Estimating the demand and market power of a firm in sawn wood markets

Estimating the Demand and Market Power of a Firm in Sawn Wood Markets The high concentration levels and the static structure of the sawn wood markets in Finland give reason to believe that the firms in the market have market power. The aim of this study is to investigate whether UPM-Kymmene has market power in Finnish sawn wood markets by analyzing the elasticity of its residual demand. Based on this analysis UPM-Kymmene will get better information on the environment it operates in and can improve its sales strategies. The study is based on empirical research using time series data from UPM-Kymmene’s sales databases and also from other public sources. Based on the UPM-Kymmene’s sales volumes, four separate product groups are chosen for the analysis. The product groups include one center good and one board product for both redwood and whitewood. In the empirical part, the study follows the residual demand literature starting from Baker and Bresnahan (1988) and uses two stage least squares method to take into account the simultaneous relation between quantity sold and price. The current literature has neglected nonstationarity issues in its analyses. This study expands on the current literature and takes into account the nonstationarity inherent in economic time series by estimating also a vector error correction model using Johansen’s (1988) method. Based on the results, UPM-Kymmene does not have market power in Finnish sawn wood markets and the prices are determined by industry-wide cost and demand factors. Thus UPM-Kymmene should not try to influence the prices by cutting its production