AN INSTITUTIONAL AND ECONOMIC ANALYSIS OF THE ARIZONA TIMBER INDUSTRY

Abstract

The purpose of this study was to investigate the pricing behavior between the Forest Service, the seller of national forest timber, and the firms in the Arizona timber industry, and buyers of this timber. The period of investigation was for the 1974 timber sales and the ultimate purchases of these sales through 1979. The market structure for the sale of national forest timber is one of monopoly on the part of the Forest Service and that of oligopsony for the industry. Two factors beside the market structure affect the behavior of the market participants. One, the interaction of the participants is constrained by several legal and institutional factors. Two, excess capacity exists in the industry and the supply of timber in Arizona is relatively fixed. Three methods were used in the study to analyze the behavior of the participants. First, the appraised value of the timber was compared to the residual value that could be afforded by each mill, using individual mill costs. Second, a linear transportation model was employed to determine the optimal allocation for the 1974 timber sales. The optimal results were then compared to the actual disposal for further analysis of the pricing behavior. Third, estimated profits were determined for the actual purchases of the 1974 sales and the results compared to the estimated profit allowances in the original appraisal. The results of the analysis showed the following. (1) The appraised values for the 1974 timber sales appeared to be overvalued. (2) The actual allocation of the 1974 sales was essentially optimal. The exceptions to the optimal allocations were generally where legal constraints prevented it. (3) Active bidding for the timber was minimal. Bidding among the firms included in the study occurred on slightly over 2% of the volume of the sales. The major conclusions reached from the analysis were that certain adjustments should be made in the appraisal process. These adjustments should be made for the lag effects of costs, the accuracy of imputed costs used, and the concept of profit allowance used. Also, the industry must improve its efficiency, especially in the area of utilizing the waste material from lumber production. The industry should also reduce its capacity to have a better balance between supply and demand, as supply is relatively fixed. Additionally, the behavior of the participants was determined to be as expected in view of the constraints, fixed supply, and locational factors. It is recommended that long-run study of this nature be conducted to offer more conclusive results.