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Effects of Input Costs, Economies of Scale, and Technological Change on International Pulp and Paper Prices

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The main objective of this study was to determine the effect of (i) varying costs of energy, labor, capital, and raw materials, (ii) economies of scale, and (iii) technological change, on international prices of pulp and paper. A theory of price formation was developed which rests on the assumption of a generalized Cobb-Douglas production function, coupled with monopolistic competition in international markets, and cost-minimizing behavior on the part of producers. The resulting price equations were estimated for wood pulp, paper and paperboard, and their major components, using data from eighteen OECD countries observed from 1961 to 1976. Judging from the magnitude of partial elasticities, paper and paperboard prices were most responsive to pulp, labor, capital, and energy price changes, in that order, whereas pulp prices were most sensitive to capital, energy, labor, and pulpwood prices, in that order. Pulp prices were more elastic with respect to energy cost than were paper and paperboard prices. Only paper and paperboard production showed important economies of scale, arising mostly in the production of paper and paperboard other than cultural paper. Technological change accounted for a decline in real prices of paper and paperboard of 1.5 to 2 percent per year during the period of observation. No similar effect was apparent in the case of wood pulp. Application of duality theory led to estimated parameters of the production functions in various subsectors of the pulp and paper industry. Conditional demand equations were also obtained, showing how relative factor prices, volume of production, and technological change affect the utilization of energy, capital, labor, and raw materials in the manufacture of pulp and paper. Forest Sci. 26:261-275.
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Keywords: Production function; cost function; monopolistic competition; pooled time series analysis

Document Type: Journal Article

Affiliations: Research Specialist Department of Forestry, University of Wisconsin-Madison

Publication date: 01 June 1980

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