Factor Demand and Market Power

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.