
column.)
+
17
M arket S tru ctu re and M arket P o w er
26
462
ambiquous
21
32
variance
Hultzkrantz
13
50
22
463
464
ambiguous
(18)
standard error
Hultkrantz
50:87-112
Comments
1
The restrictions referred to at the end of the first paragraph on page 449, are
the adverse effects on the supply of delivered wood if the cartel raises the price
of standing timber openly and early in the season.
2
The output price p, the price of pulp, is assumed to be constant and known by
the buyers of wood (see p. 449). This is not a correct description of the actual
behaviour of the pulp price —it is in fact highly volatile. On the other hand,
the unexpected component of the output price can, in general, be considered to
be captured by the random element in the wood supply equation, as the
outcomes in the two variables become known to the buyer simultaneously.
This is certainly so in the linear model estimated in this paper.
3
On page 451, it is mentioned that we, in a previous study, have rejected the
hypothesis that the import supply of wood is infinitely elastic. If this
hypothesis was true, we would expect the domestic price and quantity to be
determined by the international price of wood, and not by the price of pulp,
given that it is optimal to import any quantity at all. Only if imports are zero,
will the price of pulp enter the domestic price and quantity equations. Because
of border trade, imports will never be zero. Therefore, we hypothesized that
the international price would be significant when the net import was positive
(1975-85), and that the price of pulp would be significant when the net import
was negative (1953-74). This hypothesis was rejected by the data; in fact it
appeared as if the price of pulp was, in general, more significant than the
international price. The following table is an abbreviation of Table 1 in
Bergman and Löfgren (1988):
18
M arket S tru ctu re and M arket P o w er
Table A .l
OLS estimates of pulpwood prices and quantities and standing
timber prices, t-values within parentheses. Data and notation as in
Paper fl], except rr for price of standing timber and s for price of
sawtimber.
Explanatory variables
Time
per.
Dep.
var
const
P
ri
d
s
R2
D -W
1953—74
r
-38
.0009
.05
.15
.89
1.31
(-1.30)
1975-85
r
-121
(0.05)
.04
1.6
(3.64)
-.03
.69
1.82
rr
(-.60)
-155
(2.13)
.04
(-7.19)
(3.13)
-628
(-1.97)
.04
.20
7.16
(.67)
.04
(2.99)
53
(1.29)
.0002
(10.55)
(.74)
(.87)
-.31
(-4.12)
1953-74
1975-85
1953-74
1975-85
rr
c
c
(.20)
(1.03)
(-.16)
.67
(.41)
(2.61)
.31
1.98
-
.97
1.83
(2.27)
(5.81)
-
.40
2.31
.02
.75
1.64
.77
3.12
.25
(.73)
15
.0006
.01
-.15
.009
(.60)
(2.87)
(.45)
(-.75)
(.77)
In Bergfors, Bergman and Hultkrantz (1988), it is shown that the average
import prices paid by the Swedish industry differ substantially between
exporting countries. This also contradicts the hypothesis of an infinitely elastic
import supply.
4
We have excluded the capacity
k
and the shifter ps from equation (13), page
454, in order to simplify notation.
5
There are two data series available on fellings: one from the Forest Service,
which is used in Paper [1], and one from the National Forest Survey, which is
used in Paper [2]. At the time the papers were written, it was known that the
latter had fairly large random errors (with a standard error of approximately 7
percent), while the former was thought to be quite accurate. Today, it is
recognized that the Forest Service series also has quite large random errors,
although smaller than those of the other series, as well as a systematic error
that is probably larger than the systematic error of the National Forest Survev
M arket S tru ctu re and M arket P o w er
19
series. With hindsight, it would have been preferable to use the series from the
National Forest Survey. The reason is that this series enables one to distin­
guish the forest industry’s own fellings from the fellings of other domestic
agents. The industry’s own fellings can be used as an additional backstop, and
it would have been valuable to use this information. However, the other series
was chosen in the belief that that data was more accurate.
6
An alternative hypothesis that one could reasonably try to control for, is that
the character of the import has changed. In the 1950s and 1960s, the small
import (and export) was the result of border trade. In the 1970s and 1980s, the
net import rose sharply, and more distant markets emerged as major suppliers
of wood. However, this is exactly what Bergman and Löfgren (1988) tested for
in the study referred to in comment 3, without finding any such differences.
7
In this paper, the production function of the industry is modelled as a function
of the capacity and the input of wood only. This means that the cost of labour
and energy will not enter the reduced forms. As the capacity is assumed to be
fixed, the cost of capital will only enter the reduced forms from the supply
side. A more orthodox model would allow the production to depend on the
input of labour and energy as well, in which case we would have the reduced
forms dependent on the wage and the price of energy. We made our choice of
specification partly because of its simplicity and partly because it appeared to
fit the data better. It could also be motivated by the fact that the pulp and
paper industry’s costs for wood are typically at least twice as large as its costs
for energy and labour combined.
20
M arket S tru ctu re and M arket P o w er
Paper [2]
Differences in Final Felling and Thinning Behaviour Between
Owner Categories in Sweden
Misprintings et cetera
Page
Row(Eqv.)
Stands
Should be
269
17
Vaisanen, 1969
Vaisanen, 1970
18
1989, Clark, 1990).
1989; Clark, 1990; Reed &
Clarke, 1990).
40
q} and q? the thin­
q} and q? the pulpwood
ning and final
felling volumes
and sawtimber volumes
16
labout
labour
(17)
aå = qi =
qå = qi =
276
40
41
a positive function
an increasing function
a negative function
a decreasing function
277
Tab. 1
joint GLS reg­
restricted GLS estimates
279
282
35
35
271
274
ression analysis
39
significant
demand for timber
insignificant
demand of timber
Kikki
Kilkki
Vaisanen
Vaisanen
1969
1970
optimal policy
optimum cutting policy
for forest stands
for the forest stand
40
102, 100-112
46
optimal radiation
102, 1-23
optimal rotation
Comments
1
The two aims of the study mentioned in the introduction were to compare the
behaviour of the different owner categories and to explain the swings in total
final fellings and thinnings. However, much of the discussion in the results
section and in the concluding remarks is devoted to a comparison with earlier
work which directly studies the supply of pulpwood and sawtimber. The
easiest solution to this disparity would have been to make the comparison a
third aim. The differences in supply behaviour between owner categories could
M arket S tru ctu re and M arket P ow er
21
not be discussed at length, as the differences in behaviour were small and
mostly insignificant. The most remarkable finding was, in fact, that the price
response was so weak for all owner categories. As to an explanation for the
development of final fellings and thinnings over time, the study suggests that
this can, to a large extent, be explained by the changes in inventory.
2
The functional forms chosen for the estimation, eqs. (12*) to (15’) must of
course be seen as first order approximations of the true relations. For example,
the interest rate cannot enter the final felling and thinning equations additiveiy.
3
A possible explanation for the small and insignificant effects of prices on
thinnings is that thinnings have been required by law, and the prescribed
thinnings have probably often been larger than would have been chosen volun­
tarily.
4
A critical assumption of the paper is that there exists a stable relationship,
i.e., the transformation function of (3.1) and (3.2), between the final felling
and thinning volumes and the volumes of pulpwood and sawtimber. The
statistical analysis supporting this assumption was not included in the paper,
as perhaps it should have been. If we do not believe in a transformation func­
tion with fixed coefficients, our hypothesis must reasonably be, that a higher
percentage of the thinnings and/or final fellings will be sold as pulpwood if the
price of pulpwood rises relative to the price of sawtimber. The reason is that
the forest owner can, to some extent, choose how to cut each log into pulp­
wood and sawtimber. The simplest test of the transformation function is,
therefore, to enter this price ratio into equations (3.1) and (3.2). It turns out
that the estimated parameter is positive, as we would expect according to the
hypothesis, but insignificant. The t-values of the price ratio in the pulpwood
equation are estimated to be 0.03 and 0.64 respectively, depending on whether
we use the ‘add-to-one’ restriction or not. The corresponding t-values in the
sawtimber equation are estimated to be 2.45 and 2.00, suggesting that the
forest owners increase their ratio of sawtimber as the price of pulpwood in­
creases.
Another possibility is to make the coefficients a and ß dependent on the price
ratio. This gives us the model
M arket S tru ctu re and M arket P o w er
22
q1 = a (p 7 p 2)xt + /3(p7P2)xf
( A. l )
q2 = [i-û < p 7 p 2)]xt + [i—/?(pVp2)]xf
(A.2)
to estimate, where a (p 7 p 2) = do + <*i(p7p2) and /?(p7p2) =ßo + Æi(p7p2)> nsing
the same notation as in Paper [2].
A related issue is the question of how the systematic errors of the two series on
wood quantities affect the estimations. As discussed in comment 5 on Paper [1],
there are such errors in both the thinning and final felling series from the National
Forest Survey, and in the pulpwood and sawtimber series from the Forest Service.
In the estimations presented in the paper, the transformation function is forced to
pass through origo. The theoretical reasons for this restriction are quite obvious:
the sum of the quantities of pulpwood and sawtimber must (almost) equal the sum
of the quantities of final fellings and thinnings. The estimation procedure will be
more efficient if a correct restriction is imposed. On the other hand, together with
the systematic errors in the data series, this restriction may give rise to serial
correlation. This can perhaps explain the low Durbin-Watson values. A serial
correlation also biases the t-values upwards.
Besides estimating equations (A.l) and (A.2), which are subject to the ‘add-to-one’
restriction, we can estimate the corresponding equations without this restriction.
In all cases, we may add a constant term, so as not to force the functions through
origo. This gives us four alternative ways to estimate a system of equations, corres­
ponding to (A.l) and (A.2). Because of the restriction, this gives us 12 (and not
16) relevant estimates of a\ and ß\. In half of the cases, we cannot reject the null
hypothesis that the forest owners do not produce relatively more pulpwood, when
the price of pulpwood is high relative to the price of sawtimber. In the other cases,
we can reject the hypothesis at the 5 percent level. However, in three (out of six)
instances, the sign is ‘wrong’, suggesting that the forest owners produce less pulp­
wood when its price is high. The following table shows the results when we apply
the ‘add-to-one’ restriction, but allow the function not to pass through origo.
23
M arket S tru ctu re and M arket P ow er
Table A.2
Restricted GLS estimates of the resulting pulpwood supply from
thinning and final felling, t-values within parenthesis. Data and
notation as in Paper [2].
Explanatory variables
Dep.
var.
con.
xl
xf
(Pl/P 2)xt
(p7p2)Xf
D -W R2
q1
-6.78
.90
.51
.06
.12
1.69
(-3.41)
(3.02)
(3.84)
(.25)
(.96)
.35
The estimates of ct\ and ß\ are both insignificantly positive. When the restriction
of no constant term is lifted, the Durbin-Watson value increases and the t-values
decrease, as expected. From the results of Table A.2, estimates of a and ß can be
calculated. These are shown in Figure A.l, together with the price ratio between
the prices of pulpwood and sawtimber, indexed so that the ratio equals 1 in 1970.
Figure A.l
Ratio of thinnings (alfa) and final fellings (beta) used as pulp­
wood, and the ratio of the prices of pulpwood and sawtimber
(index: 1970 = 1), 1955 to 1987.
1.40
1.20
o
1.00
0.80
0.60
price ratio
0.40
1955
1960
1965
alfa
1970
Y ear
beta
1975
1980
1985
M arket S tru ctu re and M arket P o w er
24
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