Price dynamics and spatial market structure for three U.S. southern pine timber products

Evidence of price correlations or cointegrations in timber markets is often interpreted as indicative of the competitiveness and efficiency of these markets. This conclusion is based on the assumptions that firms price F.O.B. and F.O.B. pricing in spatial markets is expected to yield results analogous to the usual competitive results in spaceless markets (i.e., firms set price equal marginal cost plus transportation costs). Competitive arbitrage is the error correction mechanism assumed through which spatial markets are linked. This conclusion could be misleading. In the presence of significant intra-regional transportation costs between spatially dispersed markets, firms have an incentive to exploit their spatial market power. Price correlations therefore may be consistent with other, non-competitive pricing schemes such as collusive basing point pricing. In this dissertation, we model the economic impacts of oligopsony in the procurement of timber in the presence of significant intra-regional transportation costs and test it on three forest products (Pine Saw Timber (PST), Pine Chip and Saw (CNS) and Pine Pulpwood (PPW)) for seven U.S. south-eastern and south-central states using quarterly data from 1976 to 2009. We find that the south-east south central market region is not a single market. However, there is evidence of market integration between 6 to 33 percent of the markets depending on the product, with the most integration occurring in higher valued product markets (PST) as predicted by our theory. Price discrimination was found in 19 to 24 percent of the markets while collusive basing point pricing exists in 13 to 18 percent of the markets. There is also evidence to support the hypothesis that interpreting price cointegrations in timber markets as market integration could be misleading given evidence that 55 to 65 percent of basing point price regions also are cointegrated.