An econometric study of Oregon's log and lumber markets: Estimation of price elasticities using two approaches

Abstract

Estimation of price elasticities for regional and state-level timber and lumber markets is essential for conducting market-level analyses of how new policies or different types of market shocks might impact, or have impacted, the market outcomes and the economic returns experienced by market participants, such as landowners and lumber mills. By using two standard estimation approaches, 2SLS and VECM, we estimate the price elasticities from a system of simultaneous equations representing the log and lumber markets in Oregon. In contrast to previous studies, we estimate the elasticity coefficients by treating the markets for the two outputs as a whole system, meaning that both product prices are endogenous. Our empirical results show that the point estimates for price elasticities from the two approaches are reasonably similar. However, there are also differences, especially in the case of the price elasticity of lumber demand. Additionally, most of the price elasticity estimates from the 2SLS are statistically not significant with our data, whereas the VECM estimates are all statistically significant. At a general level, our results show that the demand and supply of logs and lumber in Oregon are both price inelastic, which partly helps to explain the considerable degree of variation typically witnessed in prices in both log and lumber markets.