Elsevier

Forest Policy and Economics

Volume 102, May 2019, Pages 138-150
Forest Policy and Economics

Assessing market power in the U.S. pulp and paper industry

https://doi.org/10.1016/j.forpol.2019.03.009Get rights and content

Highlights

  • Oligopsony power in the pulpwood market is not as large as previously estimated and decreases as timber procurement expands.

  • The concentration of pulpmills has direct effect on market power.

  • Welfare effects are not significantly negative to justify government intervention.

Abstract

This paper assesses the market power of pulpwood mills in different regions of the U.S. We estimated the conjectural elasticity, elasticities of substitution and price elasticities for the delivered price at the mill in Southeast and North U.S. and the stumpage in the Southeast. We assembled data composed of price and quantity of Labor, Energy, Chemical Products and Wood at firms' level from Q4/2016 to Q4/2017, and applied a variety of econometric models that measure the influence of firms and resource characteristics on market competition. The results indicate moderate levels of oligopsony power in all markets, with the highest effect at the mill in the North, and lowest in the stumpage market in the South. Market power in the pulpwood market is strongly driven by industry concentration and local company size, and decreases as the estimated wood procurement radius from a mill increases in size.

Introduction

Economists usually assume that classical markets with perfect atomistic competition between many producers and many consumers produce the best social welfare and most efficient production. However, the market of natural resources and many agriculture products are commonly imperfect competitive. These markets often have a structure where the prices of the factors of production (inputs) are formed from the interaction between a large number of sellers and few buyers. The high concentration of buyers can lead to oligopsony, where buyers of inputs pay lower prices than in a perfectly competitive environment, leading to poor resources allocation and less income to producers of input goods. The pulp and paper industry (PPI) sector has been one area where market power has been identified in the past. We re-examine this question with improved data sets and econometric methods.

The share of the total output production of the four and eight largest PPI (CR4 and CR8) in the United States are respectively 61% and 84.5% respectively (United States Census Bureau, 2018). Even with the expansion of the wood pellet production and the consequent increase in competition for pulpwood (Abt et al., 2014), pulpmills have by far the most significant share of pulpwood consumption.1 In the Southeast U.S., pulpmills shared 83% of the softwood pulpwood, while pellet mills had 4% and OSB 13% in 2014. The hardwood pulpwood market is even more concentrated; 93% of the total volume feeds pulpmills, and 7% went to OSB during the same period (Forest2Market, 2014).

Transportation costs and the suppliers' price elasticities have a substantial impact on the pulpwood market in addition to the industry concentration. Pulpmills expand or contract their procurement area according to the ratio between transportation costs and pulpwood prices. The higher the transportation costs, the more significant is the influence of the pulpmills in local markets. Also, the timber supply curve is inelastic (Parajuli and Chang, 2015; Polyakov et al., 2005), increasing the likelihood of suppressing local prices without substantially affecting the total amount of timber supplied.

A systematic lack of competition in the timber market could lead to (i) misallocation of resources, such as less production of pulpwood, due to low prices (ii) incentives for landowners to merge or to unify (Khajuria et al., 2005), and (iii) harmful effects on social welfare as defined as reductions in maximum efficiency in perfect competition (Brown et al., 2012; Niquidet and Cornelis Van Kooten, 2006). However, it is not clear to which extent a pulpmill can influence pulpwood prices and what factors might determine it.

In this paper, we investigated the oligopsony power and cost structure of three different datasets: (i) U.S. Southeast delivered pulpwood at the firm level, (ii) U.S. Southeast stumpage prices (with regional market data) and (iii) U.S. Northeast delivered pulpwood at the firm level. Our contribution to prior research consists of (i) the assessment of the market power for purchased wood at the plant level (U.S. South and North) and stumpage micromarket (only U.S. South); previous studies have used nationwide data (Mei and Sun, 2008; Murray, 1995b; Murray, 1995a) and; (ii) estimation of price elasticities for all regions and aggregate levels. Our data are composed of quantity and prices of labor, chemical, energy, and wood for 74 pulpmills; 55 are located in the Southeast U.S. and 19 in the Northeast. We assess the market competitiveness deriving the Conjectural Elasticity (CE) from a translog cost function as described next.

Section snippets

Literature review

Earlier studies on oligopsony markets in the forest sector have shown mixed results. Using aggregate data, Murray (1995a) and Mei and Sun (2008) found evidence of market power in the pulpwood and sawlog market in the U.S. According to both studies, there was a substantial increase in the market power over the past decades, mainly by the pulpmills. However, Murray (1995b) did not find significant welfare or price distortion that could have justified any government intervention. Mead (1966) also

Theoretical framework

The New Empirical Industrial Organization (NEIO) has been the most common approach adopted to study market power. The advantage of the NEIO is that it measures the market power directly through the conjectural variation (the reaction of a competitor as one company varies its output or input) grounded on the production economics. An enormous number of studies applied the NEIO approach, including in agriculture and forestry (see Perekhozhuk et al. (2016) for a detailed survey). They commonly rely

Data

We investigated the pulpwood market structure of the US using three different datasets: In the Southeast, we analyzed (1) delivered wood and (2) stumpage prices of softwood and, in the North we investigated only the (3) delivered wood prices of hardwoods. The data is composed of quarterly input (Labor, Chemical materials, Energy, and Wood) and, output prices and quantities between Q4/2016 and Q4/2017 for 74 pulpmills in the U.S. (Fig. 1 – A and B) (FisherSolve, 2018). Fifty-five mills are in

Results and discussion

This paper assesses the oligopsony power in the pulpwood market of the (1) U.S. Southeast delivered pulpwood - softwood, (2) U.S. Northeast delivered prices – hardwood, and (3) U.S. Southeast stumpage – softwood. For every market, we estimated a translog cost function and, price elasticity and elasticity of substitution. Descriptive data are presented in Table 2, Table 3.

Conclusion

This paper investigated the oligopsony power in the pulpwood market of two regions in the U.S. using plant-level data for the first time. We studied the softwood market in the U.S. South and the hardwood market in the Northern States. The analysis also included an aggregate analysis of the stumpage prices in the Southeast. We estimated a translog cost function and four cost share equations (Energy, Labor, Chemicals, and Pulpwood) and derived the conjectural elasticities (CE), static and

Funding

Conselho Nacional de Desenvolvimento Científico e Tecnológico (CNPQ), Brazil (248688/2013-8) and Southern Forest Resource Assessment Consortium (SOFAC), United States.

References (50)

  • Charles Blackorby et al.

    American economic association will the real elasticity of substitution please stand up? (a comparison of the Allen/Uzawa and Morishima Elasticities)

    Am. Econ. Rev.

    (1989)
  • Runar Brannlund

    The social loss from imperfect competition: the case of the Swedish pulpwood market

    Scand. J. Econ.

    (1989)
  • Brett J. Butler et al.

    America’ s family forest owners

    J. For.

    (2004)
  • C.D. Campbell

    Primal and Dual Models of Market Power: An Application to Eastern Oregon's Lumber and Stumpage Markets

    (1996)
  • J.L. Conrad et al.

    Effects of seasonal timber harvesting restrictions on procurement practices

    For. Prod. J.

    (2017)
  • FisherSolve

    FisherSolve International Plataform

    (2018)
  • Forest2Market

    Demand for Pulpwood: Historical and Future

  • Forest2Market

    Wood Supply Market Trends in the US South Wood Supply Trends in the US South: 1995–2015

    (2015)
  • Forest2Market

    Strong Demand for Lumber Driving Sawmill Expansions in the US South [Blog]

  • C. Greenleaf

    What Is the Future of the Pulp and Paper Industry in the U.S. Northeast? [Blog Post]

  • R.C. Griffin et al.

    Selecting functional form in production function analysis

    West. J. Agric. Econ.

    (1987)
  • G. Hahn

    Wood procurement and harvesting trends in North Carolina

    A report submitted to the Graduate Faculty of North Carolina State University in partial fulfillment of the requirements for the Degree of Master of Forestry

    (2015)
  • James W. Sewall Company

    Timberland Ownership and Forest Industry Changes in the US Northeast

  • Maarit Kallio

    Analysing the Finnish pulpwood market under alternative hypotheses of competition

    Can. J. For. Res.

    (2001)
  • M. Kallio et al.

    Nonparametric methods for evaluating economic efficiency and imperfect competition

    J. Prod. Anal.

    (2002)
  • Cited by (0)

    View full text