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Factor Demand and Market Power

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  • Sjöström, Magnus

    () (Department of Economics, Umeå University)

Abstract

This thesis consists of five self-contained papers on factor demand and market power. The main objective of Paper [I] is to analyze potential effects on the Swedish forest sector of a continuing rise in the use of forest resources as a fuel in energy generation. The background to the problem can be found in the commitments Sweden has made concerning energy policy. Two such commitments are the phase-out of nuclear power, and a decision that the Swedish energy system should be sustainable. However, an increasing use of forest resources as an energy input may have effects outside the energy sector. In this paper we attempt to consider this by estimating a system of demand and supply equations for the four main actors on the Swedish roundwood market; forestry, sawmills, pulpmills, and the energy sector. In Paper [II], we specify and estimate a dynamic factor demand model for the Swedish pulp industry. The model is estimated using firm specific Translog cost functions, and panel data from 1972 to 1990. We find weak evidence of adjustment costs for capital. Short- and long-term elasticities are calculated and the variances are estimated using the bootstrap technique. The results suggest that the user cost of capital is a significant determinant of pulp industry investments, while output level is not. We also find that pulp industry investments are insensitive to variations in the price of electricity. Paper [III] proposes a flexible form of adjustment cost function, which allows for constant, linear, concave, or convex costs of adjustment. An empirical illustration shows that the flexible form can detect both convex and non-convex adjustment costs. Furthermore, the flexible form permits testing for the experience effect on adjustment cost. The objective of paper [IV] is to analyze the price development and price formation for wood fuel used by the Swedish district heating sector. According to previous research there is a significant potential for increasing the use of wood fuel in Sweden, at a fairly moderate cost. The basic question raised in this paper is then why this potential is not realized. Specifically we propose a methodology for testing whether the reason is that market imperfections are present. According to our results we cannot reject the efficient market hypothesis for all years. The objective of Paper [V] is to test for market power on the market for biofuels. To achieve our objective we employ a statistical model and make use of the idea of Granger causality. We use a panel data set of plant specific input prices and quantities of wood chip covering a sample of Swedish district heating plants. If past values of quantity contribute significantly to the determination of price, quantity is said to Granger cause price, which we will treat as a sign of market power. According to our findings this effect is present and we conclude that the investigated plants to some degree has market power in the market for wood chips.

Suggested Citation

  • Sjöström, Magnus, 2004. "Factor Demand and Market Power," Umeå Economic Studies 633, Umeå University, Department of Economics.
  • Handle: RePEc:hhs:umnees:0633
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    References listed on IDEAS

    as
    1. Daniel S. Hamermesh & Gerard A. Pfann, 1996. "Adjustment Costs in Factor Demand," Journal of Economic Literature, American Economic Association, vol. 34(3), pages 1264-1292, September.
    2. Lau, Lawrence J., 1976. "A characterization of the normalized restricted profit function," Journal of Economic Theory, Elsevier, vol. 12(1), pages 131-163, February.
    3. Appelbaum, Elie, 1982. "The estimation of the degree of oligopoly power," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 287-299, August.
    4. Jorgensen, Steffen & Kort, Peter M., 1993. "Optimal dynamic investment policies under concave-convex adjustment costs," Journal of Economic Dynamics and Control, Elsevier, vol. 17(1-2), pages 153-180.
    5. Atkinson, Scott E & Kerkvliet, Joe, 1989. "Dual Measures of Monopoly and Monopsony Power: An Application to Regulated Electric Utilities," The Review of Economics and Statistics, MIT Press, vol. 71(2), pages 250-257, May.
    6. Erdal Atukeren, 1994. "A note on the tests of Granger-causality between exports and economic growth," Applied Economics Letters, Taylor & Francis Journals, vol. 1(11), pages 207-209.
    7. Barnett, Steven A. & Sakellaris, Plutarchos, 1998. "Nonlinear response of firm investment to Q:: Testing a model of convex and non-convex adjustment costs1," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 261-288, July.
    8. Russell Davidson & Richard Harris, 1981. "Non-Convexities in Continuous Time Investment Theory," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 235-253.
    9. Bresnahan, Timothy F., 1989. "Empirical studies of industries with market power," Handbook of Industrial Organization,in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 17, pages 1011-1057 Elsevier.
    10. Chien-Hsun Chen, 1993. "Causality between Defence Spending and Economic Growth: The Case of Mainland China," Journal of Economic Studies, Emerald Group Publishing, vol. 20(6), pages 37-43, October.
    11. Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, vol. 75, pages 321-321.
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    More about this item

    Keywords

    demand and supply; dynamic factor demand; djustment costs; bootstrap; panel data; market power;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • L73 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Forest Products
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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