Spatial pricing patterns and market power: Theory and evidence from the British Columbia interior pulp fibre market

The large scale and transportation costs of most wood producing industries, especially in the pulp and paper sector, typically leads to high levels of concentration in regional markets for wood fibre. This in turn has meant that the possible exercise of market power in forest product input and output markets has been long recognized. A recurring issue in British Columbia has been the prices paid by local pulp mills for wood chips used to produce pulp. The provincial government has directly and indirectly regulated the pulp fibre market in the Interior of the province both during its inception and throughout much of the past forty years. Government intervention led to a non-competitive outcome marked by low prices for wood chips that were characterized by the fact that prices paid to suppliers were invariant with respect to distance. A model shows how this particular equilibrium was inherently unstable, as evidenced by prices increasing four-fold after a change in firm behaviour.; Because the province owns of most of the forest land in the province it has developed a set of goals concerning the provincial forest industry that include providing employment, maintaining community stability, and collecting revenues from the harvest of timber on behalf of the public. The provincial government faces a series of policy questions regarding the forest industry in terms of harvest levels, regulation, trade policy, and stumpage design. If past trends continue, pulp and paper mills are likely to become the largest users of the forest resource within the next five years, while provincial forest policy remains focused on the production of solid wood products. At the same time, increased fibre costs due to a combination of government initiatives and decreasing fibre availability we affecting the entire forest industry in BC. For pulp and paper mills their fibre costs can determine their competitiveness in world markets. How the government responds to these issues will affect both fibre flows within the sector as well as the future structure of the forest sector.