Journal of Forest Economics > Vol 13 > Issue 4

Market and welfare implications of the reservation price strategy for forest harvest decisions

Peichen Gong, , Karl Gustaf Löfgren
Suggested Citation
Peichen Gong and Karl Gustaf Löfgren (2007), "Market and welfare implications of the reservation price strategy for forest harvest decisions", Journal of Forest Economics: Vol. 13: No. 4, pp 217-243.

Publication Date: 05 Nov 2007
© 0 2007 Peichen Gong, Karl Gustaf Löfgren
JEL Codes:C61D84Q11Q23
Rotation ageReservation pricePrice uncertaintyTimber supplyTimber market


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Previous studies have reported significant gains from adopting the adaptive harvest strategy under conditions of timber price uncertainty. For the final harvest decision in even-aged stand management, the adaptive strategy typically means that a stand is harvested when the timber price is sufficiently high, whereas low prices are avoided by postponing the harvest. Such a harvest behavior may have significant impacts on the future price process, which in turn affects the landowner's profits. Moreover, it would certainly affect the timber-based industry and consumers. This paper assesses these impacts in a hypothetical timber market, using the Faustmann rule (FR) as a benchmark. The results show that changing from the FR to the reservation price strategy (RPS) reduces the supply of timber, thereby pushes up the price level. The RPS significantly reduces the short-run random variation of timber price. In the long run, both the mean and the variance of the timber price tend to stabilize. Depending on the anticipated price variation underlying the RPS, the expected timber price may be close to, or much higher than, the benchmark level, and the variance of price can be very large or very small. The welfare effect of the RPS is small if the anticipated variance of timber price used to optimize the RPS is small. If the anticipated variance of price is large, then the RSP leads to significant increase in the landowners’ profits and at the same time reduces the consumer surplus by a much larger amount.