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
 Either P>MC (monopoly) or MRP>MC (monopsony)
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)
Firm With Monopoly Power
MC
P
What is the loss
to society?
Pm
Ppc
Qm Qp
c
MR Demand Q
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.competitionbur
eau.gc.ca/eic/site/cbbc.nsf/eng/h_02760.html
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/2
007/apr/18/7
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
Monopsony Power
ME
SAE
Q2
Q1
D
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 / Seppo Nykänen
http://www.yle.fi/uutiset/news/2009/12/forest_companies_fined_for_price-fixing_1237358.html
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/provinc
ial-map.htm
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/w
eb/timber-tenures/apportionment/aptr043.pdf
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
Common forms of levies on forest resources
Common form
Usual method of
determination
Usual Method of
assessment
Land rent
Arbitrary
Annual levy
Land tax
% rate on land
value or
productivity
Annual levy
Timber
Property tax
% rate on timber
value
Annual levy
Harvest
Royalty, severance
tax, and cutting
fees
Specific fees for
volumes harvested
According to
harvest
Yield tax
% rate on value
harvested
According to
harvest
Stumpage
Competitive
bidding or
appraisal
Lump sum, annual
charge, or
according to
harvest
Licence fee
More-or-less
arbitrary
Lump-sum or
annual charge
Base
Land
Rights
Source: Pearse, P. H., 1990. An Introduction to Forest Economics, UBC Press.; Vancouver.
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.
Alternative Stumpage Systems
• Fixed Schedules
• Appraisals
• Competitive Auctions

Bill spoke to this
Timber Pricing
Source: http://www.for.gov.bc.ca/hva/aboutus/index.htm
Appraisal or residual –based pricing –
“Upset Stumpage”
1. Volumes are estimated
from inventory data
Example
2. Value or price is
determined from market
information
3. Harvesting costs are
assessed (including road,
logging, and hauling costs)
4. Allowance for the
operator’s profit and risk is
deducted
Source: Pearse, P. H., 1990. An Introduction to
Forest Economics, UBC Press;
Vancouver.
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/
The final equations, compared to the Benchmark Equations, are shown below.
Winning Bid – Benchmark and Final
Dependant Variable
Benchmark
Final Equation
Real Winning Bid
Real Winning Bid
Explanatory Variable
Coefficient
t-Statistic
Coefficient
t-Statistic
Constant
3.63
0.58
-23.74
-4.12
Hembal
-10.09
-3.52
N/A
N/A
3-Month Average Log Selling Price
0.647
10.99
0.619
11.74
Cedar and Cypress
N/A
N/A
9.67
2.41
Cedar and Cypress 2007
N/A
N/A
30.21
6.67
Gambier Dist 400
N/A
N/A
-7.95
-1.58
Cruise Grades
N/A
N/A
6.27
3.90
Conventional Slope
-0.101
-2.12
-0.103
-2.65
Helicopter Logging
-26.65
-7.86
-25.63
-8.44
LN (Volume per Hectare/1000)
7.74
3.36
7.65
2.29
Number of Bidders
1.90
8.55
2.03
9.68
Distance to Gambier
-0.00321
-0.76
N/A
N/A
2008 Auctions
-8.98
-4.59
N/A
N/A
2009 Auctions
-11.40
-4.91
N/A
N/A
2010 Auctions
-8.28
-3.52
N/A
N/A
2011 Auctions
-3.75
-1.69
N/A
N/A
Location
-0.0567
-3.69
-0.0659
-4.53
LN (Piece Size)
N/A
N/A
2.24
1.12
LN (Piece Size) * Old Growth
3.96
1.46
N/A
N/A
Second Growth Fir
N/A
N/A
9.57
4.39
Second Growth
4.33
1.98
N/A
N/A
Number of Observations
Adjusted R
2
Note: LN means natural logarithm
277
277
0.724
0.746
Coast Market Pricing System – Update 2012
VARIABLES AND DEFINITIONS
PREDICTED BID
Used in the Number of Bidders equation: The estimated
winning bid for the cutting authority from the corresponding
winning bid equation, expressed in $/m3.
3 MONTH
AVERAGE LOG
SELLING PRICE
Average coniferous log selling price estimate expressed in
$/m3. This is based upon a consideration of log grades and
species for the cutting authority area, and schedules of log
market values collected and published by the Timber Pricing
Branch.
SECOND GROWTH
FIR
If selling price zone in the appraisal data submission is 52,
then 2nd GROWTH FIR is the fraction of the coniferous cruise
volume that is Douglas-fir. If the selling price zone is not 52,
then 2nd GROWTH FIR = 0. 2nd GROWTH FIR is in decimal
form, rounded to 2 decimal places.
CEDARCYPRESS
The fraction of the coniferous cruise volume that is cedar and
cypress. CEDARCYPRESS is in decimal form, rounded to 2
decimal places.
HEMBAL
The fraction of the coniferous cruise volume that is hemlock
and balsam. HEMBAL is in decimal form, rounded to 2
decimal places.
CONVENTIONAL
SLOPE
The average side slope percentage for that part of the cutting
authority area that will not be helicopter yarded.
VOLUME PER
HECTARE
Cruised volume of coniferous timber per hectare. Expressed
in m3/ha and is rounded to 2 decimal places.
PIECE SIZE
The net coniferous cruised volume per 10 m log expressed in
m3. PIECESIZE is expressed in m3 and is rounded to 2
decimal places.
HELICOPTER
LOGGING
The fraction of the total net cruise volume, including
deciduous volume, of timber in a cutting authority area that
must be helicopter yarded or yarded by skyline where logs
Government Forestry Revenues in BC, 1981-2012, 000’s of
Canadian dollars
$2,000,000
$1,800,000
$1,600,000
$1,400,000
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
09/10
08/09
07/08
06/07
04/05
02/03
01/02
00/01
99/00
97/98h
98/99
96/97h
95/96h
94/95h
93/94
92/93
91/92f
90/91e
89/90
88/89
87/88
86/87
84/85
85/86
83/84d
82/83d
81/82
$0
Actual
3/2012 -$482 million
3/2011-$436 million