Analysing the Finnish pulpwood market under alternative hypotheses of competition

Efficient functioning of the wood market is crucial in a country where the forest sector is of strong macroeconomic importance. We investigate the possibility of noncompetitive behavior of the buyers in the Finnish pulpwood market. We simulate the buyersʹ behavior under alternative competition structures (perfect competition, Cournot oligopsony, and monopsony) and compare the simulated equilibria with the observed behavior in the years 1988-1997. In the static models the pulp industry firms are assumed to maximize their short-run variable profits either under fixed production capacity or, hypothetically, under variable capacity. The results suggest that, during the boom years, the industry has been capacity constrained, sometimes even for monopsony output. During the recession years, the actual wood prices have often been between simulated Cournot oligopsony and monopsony prices. Hence, noncompetitive behavior of the buyers is possible during the recessions. The capacity investment behavior of the industry is explored with dynamic models. The conclusions from these models depend on the price elasticity of pulpwood supply used.