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Market Power and Timber Pricing

Market Power and Timber Pricing. January 24 2013. Imperfect Competition. Market power can happen in terms of selling Monopoly Oligopoloy Market power can happen on the input side Monopsony Oligopsony In both cases tend to have lower output and higher profits than perfect competition

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Market Power and Timber Pricing

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  1. Market Power and Timber Pricing January 24 2013

  2. Imperfect Competition • Market power can happen in terms of selling • Monopoly • Oligopoloy • Market power can happen on the input side • Monopsony • Oligopsony • In both cases tend to have lower output and higher profits than perfect competition • Either P>MC (monopoly) or MRP>MC (monopsony)

  3. Monopoly Monopoly Power of Firms • Single firm produces all outputs • Firm faces the entire demand curve • May arise for several reasons • Barriers to entry (policy, regulations) • Economies of scale (average costs fall as you get larger)

  4. MC P Pm Ppc Qm Qpc Q Demand MR Firm With Monopoly Power What is the loss to society?

  5. Oligopoly • When a group of firms exercise market power in the output market • Explicit collusion is illegal • However tacit collusion/implicit coordination can happen http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/h_02760.html

  6. Price Fixing…Yes, even Beer The European commission today imposed a fine of €219.3m (£150m) on Dutch brewer Heineken for operating a price-fixing cartel with three other companies in Holland, one of Europe's biggest beer markets.... http://www.guardian.co.uk/business/2007/apr/18/7

  7. Monopsony • Total input is bought by one firm • Firm faces the market supply curve for the input • Barriers to entry can again be due to the same reasons

  8. Monopsony Power ME SAE D Q2 Q1

  9. How Might This be An Issue in the Forest Sector? • The Finnish Competition Authority’s Market Court has recently  fined forest products giants Metsäliitto Cooperative and Stora Enso a total of 51 million euros for running a price cartel reports The firms applied peer pressure against those who 'overpaid' for wood. Image: YLE / SeppoNykänen http://www.yle.fi/uutiset/news/2009/12/forest_companies_fined_for_price-fixing_1237358.html

  10. Trends in Apportionment in BC (March 2008) • Over time the Province has undertaken efforts to make timber volumes available for smaller operators through a variety of mechanisms: • Small Business Program • Creating special licenses • Reallocation (2003) http://www.for.gov.bc.ca/hth/timten/provincial-map.htm

  11. But concentration has increased within the industry • Ownership has changed but regional concentration has increased in past three decades http://www.for.gov.bc.ca/ftp/hth/external/!publish/web/timber-tenures/apportionment/aptr043.pdf

  12. Forest charges • Three desirable qualities of taxes and charges: • Neutrality • Neutral charges do not create incentives to change behaviour • Example: do stumpage charges alter firms’ behaviours? • Equity • Distribution of income. Forest owners capture economic benefits (rent) that would otherwise accrue to others • Simplicity • Refers to the ease of administration, understandability, and costs of enforcement

  13. Common forms of levies on forest resources Source: Pearse, P. H., 1990. An Introduction to Forest Economics, UBC Press.; Vancouver.

  14. Stumpage • Stumpage is a term used to describe the price paid for standing timber. • Our focus here is on using it to denote the price paid to the Crown.

  15. Alternative Stumpage Systems • Fixed Schedules • Appraisals • Competitive Auctions • Bill spoke to this

  16. Timber Pricing Source: http://www.for.gov.bc.ca/hva/aboutus/index.htm

  17. Appraisal or residual –based pricing – “Upset Stumpage” Example • Volumes are estimated from inventory data • Value or price is determined from market information • Harvesting costs are assessed (including road, logging, and hauling costs) • Allowance for the operator’s profit and risk is deducted Source: Pearse, P. H., 1990. An Introduction to Forest Economics, UBC Press; Vancouver.

  18. Market Pricing System (MPS) in BC • The MPS attempts to let market forces determine the stumpage rate • Standing timber is auctioned off to establish a market value for timber. This market value is then used to determine stumpage prices for longer-term tenure holders BCTS ≈ 20% of Crown timber → Determines “market value” of timber “Market value” → Determines stumpage rates for other forms of tenure in BC http://www.for.gov.bc.ca/mof/plan/

  19. Government Forestry Revenues in BC, 1981-2012, 000’s of Canadian dollars Actual 3/2012 -$482 million 3/2011-$436 million

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