Access to Resources: A Barrier to New Competition in the Southern Pine Lumber Industry

It has been widely assumed that because of the large number of firms and the homogeneity of output that the lumber industry is a textbook example of a competitive market. Access to resources, however, is shown to constitute a barrier to entry into the industry. The study established that an optimum size southern pine sawmill has an annual one-shift capacity of 30-45 MMBF per year. The required investment for market entry at this level is a relatively low $4-$6 million. This capital requirement is not in itself a barrier to entry; however, existing mills of optimum size exhibited substantial backward integration into logging and sawtimber production. For a firm entering the market at the optimum level to be competitive, it was assumed that it should (1) invest in five mechanized harvesting systems and (2) secure one-third of its annual stumpage requirement through either negotiation of cutting agreements, or outright purchase of timberlands. To comply with these assumptions would require an additional investment in excess of $15 million, three times the cost of physical processing facilities for an optimum size mill. If an entering firm elects instead to purchase 100 percent of its annual requirement on the open market, it would account for 29.3 percent of the sawtimber drain in its active procurement area and would undoubtedly bid up the price of sawtimber. The firm might initially pay a premium for sawtimber to insure an adequate supply of raw material although any differential would be expected to close over time. Regardless of which scheme of raw material supply is used, a substantial barrier, access to resources, faces a firm entering at the optimum level of 30-45 MMBF per year. This barrier represents a significant market imperfection and contributes an additional degree of inelasticity to the supply function for southern pine lumber.

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