1. Market Power and Timber Pricing January 24 2013

2. 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)

3. 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)

4. Firm With Monopoly Power Q P MC MR Demand QmQm PmPm P pc QpcQpc What is the loss to society?

5. 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/cb- bc.nsf/eng/h_02760.html

6. 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

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

8. Monopsony Power ME SAE D Q2Q2 Q1Q1

9. 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

10. Trends in Apportionment in BC (March 2008) http://www.for.gov.bc.ca/hth/timten/provinc ial-map.htm  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)

11. 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

12. 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

13. BaseCommon form Usual method of determination Usual Method of assessment Land Land rentArbitraryAnnual 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 StumpageCompetitive bidding or appraisal Lump sum, annual charge, or according to harvest Rights Licence feeMore-or-less arbitrary Lump-sum or annual charge Common forms of levies on forest resources Source: Pearse, P. H., 1990. An Introduction to Forest Economics, UBC Press.; Vancouver.

14. 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. Stumpage

15. Fixed Schedules Appraisals Competitive Auctions  Bill spoke to this Alternative Stumpage Systems

16. Timber Pricing Source: http://www.for.gov.bc.ca/hva/aboutus/index.htm

17. Appraisal or residual –based pricing – “Upset Stumpage” 1.Volumes are estimated from inventory data 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 Example Source: Pearse, P. H., 1990. An Introduction to Forest Economics, UBC Press; Vancouver.

18. 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/

21. Government Forestry Revenues in BC, 1981-2012, 000’s of Canadian dollars Actual 3/2012 -$482 million 3/2011-$436 million