A Game-Theoretic Approach to the Roundwood Market with Capital Stock Determination

The paper provides a framework to approach price and quantity determination in the roundwood market from a slightly new perspective. In the spirit of the trade union literature, a model of timber price determination is formulated according to which the forest owners' association determines timber prices and then forest firms unilaterally decide upon the timber to be used. The novelty here is to incorporate investment decisions of firms as a strategic factor into the model. The structure of the model is the following. The game is played in two stages. First, the forest owners' association and the firms in the forest industry decide on timber prices and capital stock, respectively. In the second stage, the firms determine timber demand conditional on the timber price-capital stock game, so that the equilibrium concept is the subgame perfect Nash equilibrium. This game-theoretic model is applied to the annual data from the Finnish paper and pulp industry over the period 1960-1992. Estimation and testing results concerning the price and quantity determination of timber as well as capital stock determination are generally favorable for the hypotheses presented. In particular, diagnostics and various test procedures indicate that these equations outperform conventional specifications derived from the theory of the demand for factors of production.