Interdependence of the sawlog, pulpwood and sawmill chip markets: An oligopsony model with an application to Finland

Abstract

The interdependence of the markets for pulpwood, sawlogs and sawmill chips is analysed using a short-run model, which accommodates the alternative competition structures of wood buyers. We propose that imperfect competition in the pulpwood market tends to make the sawmills owned by the pulp and paper companies larger than the independent ones, even in the absence of transactional economies of integration. The impact of the wood market competition pattern on the profits of the forest owners and forest industry firms depends upon a firm-capacity structure, wood supply elasticities, and business cycles in the output markets. The numerical application of the model to the Finnish softwood market suggests that inflexibility of production capacities tends to make the wood demand rather insensitive with respect to price. Only the large firms, which all produce both pulp and sawnwood, may have oligopsony power under some conditions. Integrated production can increase competition in the sawlog market via the wood chip market.