Monopsony markets in regional CGE modeling: The Oklahoma forest products industry case

Scope and method of study. The primary purpose of this research is to develop and test a model of the impact of programs and policies on the Oklahoma forest products industry (FPI) which accommodates industries that which may not possess constant returns to scale (CRS) in production and/or are not price-takers. Econometric analysis is used to estimate elasticity of factor substitution, returns to scale factor and the technology of the FPI in Oklahoma. Regional CGE modeling based on the cost approach is adapted to accommodate imperfect competition in the raw material market. This model consists of six sectors, three factors of production, government and households. The monopsonistic market structure is assumed for the raw material market: between FPI and forestry sectors. To assess welfare changes on forest region residents using the developed regional general equilibrium model, a simulation analysis is carried out for a pro-competitive shock in the raw material market.; Findings and conclusions. Oklahoma's forest products industry could exert monopsony power in the raw material market. The calibrated monopsony general equilibrium model was validated for SAM data of 1993. Simulation results indicate that changes at the state level are not of great magnitude. Forestry sector benefits from a pro-competitive shock in the raw material market structure are {dollar}27 million in the long run. However, other factors affect the level of welfare gains, especially, forestland ownership. Results show welfare gains when competition is inserted in the raw material markets. The procedure used here to calibrate a monopsony CGE model offers new possibilities for regional scientists interested in modeling imperfect market structures. The contributions of this paper may be affected by the assumption of constant returns to scale and the static nature of the modeling technique used. An examination of how these assumptions affect the validation of our analysis would be highly desirable.