Academic journal article Journal of Agricultural and Applied Economics

Assessing Time-Varying Oligopoly and Oligopsony Power in the U.S. Paper Industry

Academic journal article Journal of Agricultural and Applied Economics

Assessing Time-Varying Oligopoly and Oligopsony Power in the U.S. Paper Industry

Article excerpt

The U.S. paper industry has become increasingly concentrated and therefore been suspected of imperfect competition. In this study, the new empirical industrial organization approach is employed to measure the degree of oligopoly and oligopsony power in the U.S. paper industry simultaneously. The model is estimated by iterative three-stage least squares using annual data from 1955 to 2003. The results reveal that there has been significant oligopoly and oligopsony power in the U.S. paper industry, and the oligopoly power has been consistently lower than the oligopsony power.

Key Words: market power, NEIO, three-stage least squares, time-varying parameters

JEL Classifications: L13, Q23

The forest products industry has been a major component of the manufacturing sector in the United States (U.S. Census Bureau 2007a). It has provided numerous job opportunities and generated income in billions of dollars. The U.S. forest products industry is usually divided into three subindustries: the lumber industry (NAICS 321 or SIC 24),1 furniture industry (NAICS 337 or SIC 25), and paper industry (NAICS 322 or SIC 26). Among the three subindustries, the paper industry is the largest in terms of value of shipments and employment. According to the latest Annual Survey of Manufacturing (U.S. Census Bureau 2007a), in 2005 the value of shipments for the paper industry reached $163 billion, and the employment totaled 429,000, or 45% and 29% of the forest products industry, respectively.

The paper industry has several distinct characteristics. Pulpwood, the raw material for paper mills, is bulky to transport. On average, harvesting and transportation costs account for two-thirds of the delivered price for pine pulpwood (Guo, Sun, and Grebner). High transportation costs of timber materials can mitigate competition and increase the potential exercise of local market power (Murray). In addition, the paper industry is a capital-intensive manufacturing sector in the U.S. economy. While capital recovery and fixed costs remain a large component of manufacturing costs (Ince), high capital costs due to the stringent environmental regulations on the paper industry have created barriers to entry and motivated mergers and acquisitions within the industry (Asinas; Gomez).

The U.S. paper industry has become increasingly concentrated over time, as indicated by the share of value of shipments accounted for by the largest four companies (i.e., CR4). The CR4 for the paper industry was 18% in 1954 and reached 49% in 2002 (U.S. Census Bureau 2007a). This situation has been further aggravated by increasing mergers observed in recent years (Mei and Sun). Overall, the evolution of the paper industry has made it structurally concentrated with a few big processing firms, a large number of forest landowners as timber suppliers, and numerous paper products retailers. Such an industry structure has aroused wide concerns about potential market power in both the paper products output and pulpwood input markets (Bernstein).

The objective of this study is to measure the degree of market power in the paper products output and pulpwood input markets simultaneously for the U.S. paper industry during the span of 1955-2003. An econometric equation system is composed of a production function and three cost share equations for pulpwood, capital, and labor inputs. The system is estimated separately with and without the specification of time-varying conjectural elasticities by iterative three-stage least squares (I3SLS). This study extends the existing literature of market power related to the U.S. paper industry by examining the time-varying oligopoly and oligopsony power jointly over the past several decades. Results from this study will be helpful in understanding the evolution of market behavior in the U.S. paper industry.

The next section provides a literature review of market power research with emphasis on the U.S. forest products industry. …

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