Game-Theoretic Approach to Russian- Finnish Roudwood Trade

Transcription

1 Game-Theoretic Approach to Russian- Finnish Roudwood Trade Antti Mutanen & Jari Viitanen Finnish Forest Research Institute, Joensuu Seminar Towards a Progressive Forest Sector in Northwest Russia Petrozavodsk, Metsäntutkimuslaitos Skogsforskningsinstitutet Finnish Forest Research Institute

2 Contents 1. Objectives 2. Overview of Finnish Roundwood Imports 3. Theoretical Model

3 Objectives In previous studies, the models based on the assumption of competitive markets have failed to capture the special features in Russian-Finnish roundwood trade. Our main aim is to provide an alternative modelling approach for describing the import of Russian roundwood into Finland and its connections with the Finnish roundwood market behaviour. By applying and combining economic theory and evidence from recent studies we have designed a model that is both theoretically and empirically sound

4 Overview of Finnish Roundwood Imports I In 2005, roundwood imports into Finland totalled 21.1 mill. m 3 (over bark), of which 80 % originated from Russia. Since the beginning of 1990s, the import volumes have grown at an average rate of % per annum. The growth slowed down slightly in the 2000s. Despite the increased export duties on Russian coniferous roundwood as well as the export standstill at Russian border in June 2006, the Finnish roundwood import in 2006 has remained at the same level as in the record year The proportion of imported roundwood in the Finnish forest industries total wood consumption has been about 20-25% (29% in 2005). In Eastern Finland the proportion of imported wood from wood consumption is about 45%

5 Overview of Finnish Roundwood Imports II Volumes of roundwood imports from Russia 1000 m Chips Spruce sawlogs Pine sawlogs Birch sawlogs Spruce pulpwood Pine pulpwood Birch pulpwood Shares of timber assortments in the total volume of roundwood imports from Russia 100% 80% 60% 40% 20% 0% Chips Spruce sawlogs Pine sawlogs Birch sawlogs Spruce pulpwood Pine pulpwood Birch pulpwood

6 Overview of Finnish Roundwood Imports III Price Development Birch pulpwood Spruce sawlogs /m3 (over bar) Delivery price of birch pulpwood in East Finland DAF Import price of Russian birch pulpwood /m3 (over bark) Delivery price of spruce sawlog in East Finland DAF Import price of Russian spruce sawlog

7 Overview of Finnish Roundwood Imports IV Future growth in wood consumption will be moderate in Finland. Even without the raise of export duties, price competitiveness of imported Russian roundwood has decreased in relation to domestic Finnish roundwood. Increasing demand for wood products in Russia will result in increased domestic use of wood as raw material. It is expected that Import of coniferous sawlogs will decrease (already stagnated) Import of birch pulpwood will remain at a high level due to inadequate domestic birch resources in Finland and the lack of birch pulpwood using industry in Russia

8 Theoretical Model I Why a model based on game theory? 1. In Finland the buyers of roundwood are highly centralised: the three largest companies purchase about 80% of the wood transacted in roundwoood market. 2. These same companies and their subsidiaries are notable actors in Russian roundwood markets as well. 3. As a counterforce for concentrated buyer side, the largest seller segment, the non-industrial private forest owners are highly organised in Finland and until the late 1990s the representatives of forest industry and private forest owners negotiated and agreed on the stumpage prices and even sales volumes. 4. Russian roundwood dealers selling wood to Finland seem to monitor the functioning of Finnish roundwood markets and to adjust the wood prices accordingly

9 Theoretical Model II Fundamental questions in designing a game-theoretic model: 1. Who are the relevant players? (Producers, consumers, state authorities etc.) 2. What are the decision variables? (Price, quantity, production capacity etc.) 3. In which order are the decisions made? (Simultaneously, stages) 4. Do players co-operate? (Negotiations over the decisions, distribution of negotiating power etc.) 5. How is information distributed? (players payoff functions are of common knowledge, there is uncertainty involved etc.)

10 Theoretical Model III Overview of the game: Players: Finnish forest industry enterprise (buyer of roundwood) Forest Management Association (representative of organised nonindustrial forest owners, seller of roundwood in Finland) Large Russian roundwood dealer (seller of roundwood in Russia) Decision variables: Production capacity Stumpage price of Finnish roundwood Price of Russian roundwood sold to Finnish forest industry enterprise Information: Full and complete. Pay offs are commonly known and each player know the current, the following and the past stages of the game

11 Theoretical Model IV Course of the game: Players make their decisions alternately in four stages. The Finnish forest industry enterprise acts as a Stackelberg leader in relation to roundwood sellers, whereas the Finnish Forest Management Association acts as a Stackelberg leader in relation to Russian roundwood dealer. Stage 1. Finnish forest industry enterprise decides on the amount of capital stock. Stage 2. Forest Management Association decides on the stumpage price of Finnish roundwood. Stage 3. Russian roundwood dealer decides on the price of Russian roundwood. Stage 4. Finnish forest industry enterprise purchases Finnish and Russian roundwood according to their price levels

12 Theoretical Model V The payoff functions are: Finnish forest industry enterprise: max π = Pf ( k, x, q) rk p x( p, p ) p q( p, p ) c x x q q x q where π= profit, P=market price of end product, f(.)=production function, p x =price of Finnish roudnwood, p q =price of Russian roundwood, x(.)=volume of Finnish roundwood, q(.)=volume of Russian roundwood, r=price of production capacity (interest rate), k=amount of capital stock (production capacity) and c=fixed costs. It is assumed that capital and roundwood are complements in production (f xk >0, f qk >0) but Finnish and Russian roundwood can be either complements (f xq >0) or substitutes (f xq <0) Forest Management Association: max U = p x x x - 0 e(x) dx, where U=utility of forest owners from selling roundwood, e(x)=reservation price Russian roundwood dealer: max W = p q q c q q where W = sales proceeds, c q = unit costs of roundwood procurement

13 Theoretical Model VI The game is solved using backwards induction and implicit function theorem. The result gives the following five functions: Stage 1: Demand function for optimal capital stock, k*=k*(p x*,p q *,P,r) Stage 2: Price function for optimal price of Finnish roundwood, p x *=p x *(x*,q*, P, k,) Stage 3: Price function for optimal price of Russian roundwood, p q *= p q *(x*,q*, P, k,) Stage 4: Demand functions for optimal volumes of Finnish and Russian roundwood, x*= x*(p x *,p q *, P, k*) and q*= q*(p x *,p q *, P, k*) Comparative static results depend highly on whether Russian and Finnish roundwood are substitutes or complements in production

14 Theoretical Model VII Main outcomes: The optimal prices of Finnish and Russian roundwood are interdependent but they may differ in the equilibrium. The model produces demand functions for Finnish and Russian roundwood but not supply functions. Previous empirical evidence supports this, as supply function for Russian roundwood has been difficult to identify. The changes in world market price for final products can affect the demands for Finnish and Russian roundwood asymmetrically. Future activities: Full description of the model will be published in early Empirical testing of the model with time series data. The most interesting case is the import of spruce sawlogs from Russia and its effects on roundwood markets in East Finland

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