Oligopsony in the Tire Industry

:

A Study of its Impacts on the Natural Rubber Industry in Thailand










By

Saowalak Trangadisaikul B.E., M.A. (Econ)


A Thesis submitted as part of the requirement for the award of the degree of

Doctor of Business Administration

The Faculty of Business

Charles Sturt University

Page i

Table of Contents

Abbreviations .......................................................................................................................... vii
Certificate of Authorship.......................................................................................................... ix
Acknowledgement...................................................................................................................... x
Abstract .................................................................................................................................... xi
Chapter 1 .................................................................................................................................... 1
Introduction ................................................................................................................................ 1
1.1 Introduction ...................................................................................................................... 1
1.2 Justification for the Research ........................................................................................... 2
1.3 Methodology .................................................................................................................... 4
1.4 Empirical Application ...................................................................................................... 5
1.5 Outline of the Thesis ........................................................................................................ 6
Chapter 2 .................................................................................................................................... 7
Rubber as a Product: Nature, Production, Uses and Market ...................................................... 7
2.1 Introduction ...................................................................................................................... 7
2.1.1 Biology of Rubber Trees ........................................................................................... 7
2.1.2 Rubber as a Commercial Product .............................................................................. 7
2.1.3 Synthetic Rubber ....................................................................................................... 8
2.2 Natural Rubber Location and Production ........................................................................ 9
2.2.1 Location .................................................................................................................... 9
2.2.2. Production Methods ............................................................................................... 11
2.3 Uses of Natural Rubber .................................................................................................. 14
2.3.1 Uses of Natural and Synthetic Rubber in Tire Sector ............................................. 18
2.3.2 Natural Rubber and the Tire Industry ..................................................................... 20
2.4 Natural Rubber Market and Prices ................................................................................. 20
2.4.1 Thai Domestic Natural Rubber Prices .................................................................... 21
2.4.2 Thai Natural Rubber Export Prices ......................................................................... 24
2.4.3 Other Export Market Prices .................................................................................... 25
2.5 Thai Natural Rubber Market Structure .......................................................................... 25
2.5.1 Primary Producers Market ...................................................................................... 27
2.5.2 Export Market ......................................................................................................... 28
2.5.3 Tire Manufacturing Market ..................................................................................... 30
2.6 Global Level Natural Rubber Market Structure ............................................................. 31
2.6.1 World Primary Production ...................................................................................... 31
2.6.2 World Export Market .............................................................................................. 32
2.6.3 Natural Rubber Export Country and Buying Country Concentration ..................... 33
2.6.4 World Tire Market .................................................................................................. 37
2.7 Conclusion...................................................................................................................... 41
Chapter 3 .................................................................................................................................. 45
Market Power and the Natural Rubber Industry ...................................................................... 45
3.1 Introduction .................................................................................................................... 45
3.2 Competitive and Non Competitive Markets .................................................................. 45
3.3 Equilibrium Conditions in Input Markets ...................................................................... 46
3.4 Oligopsony Analysis ...................................................................................................... 50
3.4.1 Buyer Concentration Approach .............................................................................. 51
3.4.2 Structural Changes and Market Power Analysis ..................................................... 52
3.4.3 Cournot Model with Conjectural Variation Approach ........................................... 53
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3.5 Studies of Oligopsony Market Power Analysis with Conjectural Variation
Approach ................................................................................................................ 58
3.6 Empirical Studies of the Tire Industry ........................................................................... 70
3.6.1 Tire Production ....................................................................................................... 70
3.6.2 Tire Demand ........................................................................................................... 72
3.7 Empirical Studies of the Natural Rubber Industry. ........................................................ 73
3.7.1 Natural Rubber Supply Elasticity ........................................................................... 73
3.8 Natural Rubber and Price Stabilization .......................................................................... 74
3.8.1 Natural Rubber Prices and Currency Exchange Rates ............................................ 75
3.9 Conclusion...................................................................................................................... 75
Chapter 4 .................................................................................................................................. 77
A General Model of Oligopsony Market Power ...................................................................... 77
4.1 Introduction .................................................................................................................... 77
4.2 The General Model ........................................................................................................ 77
4.2.1 Optimality Condition and the Derivation of Market Power Index for Model 1 ..... 79
4.2.2 Reconciliation of the Derived Market Power Index and the Chang &
Tremblay Index ........................................................................................................ 83
4.2.3 Optimality Conditions and Derivation of Market Power Index for Model 2 .......... 84
4.2.4 The Derivation of Market Power Index for Model 3 .............................................. 85
4.2.5 The Derivation of Market Power Index for Model 4 .............................................. 86
4.3 Interpretation of the Market Power Index ...................................................................... 86
4.4 Application of the Model to Global Natural Rubber and Tire Industries ...................... 88
4.5 Conclusion and Summary .............................................................................................. 91
Chapter 5 .................................................................................................................................. 95
Data Analysis and Empirical Estimation ................................................................................. 95
5.1 Introduction .................................................................................................................... 95
5.2 Data Tests for Nonstationarity ....................................................................................... 95
5.3 Estimation of the Tire Demand Function ....................................................................... 96
5.3.1 Estimation Results for Tire Demand ....................................................................... 99
5.4 Estimation of the Natural Rubber Supply Function ..................................................... 103
5.4.1 Estimation Results of the Natural Rubber Supply ................................................ 111
5.5 Estimation of the Tire Production Function ................................................................. 116
5.5.1 US Tire Production Function Estimation .............................................................. 118
5.5.2 France‟s Tire Production Function Estimation ..................................................... 121
5.5.3 Japan‟s Tire Production Function Estimation ....................................................... 124
5.5.4 Germany‟s Tire Production Function Estimation ................................................. 127
5.6 Estimation of the Optimality Condition Function ........................................................ 130
5.6.1 US MPI Estimation Using Model 1 ...................................................................... 131
5.6.2 US MPI Estimation Using Model 2 ...................................................................... 135
5.6.3.France‟s MPI Estimation Using Model 1 ............................................................. 138
5.6.4 France‟s MPI Estimation Using Model 2 ............................................................. 141
5.6.5 Japan‟s MPI Estimation Using Model 1 ............................................................... 143
5.6.6. Japan‟s MPI Estimation Using Model 2 .............................................................. 146
5.6.7 Germany‟s MPI Estimation Using Model 1 ......................................................... 149
5.6.8 Germany‟s MPI Estimation Using Model 2 ......................................................... 152
5.7 Market Power Index Estimation Using Models 3 and Model 4 ................................... 155
5.8 Summary ...................................................................................................................... 161
Chapter 6 ................................................................................................................................ 173
Conclusions and Policy Recommendations ........................................................................... 173
6.1 Introduction .................................................................................................................. 173
6.2 Thesis Process and Outcomes ...................................................................................... 174
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6.3 Interpretation of Results and Implications for Policy Options ..................................... 178
6.4 Limitations ................................................................................................................... 188
6.5 Summary of Conclusions ............................................................................................. 189
6.6 Claims for the Thesis ................................................................................................... 190
References .............................................................................................................................. 192
Appendix ................................................................................................................................ 202
Appendix 2.1: Ownership Structures in Tire Manufacturing ............................................. 202
Appendix 2.2: International Natural Rubber Organization (INRO) .................................. 204
Appendix 5.1: Variable Tests for Stationary ...................................................................... 209
Appendix 5.2: Tests for Cointegrating Relationships ........................................................ 213
Appendix 5.3: Error Correction Models for Natural Rubber Price and Quantity .............. 214
Appendix 5.4 Variables and Data ...................................................................................... 217

List of Tables

Table 2.1 Elastomer Consumption ................................................................................... 9
Table 2.2 Areas under Natural Rubber Plantation (2004) ............................................. 10
Table 2.3 Natural Rubber Production in Thailand, Indonesia and Malaysia (1960-
2004) ............................................................................................................. 14
Table 2.4 Thai Natural Rubber Products Exports (fob Value, $US Million, 2004) ..... 17
Table 2.5 Tire Manufacture Ingredients......................................................................... 19
Table 2.6 Natural and Synthetic Rubber Used in US, France, Japan & Germany Tire
Sectors (1960-2004) ...................................................................................... 20
Table 2.7 Natural Rubber Price ...................................................................................... 21
Table 2.8 Natural Rubber Local Market Prices and Central Market Prices (1998-2007)
....................................................................................................................... 22
Table 2.9 Thai Domestic Natural Rubber Prices (1998-2007) ...................................... 23
Table 2.10 Thai Natural Rubber Export Market Prices (1996-2004) ($US/ton) ............ 24
Table 2.11 Concentration in Rubber Exporters by Number of Firms (1955-2000) ........ 28
Table 2.12 Natural Rubber Exporter Concentration by Company Sale Quantity (2000)29
Table 2.13 Thailand Tire Manufactures Capital Concentration (2003) .......................... 30
Table 2.14 Small Holdings and Estate Areas under Rubber Plantation .......................... 32
Table 2.15 World Net Exports Market Structure (2004) ................................................ 32
Table 2.16 Gross Exports from Thailand to Natural Rubber Consuming Countries
(1975 – 2000) ................................................................................................ 34
Table 2.17 Gross Exports from Indonesia Natural Rubber to Consuming Countries
(1975-2000) ................................................................................................... 35
Table 2.18 Gross Exports from Malaysia to Natural Rubber to Consuming Countries
(1975-2000) ................................................................................................... 35
Table 2.19 Export Shares of Natural Rubber Producing Countries and Natural Rubber
Imports of Consuming Countries .................................................................. 37
Table 2.20 Global Tire Sector Consumption of Natural and Synthetic Rubber (1946-
2004) ............................................................................................................. 38
Table 2.21 Concentration in Natural Rubber Consumption by Tire Producing Countries
....................................................................................................................... 39
Table 2.22 Concentration in Tire Sale Volume by Producing Countries ....................... 39
Table 2.23 Concentrations in Tire Sale Volume by Producing Companies (2000) ........ 40



Page iv

Table 3.1 Optimality Conditions for Input Employment and Input Price in Various
Types of Market Structure ............................................................................ 49
Table 3.2 Cournot Model with Conjectural Variation ................................................... 54
Table 3.3 Conjectural Variation and Market Performance ............................................. 55
Table 3.4 Comparing Conjecture Variation Definitions and Resulting Implications ..... 56
Table 3.5 Relevant Conditions in Oligopsony Studies .................................................. 63
Table 3.6 Tire Production .............................................................................................. 71
Table 3.7 Tire Demand Elasticity .................................................................................. 72
Table 3.8 Natural Rubber Supply Price Elasticity ......................................................... 74
Table 4.1 Market Power Index and Market Structures...................................................88

Table 5.1 Variable Description for the Estimation of the Tire Demand Function ......... 97
Table 5.2 Summary Statistics for Tire Demand ............................................................. 98
Table 5.3 Equation (5:1) Inverse Tire Demand Function Estimation Results ............. 100
Table 5.4 Equation (5:2): Direct Tire Demand Estimation Results ............................. 102
Table 5.5 Comparative Estimates of Tire Demand Elasticities ................................... 103
Table 5.6 Variable Descriptions for the Natural Rubber Supply Function .................. 104
Table 5.7 Summary Statistics for Natural Rubber Supply Function ............................ 108
Table 5.8 Equation (5:3) Inverse Natural Rubber Supply Function Estimation Results
..................................................................................................................... 112
Table 5.9 Equation (5:4) Direct Natural Rubber Supply Function Estimation Results
..................................................................................................................... 115
Table 5.10 Comparative Estimates of Natural Rubber Supply Elasticities .................. 116
Table 5.11 Variables Description for US Tire Production Function ............................ 119
Table 5.12 Data Summary for Variables in the US Tire Production Function ............. 119
Table 5.13 Equation (5.5US): US Tire Production Estimation Results ........................ 121
Table 5.14 Variable Description for France‟s Tire Production Function ..................... 122
Table 5.15 Data Summary for France‟s Tire Production Function ............................... 122
Table 5.16 Equation (5:5FR) France‟s Tire Production Estimation Results ................ 124
Table 5.17 Variable Description for Japan‟s Tire Production Function ....................... 125
Table 5.18 Data Summary for Japan Tire Production Function ................................... 125
Table 5.19 Equation (5:5JA) Japan‟s Tire Production Function Estimation Results ... 127
Table 5.20 Variable Description for Germany‟s Tire Production Function ................. 128
Table 5.21 Summary Statistics for Germany‟s Tire Production Function .................... 128
Table 5.22 Equation (5:5GR) Germany‟s Tire Production Function Estimation Results
..................................................................................................................... 130
Table 5.23 Equation (5:6.1US) Optimality Function for US Tire Manufacturing
(Model 1) Estimation Results ...................................................................... 132
Table 5.24 Hypothesis Tests for u
11US,
u
21US,
u
31US
(Estimation A) ............................... 133
Table 5.25 Hypothesis Tests for u
31US
(Estimation B) ................................................. 134
Table 5.26 Equation (5:6.2US) Optimality Function for US Tire Manufacturing
(Model 2) Estimation Results ...................................................................... 136
Table 5.27 Hypothesis Tests for u
12US
, u
22US,
u
32US
(Estimation A) .............................. 136
Table 5.28 Hypothesis Tests for u
12US
, u
22US
, u
32US
(Estimation B) .............................. 138
Table 5.29 Equation (5:6.1FR) Optimality Function for France‟s Tire Manufacturing
(Model 1) Estimation Results ...................................................................... 139
Table 5.30 Hypotheses Tests for u
11FR
, u
21FR
, u
31FR
(Estimation A) ........................... 140
Table 5.31 Equation (5:6.2FR) France‟s Optimality Function (Model 2) Estimation
Results ......................................................................................................... 142
Table 5.32 Hypotheses Tests for u
12FR
, u
22FR
, u
32FR
(Estimation B) ............................. 143
Page v

Table 5.33 Equation (5:6.1JA) Optimality Function for Japan‟s Tire Manufacturing
(Model 1) Estimation Results ...................................................................... 145
Table 5.34 Hypothesis Tests for u
11JA
, u
21JA
, u
31JA
(Estimation B) .............................. 146
Table 5.35 Equation (5:6.2JA) Optimality Function for Japan‟s Tire Manufacturing
(Model 2) Estimation Results ...................................................................... 147
Table 5.36 Hypothesis Tests for u
12JA
, u
22J
A and u
32JA
(Estimation A) ........................ 148
Table 5.37 Hypothesis Tests: u
12JA
, u
22JA
, u
32JA
(Estimation B) ................................... 149
Table 5.38 Equation (5:6.1GR) Optimality Function for German Tire Manufacturing
(Model 1) Estimation Results ...................................................................... 151
Table 5.39 Hypothesis Tests for u
11GR
, u
21G
R, u
31GR
(Estimation A) ............................ 151
Table 5.40 Equation (5:6.2GR) Optimality Function for German Tire Manufacturing
(Model 2) Estimation Results ...................................................................... 154
Table 5.41 Hypothesis Tests for u
12GR
, u
22GR,
u
32GR
(Estimation A) ............................. 154
Table 5.42 Hypothesis Tests for u
32GR
(Estimation B).................................................. 155
Table 5.43 Estimation Results for (5:12): Countries‟ Conjectural Elasticities in Global
Tire Industry ................................................................................................ 158
Table 5.44 Estimation Results for (5:13): Countries‟ Conjectural Elasticities in Global
Natural Rubber Supply Market. .................................................................. 159
Table 5.45 MPI Estimations Using Model 3 ................................................................. 160
Table 5.46 MPI Estimations Using Model 4 ................................................................. 161
Table 5.47 Demand and Supply Function Elasticity Estimates (n, n*,c, c*) ............... 163
Table 5.48 Natural Rubber Marginal Product Estimates(v
i
: v
US,
v
FR
, v
JA
, v
GR
) ........ 163
Table 5.49 Hypothesis Test Summary for US (Models 1 and 2) .................................. 164
Table 5.50 Conjectural Elasticities for US and MPI
US
Summary ................................. 165
Table 5.51 Hypothesis Test Summary for France (Models 1 and 2) ............................ 166
Table 5.52 Conjectural Elasticities for France and MPI
FR
Summary ........................... 166
Table 5.53 Hypothesis Test Summary for Japan (Models 1 and 2) .............................. 168
Table 5.54 Conjectural Elasticities for Japan and MPI
JA
Summary ............................. 168
Table 5.55 Hypothesis Test Summary for Germany (Models 1 and 2) ........................ 169
Table 5.56 Conjectural Elasticities for Germany and MPI
GR
Summary ....................... 170
Table 5.57 Market Power Index (Preferred Model Estimates) ..................................... 172

Table A2.1 Ownership in Tire Manufacturers .............................................................. 202
Table A2.2 World Natural Stocks and INRO Daily Market Indicator Prices (DMIP) . 207

Table A5.1 Variable Tests for Stationarity ................................................................... 209
Table A5.2 Cointegration Tests (Phillips-Perron Method on Residuals) ..................... 213

Table A5.3.1 Variable Description for Error Correction Models ................................. 214
Table A5.3.2 Error Correction Model for the Inverse Natural Rubber Supply ............ 215
Table A5.3.3 Error Correction Model for the Direct Natural Rubber Supply Function
..................................................................................................................... 216

Table A5.4 1 Variables and Data .................................................................................. 217

List of Figures
Figure 2.1 Uses of Natural Rubber ................................................................................ 16
Figure 2.2 Natural Rubber Price .................................................................................... 21
Figure 2.3 Thai Natural Rubber Prices .......................................................................... 23
Figure 2.4 World Natural Rubber Production (1900-2004) ........................................... 31

Page vi

Figure 3.1 Input Employment in a Competitive Input Market ...................................... 47
Figure 3.2a Input Employment in a Non-Competitive Input Market.............................. 48
Figure 3.3b Comparing Input Employment in Competitive and Non-Competitive Input
Markets .......................................................................................................... 48
Figure 4.1 The Flows of Natural Rubber from Producing Countries ...................................... 91
Figure 4.2a Summary Derivation of the Market Power Index for Model 1 and Model 2
....................................................................................................................... 93
Figure 4.3b Summary Derivation of the Market Power Index for Model 3 and Model 4
....................................................................................................................... 94
Figure 5.1 Tire Price Index (P) ...................................................................................... 98
Figure 5.2 Tire Price Index (P) (deflated by US consumer price index) ........................ 98
Figure 5.3 World Tire Production (Q) (mill) ................................................................. 99
Figure 5.4 World Passenger Car & Commercial Vehicle Production (VP) (mill.) ........ 99
Figure 5.5 World Passenger Car and Vehicle In-use (VI) (mill.)................................... 99
Figure 5.6 US Per Capita Income (GDPPUS) ($US deflated)..................................... 99
Figure 5.7 Natural Rubber Price (WR) (fob Malaysia Ringgit/ton) ............................. 109
Figure 5.8 Natural Rubber Price (WR) ($US/ton) ........................................................ 109
Figure 5.9 Natural Rubber Price (WR) (deflated by US consumer price index)
($US/ton) ..................................................................................................... 109
Figure 5.10 World Natural Rubber Production (XR) (1,000 tons) ................................ 109
Figure 5.11 Rainfall (RAIN) (millimetres) .................................................................... 109
Figure 5.12 Synthetic Rubber Price (WS) ($US/ton) .................................................... 109
Figure 5.13 Synthetic Rubber Price(WS) (deflated by US CPI) ($US/ton) .................. 110
Figure 5.14 Japan‟s Currency Exchange Rate (ERJA) (100 Yen / $US) ...................... 110
Figure 5.15 Japan‟s Currency Exchange Rate (deflated by Japan‟s CPI) (ERJA) (100
Yen / $US)................................................................................................... 110
Figure 5.16 Thai Currency Exchange Rate (ERTH) (Baht/$US) .................................. 110
Figure 5.17 Thai Currency Exchange Rate (deflated by Thai consumer price index)
(ERTH) (Baht / $US) ................................................................................... 110
Figure 5.18 Singapore‟s Currency Exchange Rate (ERSP) (S$ / $US) ........................ 110
Figure 5.19 Singapore‟s Currency Exchange Rate (deflated by Singapore consumer
price index) (ERSP) ($S/$US) .................................................................... 110
Figure 5.20 CR7 Concentration Ratio in World Tire Production (RQM) ..................... 110
Figure 5.21 The Ratio of Natural Rubber and Synthetic Rubber Consumption in World
Tire Sectors (RXSM)(Ratio) ........................................................................ 111
Figure 5.22 Quantity of US Tire Production (q
US
) (1,000s) ......................................... 120
Figure 5.23 Quantity of Natural Rubber Used in US Tire Sector (xr
US
) (1,000s) ........ 120
Figure 5.24 Quantity of Synthetic Rubber Used in US Tire Production (xs
US
) (1,000s)
..................................................................................................................... 120
Figure 5.25 World Crude Oil Price (WO) ($US/barrel) ................................................ 120
Figure 5.26 World Crude Oil Price (WO) (deflated by US consumer price index) ...... 120
Figure 5.27 US Vehicle In-Use (VI
US
) (1,000s) ............................................................ 120
Figure 5.28 Tire Production for France (q
FR
) (1,000s) ................................................. 123
Figure 5.29 France‟s Quantity of Natural Rubber Used in Tire Sector (xr
FR
) (1,000s) 123
Figure 5.30 France‟s Quantity of Synthetic Rubber Used in Tire Sector (xs
FR
) (1,000s)
..................................................................................................................... 123
Figure 5.31 France‟s Passenger Car and Commercial Vehicle Production (VP
FR
)
(1,000s)........................................................................................................ 123
Figure 5.32 Japan‟s Quantity of Tire Production (q
JA
) (1,000s) ................................... 126
Figure 5.33 Japan‟s Quantity of Natural Rubber Used in Tire Sector (xr
JA
) (1,000s) .. 126
Figure 5.34 Japan‟s Quantity of Synthetic Rubber Used in Tire Sector (xs
JA)
(1,000s) 126
Page vii

Figure 5.35 Tire Production for Germany (q
GR
) (1,000s) ............................................. 129
Figure 5.36 Germany‟s Quantity of Natural Rubber Used in Tire Sector (xr
GR
) (1,000s)
..................................................................................................................... 129
Figure 5.37 Germany‟s Quantity of Synthetic Rubber Used in Tire Sector (xs
GR
)
(1,000s)........................................................................................................ 129
Figure 5.38 Germany‟s Quantity of Passenger Car In-use (VI
GR
) (1,000s) .................. 129
Figure 6.1 Bilateral Monopoly Model ............................................................184

Figure A2.1 INRO Prices Setting.................................................................................. 205
Figure A2.2 RSS1 Natural Rubber Price, Changes in Stocks and INRO‟s Daily Market
Indicative Prices .......................................................................................... 208

Abbreviations
Organizations
AFET Agricultural Future Exchange of Thailand
INRO International Natural Rubber Organization
IRCO International Rubber Consortium Limited
IRSG International Rubber Study Group
OPEC Organization of the Petroleum Exporting Countries
SICOM Singapore Commodity Exchange
TOCOM Tokyo Commodity Exchange
UNTAD United Nations Conference on Trade and Development
USDA United States Department of Agriculture
Economic Terms
CR4 Four-firm Market Concentration Ratio
HHI Herfindahl-Hirschman Index
MRC Marginal Resource Cost
MRP Marginal Revenue Product
VMP Value of Marginal Product
Natural Rubber Industry Terms
ISR Indonesia Standard Rubber
MSR Malaysia Standard Rubber
RSS Ribbed Smoked Sheet Rubber
SBR Copolymer of Styrene and Butadiene
TSR Thai Standard Rubber
General Terms
Cif Cost, Insurance and Freight
Fob Freight on Board
Page viii

SDR Special Drawing Right
Exchange Rate Terms
Terms Currency Currency value / $US (2005)
ERML Malaysia Ringgit 3.79
ERJA Japan (100 Yen) 1.10
ERSP $ Singapore 1.67
ERTH Thai Baht 40.22
Source: Compiled from The Bank of Thailand
Measurement Terms
Metric System:
1 hectare = 10,000 square meters
1 acres = 4,050 square meters
Thai System
1
:
1 rai = 1,600 square meters
1 ngan = 400 square meters
1 tarangwa = 4 square meters


1
Source: service.nso.go.th/nso/data/data07/07files/unit.doc (21Aug.2009)

Page ix


Certificate of Authorship


Page x


Acknowledgement

I would like to extend my appreciation and gratitude to my supervisor, Professor Greg
Walker, for his guidance, assistance and support provided throughout my candidature as
I have completed this thesis. His comments and advice have always been constructive in
generating a relevant issues and applications for my research. Residential schools given
by Professors from Charles Sturt University and supplementary courses in statistics
organized by Sukhothai Thammathirat Open University were helpful in developing my
thesis. The two institutes also provided accommodation throughout my candidature and
the librarians in both institutes provided a lot of assistance with my research and
literature review.
Dr Sanit Samosorn and Dr Viroj Na Ranong, via interviews, provided me with useful
background knowledge on the natural rubber industry. Dr Hidde Smit, provided me
with advice during a seminar in Bangkok and sent me some of his papers that proved
useful for this thesis.
The library of The Rubber Research Institute of Thailand provided a lot of useful data
without which I would not have been able to complete my research. Further essential
data were also provided by The Office of Rubber Replanting Aid Fund.
Mrs. Valerie Webb Suwanseree helped edit my writing in the initial chapters.
My relatives and friends have always supported me, leading to this achievement.
I extend my gratitude to all of the help provided to me at each stage of my candidature.
Any remaining errors and omissions are my own responsibility.

Page xi


Abstract
Purpose:
Natural rubber is significant for producer countries such as Thailand, Indonesia and
Malaysia. However, its market structure indicates an increasing degree of concentration
from the plantation to the transformation and end product production level that includes
tire
2
manufacture. This identifies a potential for oligopsony market power to exist in
upstream markets. Specific to the natural rubber industry is the potential for its market
structure characteristics to be considered at a country level. Concentrated multinational
companies in tire producing industrialised countries who import natural rubber inputs
are potentially capable of exercising oligopsony market power on the small farms of
developing countries producing the natural rubber. Thus there is the potential for
oligopsony market power and its social welfare distortions to translate into a global
level posing the possibility that welfare might be shifted from less developed countries
producing the natural rubber input to more developed countries producing tires.
This provides the stimulus for the study conducted in this thesis in order to answer the
research question: Does oligopsony market power exist in the natural rubber input
market for the global tire industry?
Design/Methodology/Approach:
Given the possibility that market power could be exercised by tire manufactures to
either the consumer side of the tire output market or the supplier side of the natural
rubber input market, a theoretical model that accommodates the measurement of both
oligopoly and oligopsony is adopted from the literature.
This model is based on the basic theory of output production and input employment
linked to the Cournot conjectural variation approach. An optimality condition is applied
to derive an oligopsony/oligopoly market power index based on the Lerner index which
defines the degree of market power as the deviation of the input price from its shadow
price as measured by the input‟s value of marginal product. The derived index can be
expressed in a series of elasticities that are estimable. The model is estimated using four
different interpretations of the model‟s components. Hence results can be cross checked

2
The common usage English spelling in Thailand is the U.S. version: „tire‟ as opposed to the English and
Australian spelling „tyre‟. The U.S. and Thai spelling is adopted for this thesis.
Page xii

across four different approaches and transformed from a conventional industry/firm
level to a global industry/country level to answer the research question.
To implement the market power index, the global tire demand, the global natural rubber
supply and the tire production functions for the USA, France, Japan and Germany are
estimated. Data for variables in each equation are analysed and tested for
nonstationarity prior to functional specification. From each individual country data,
estimated coefficients are used for hypothesis tests for the existence of oligopsony
market power as well as oligopoly market power. If the hypothesis tests reject the null
hypothesis of competitive markets, the presence of oligopsony and/or oligopoly market
power is indicated. Derived elasticities enable the derivation of corresponding market
power indexes specific to each country.
Findings:
Results imply that the tire industries in USA, France, Japan and Germany do display
oligopsony power on the world natural rubber market. Policy implications are drawn
using the elasticity values of the market power indexes. They call for policies aimed at
raising the elasticity of demand for tire and supply of natural rubber and generating
more competition in the global tire market and natural rubber input market.
This supports the claim that typical agricultural policies designed to raise natural rubber
supply elasticity, such as price stabilization and subsidies, could be adopted to counter
oligopsony market power possessed by its downstream industries. Policies to raise
supply elasticity such as access to information, income equalization funds and risk
management are also supported.
Policy implementations to address oligopoly power in tire market support attempts to
increase competition in the global tire market from newly developing economies but
further studies are called for in this regard.
Originality/Value:
Oligopsony market power theory based on an industry/firm level is applied to a global
industry/country level. Hence, in addition to identifying economic inefficiency, this
approach is capable of identifying welfare shifting from less developed countries
producing commodity inputs to industrialised countries using the inputs. Furthermore,
the approach is innovative as it estimates a market power index derived from a Cournot
Page xiii

conjectural variation approach with four different variations. The multiple variation
approach provides stronger support for the tested outcomes.

Chapter 1 Page 1

Chapter 1
Introduction

1.1 Introduction
This thesis explores the extent of input price distortion on the world natural rubber
industry. As an agricultural commodity requiring specific plantation and climate
conditions, the production of natural rubber is restricted to certain countries,
predominantly the developing economies of Thailand, Indonesia and Malaysia of which
Thailand is the top producing country. The importance of the natural rubber industry for
Thailand is of particular significance for this thesis.
The natural rubber industry has a product chain that commences in plantation activity.
The producing trees are perennial crops and require as much as six to seven years before
they can produce the raw product latex. Latex outputs are not easily stored overtime like
manufacturing products. Production areas are spread across locations that involve
significant transport costs. Latex requires several production processes before it
becomes the rubber sheets and blocks that are important inputs for downstream
industries such as automotive tires. Much of the natural rubber production is conducted
on relatively small and low income farms. The markets for natural rubber progressively
increase in concentration for each down-stream industry stage, from field latex to un-
smoked sheets, smoked- sheets, block rubber and the major end product of automotive
and other vehicle tires. These conditions have the potential to generate a lack of
bargaining power for natural rubber farmers in the market for natural rubber.
In contrast the major end product of tire production is dominated by large multinational
companies in a relatively concentrated industry with production and sales concentrated
in wealthy developed countries. Consequently the market for natural rubber, as an input
for tire production, has both economic efficiency and welfare issues of interest. The
economic efficiency issue of concern is the possibility that tire manufacturers may be
able to exert market power in the market for natural rubber inputs such that natural
rubber prices paid to its producers are less than the marginal revenue product earned by
the tire producers from this input. The welfare issue of concern is the possible distortion
in income distribution between natural rubber producers and consumers of natural
rubber products. As natural rubber production is concentrated in a small number of less
wealthy producing countries and production of tires is concentrated in multinational
Chapter 1 Page 2

companies with developed country ownership and the sale of tires is concentrated in
these same developed countries, welfare issue of income distribution translates to a
country level. Accordingly, an assessment of oligopsony power of tire producing
countries on world natural rubber market is called for.
Therefore, this thesis examines the potential for market power in a global natural rubber
industry supplying inputs to the global automotive tire industry and the associated
welfare implications of an inefficient and inequitable income distribution that could
exist between the lesser developed countries producing the natural rubber inputs and
developed country producers and consumers of automotive tires.
The key research question is: Does oligopsony market power exist in the natural rubber
input market for the global tire industry?

1.2 Justification for the Research
Natural rubber is an important industry for the producing countries. It provides jobs for
rubber farmers and supplies raw material for rubber manufacturing industries. In the
year 2005 natural rubber production reached 2.91, 2.27 and 1.13 million metric tons for
Thailand, Indonesia and Malaysia respectively. A quantity of 2.46 million tons
3
or 40%
of the three countries‟ natural rubber outputs were used by major vehicle tire producing
countries.
4

Natural rubber production in Thailand has been growing and currently Thailand is the
top producing country. Natural rubber is one of Thailand‟s major export earning crops.
There are about 1,088,000 farms producing natural rubber. The number of natural
rubber farmers is approximately six million. About one-third of world total supply
comes from Thailand. The industry generates jobs and decreases labour migration from
the provinces to Bangkok, which helps to improve provincial population welfare. The
number of employees in government institutions which are related to natural rubber
administration is about five thousand.
However, despite this significance, the income from natural rubber and natural rubber
products comprise only 1.24 % and 0.85 % of Thai GDP respectively. Natural rubber
value added industries are still small, using only 10% of total natural rubber output.

3
International Rubber Study Group (2005)
4
This figure excludes some countries whose data for natural rubber consumed in the tire sector are not
available such as China and Russia.

Chapter 1 Page 3

However, they generate approximately40% of total natural rubber export income, which
illustrates the significance of value added products compared to intermediate rubber
products which generated approximately 60% of export income despite comprising 90%
of the natural rubber stocks that were not used for local consumption. Four economic
regions consumed up to 72% of Thai natural rubber exports (see Chapter 2): namely
Japan (38%), USA (12%), France (12%) and other EU countries (10%) during the
studied period.
5
The global tire industry is dominated by a few well-known producer
countries. The average world tire sale volume concentration ratio for the period 1960-
2000 for the top four producing countries was 77 %. The largest producers in 2000
were: Japan (30%) followed by USA (22%), France (19%) and Germany (7%).
6
Thus,
enhanced by the collapse of the International Natural Rubber Organization in 1999, the
potential for market power to be applied by a small number of multinational tire
manufacturers in the market for natural rubber is of considerable concern for natural
rubber producer countries such as Thailand.
This concern is related to the concept of market power and its consequences. The
conceptual basis is found in industrial economics. The consequences are that market
power can adversely affect economic welfare. Economic welfare depends on market
performance, which in turn is seen by mainstream industrial economic theory to be a
consequence of market structure. A concentrated market structure could enable a few
large firms to exploit consumers and input suppliers by producing at a lower than
optimal output level at higher than optimal output prices with lower than optimal
employment of inputs at lower than optimal input prices.
This outcome is unambiguously predicted in the extreme case of a monopoly producer
who is also a monopsony purchaser of inputs. Here the monopolist is in receipt of
economic rents that are generated in the output market by a price that is higher than the
marginal cost of the output sold and in the input market by paying an input price that is
less than the value of the marginal product derived from that output. Assessment of the
price – marginal cost differential and the value of marginal product – input price
differential is the fundamental approach to economic evaluation of output and input
market power respectively.

5
Chapter 2, Table 2.16
6
Chapter 2, Table 2.22
Chapter 1 Page 4

However, in the case of oligopoly and oligopsony, where there are a few firms,
economic theory does not provide an unambiguous predicted outcome. The outcome is
dependent on the conduct of the firms in reaction to each other. They may employ a
variety of strategies, resulting in a variety of outcomes. The resulting market
performance may or may not approach the optimal theoretical performance outcome. It
thus becomes an empirical question that requires case by case assessment of the price –
marginal cost differential and the value of marginal product – input price differential to
identify oligopoly or oligopsonistic market power respectively.
A consequence of possible market power that applies to this particular application is
that tire producers are located primarily in developed industrialized countries whereas
natural rubber is produced by small-scale farmers in developing agricultural countries.
Hence, if there are market power rents being earned from market power, then economic
welfare gains are being transmitted from less developed countries to more developed
countries. This enhances the concern over market power for the industries in question
and calls for analysis at a country level as the consequences of exploitation, leading to
economic welfare distortion, could occur at a national level.

1.3 Methodology
The literature on market power assessment is heavily focused on oligopoly applications
as opposed to assessment of oligopsony applications. Very few studies have been
applied to oligopoly and oligopsony power simultaneously and no study has been found
that analyses the markets researched in this thesis. Papers of special interest to the
methodology adopted in this thesis are Chang & Tremblay (1991) and Chang &
Tremblay (1994). These papers develop theoretical models that simultaneously assess
the market power on both the output and input market sides. This allows for tracing of
potential oligopsony power for an input market such as natural rubber and its
interrelationship with a potential oligopolistic downstream output market such as tire
manufacture. The model generates an index measure of market power for both market
types that is composed of empirical variables such as price and conjectural elasticities.
The methodology is based on comparing the value of marginal product (VMP) between
the profit maximizing optimal VMP and the observed marginal resource costs (MRC)
(see Chapter 3). The measurement is simplified to a single market power index
comprising four estimable elasticities. The index is capable of identifying the market
Chapter 1 Page 5

structure of the input and output markets ranging from competitive/competitive to
oligopsony/oligopoly and monopsony/monopoly performance (see Chapter 4). The
index is capable of covering the range of potential market conditions. For example, on
the industry level, given market shares as a weight, the Chang & Tremblay index
approaches the Herfindahl-Hirshman index. When each firm has equal market shares,
the case approaches a Cournot case. The index can also accommodate the
monopsony/monopoly Robinson case and the Lerner index case of market power in the
output market without market power in input markets.
This thesis extends the Chang & Tremblay (1991) model, to create a general model with
four variations depending on the interpretation and estimation approach adopted for the
elasticity terms involved. The development of this general model is described in
Chapter 4.
A further extension of the model is its application at a global market level with country
level output and input markets as opposed to the traditional firm – industry within a
country level application that is commonly found in industrial economics.
The model is empirically estimated and applied to the four major tire producing
countries, namely the USA, Japan, France and Germany as purchasers of natural rubber
inputs from the world natural rubber market which is dominated by three major supplier
countries, namely Thailand, Indonesia and Malaysia. Particular focus is placed on the
implications of the market power interrelationships in these markets for Thailand which
is the top natural rubber supplying country.

1.4 Empirical Application
The empirical analysis and results are provided in Chapter 5. The analysis involves
estimation of a number of demand and supply functions including: a world tire demand
function; tire production functions for each country; a world natural rubber supply
function and optimality condition functions for each country. These estimations are
used to derive values for key variables that are required for market power index
construction including: demand and supply elasticities, marginal products and
conjectural elasticities for the tire market (output) and natural rubber market (input) for
each country. These variables are then used to construct market power indexes for each
country for both their tire output and natural rubber input markets. In addition, in order
to accommodate a number of theoretical and empirical challenges encountered, the four
Chapter 1 Page 6

alternative approaches to index derivation are applied (see Chapters 4 and 5 for Models
1 to 4).
Results support the presence of the oligopsony market power in the natural rubber input
market for tire manufacture on a country level basis.

1.5 Outline of the Thesis
Chapter 1 provides an introduction to the thesis, the research problem, the relevance of
the study and its justification, a brief outline of the methodology used, and the basic
conclusion. Chapter 2 presents an overview of the natural rubber industry in Thailand
and at the world level and its relationship to the global tire industry. Chapter 3 surveys
the theoretical base for economic analysis of market power and the relevant literature.
The methodology to be applied, in the form of a general empirical model, is developed
in Chapter 4. Chapter 5 describes the empirical application of the model developed in
Chapter 4 to the tire and natural rubber industries. Results are presented and discussed
in Chapter 5. Chapter 6 provides a conclusion to the thesis and includes a discussion of
the implications of the findings for the natural rubber industry with particular emphasis
on Thailand. Policy options are also discussed.







Chapter 2 Page 7

Chapter 2
Rubber as a Product: Nature, Production, Uses and Market

2.1 Introduction
In 1770 an English chemist, Joseph Priestley, received a bouncing ball from a
colleague. He noticed that the interesting object could eliminate lines that are written by
pencils. He therefore named the material rubber. Rubber has since then been applied to
produce many useful objects that help develop a modern society. Its original source was
latex, a natural product from tree sap. However, in modern times, due to growing
demand, synthetic rubber derived from petroleum was invented to provide additional
sources of rubber.

2.1.1 Biology of Rubber Trees
There are more than 200 species of plants that produce rubber latex. However, there are
only two species that have become commercially significant. They are Hevea
Brasiliensis and Guayule bush. It is Hevea Brasiliensis that produces 99% of natural
rubber consumed today. Its origin is in Brazil. It has been introduced to other tropical
areas such as Malaysia, Indonesia, Thailand, India, and Sri Lanka. It has also been
planted in some African countries.
Due to high demand in recent years and increasing costs of synthetic rubber production,
there have been attempts to boost natural rubber supply by cultivating Hevea trees in
areas far from equator zones. Research on substitute trees such as the Guayule bush
found in Mexico and south western parts of USA is in progress as are attempts to
produce natural rubber by gene technology.

2.1.2 Rubber as a Commercial Product
Since the 11
th
century the use of Hevea latex has been known in Central and South
America. However, it was not until 1736 that the first sample material from latex was
sent to Europe by the French scientist Charles Marie de La Condamine. More than thirty
years later, in 1770, the material was first named rubber by Joseph Priestley. In 1818,
rubber was first applied to modern uses such as raincoats. Rubber was first applied to
industrial uses after Charles Goodyear, in 1839, discovered a process to transform
Chapter 2 Page 8

rubber into more flexible forms. He is said to have accidentally dropped a piece of
rubber and some sulphur into fire. After retrieving the material it was found to be
stronger and more elastic. The process of mixing rubber with sulphur under heating is
called vulcanization. In 1887 John Boyd Dunlop patented his pneumatic tire.
Subsequently the supply of rubber was depleted by strong demand. Hence British
rubber traders commenced cultivation of huge rubber plantations in India, Malaysia and
Ceylon. It was during this period that Hevea trees were first introduced to Thailand by
Phraya Ratsadanupradit Mahison Pakdi (Kor Sim Bee) in 1899.

2.1.3 Synthetic Rubber
Since the 1900‟s there have been many experiments to improve rubber quality. In 1910
sodium was found to be a catalyst for the polymerization process and this meant it was
possible to synthesize rubber by polymerization from a variety of molecular links. In
WWI Germany was cut off from natural rubber supplies, so they invented 2,500 tons of
synthetic rubber from dimethyl butadiene. Later, during WWII Japan gained control of
major natural rubber sources in Asia. This led the US to develop more than one million
metric tons of synthetic rubber during 1941-1944. In order to avoid having to rely on
overseas rubber supplies, other countries also produced their own synthetic rubber
supplies. Synthetic rubber thus became more common and its output reached 4 million
tons after the Korean War. Since then synthetic and natural rubber production and
consumption have grown in rough balance.
Rubber materials comprise millions of long and tangled polymeric molecules. Each
polymeric molecule consists of tens of thousands of linked isoprene molecules. Each
isoprene molecule of natural rubber has 13 atoms of carbon and hydrogen. Thus it is
known chemically as polyisoprene. If the polymer strands anywhere in the mass of
rubber are pulled, they can straighten and uncoil then re-coil when the pulling is
stopped.
7

Although natural rubber and synthetic rubber are similar in chemical and physical
properties, they are produced differently. Natural rubber is a natural plantation crop. As
such it is less stable both in quantity and quality. However, it is environmentally
friendly. On the other hand, synthetic rubber output is more stable but lacks the full
qualities of natural rubber and as it is derived from petroleum, it is exposed to

7
Polymers are huge chainlike molecules composed of many smaller molecular links.
Chapter 2 Page 9

fluctuations in the world oil price. Table 2.1 displays the relative consumption rates in
recent years.

Table 2.1 Elastomer Consumption
(1,000 metric tons)
Year Natural Rubber Synthetic Rubber Total
2004 8,280 (41%) 11,800 (59%) 20,080
2005 9,001 (43%) 11,917 (57%) 20,918
Source: compiled from International Rubber Study Group (various copies).
From Table 2.1 it can be seen that world elastomer consumption in recent years has
been more than 20 million metric tons annually and is split roughly 40% to 60%
between natural and synthetic rubber.

2.2 Natural Rubber Location and Production
Natural rubber production is linked to the location of tree cultivation, latex tapping, the
production of rubber sheets and block rubber.

2.2.1 Location
Natural rubber trees were first discovered in the Amazon basin of South America
including Brazil, Bolivia, Venezuela and Peru. Historically more than 90% of natural
rubber was exported from Brazil. However, when natural rubber was commercialized,
natural rubber production could not meet demand because of natural restrictions on
production. First natural rubber was produced from wild natural rubber trees in
rainforests hence, production was limited. Secondly, the tapping cost structure was high.
The high costs were caused by tough working conditions including health problems
such as yellow fever and malaria in the forests. There was a scarcity of rubber tappers
and production facilities on top of high transportation costs from Brazil. In addition
tapping was restricted to the months of August to January to avoid the rainy season.
Consequently the demand for natural rubber soon outstripped the production capacity of
Brazil (Zephyr & Musacchio, 2002).


Consequently, attempts were made to plant more rubber trees in Southern parts of Asia.
Due to appropriate management and a suitable climate, Southeast Asia became the
Chapter 2 Page 10

essential geographic area for natural rubber supply. Currently there are three countries
that are the key supply sources of natural rubber: Thailand, Indonesia and Malaysia.
Other producing countries are in South Asia such as India, Sri Lanka and newcomers
such as Vietnam, Lao, Cambodia and Myanmar. In addition there is some supply from
China and Africa. By 2004 there was a total of 9,335.6 million hectares of rubber
planted globally.
Table 2.2 displays areas under natural rubber plantation for the year 2004.

Table 2.2 Areas under Natural Rubber Plantation (2004)
Country Area (1,000 hectares) % of Total
Asia
Indonesia 3262.0 34.94
Thailand 2083.4 22.32
Malaysia 1282.0 13.73
China 600.0 6.43
India 578.0 6.19
Vietnam 450.9 4.83
Sri Lanka 128.9 1.38
Myanmar 104.8 1.12
Philippines 92.0 0.99
Cambodia 52.3 0.56
Bangladesh 46.7 0.50
Papua New Guinea 13.7 0.15
Total area 8694.7 93.13
Africa
Nigeria 150.0 1.61
Liberia 108.9 1.17
Cote d’ Ivoire 95.8 1.03
Cameroon 48.3 0.52
D R of the Congo 35.0 0.37
Chapter 2 Page 11

Table 2.2 (continued)
Ghana 16.9 0.18
Gabon 13.0 0.14
Total area 467.9 5.01
South America

Brazil 117.3 1.26
Guatemala 44.5 0.48
Mexico 11.2 0.12
Total area 173 1.85
Total World Area 9335.6 100%
Source: Compiled from International Rubber Study Bulletins.
In 2004 Asia had 8,694,700 hectares (93%) of world natural rubber planting area
followed by Africa (5%) and South America (2%). Indonesia, Thailand and Malaysia
are the three largest producing countries, sharing 35%, 22% and 14% respectively for a
total of 71% of total world production. China, India and Vietnam form the second
largest group of countries producing 6%, 6%, and 5% respectively for a total of 17%.

2.2.2. Production Methods

2.2.2.1. Natural Rubber Plantation
In plantations a Hevea tree requires five to seven years to mature. They can then be
tapped for latex until they reach 30 years of age. Latex yield depends on the type of tree
clone and environmental conditions. Clone properties determine average yields,
productive years, pre-mature periods before tapping, wind susceptibility, resistance to
diseases and pests, and soil and terrain requirements. Average yield is around 250
kilogram per rai (1,600 kilogram per hectare). The clone that is mostly planted in
Thailand is RRIM600. The Rubber Research Institute of Thailand (RRIT) is actively
involved in research to develop more productive clones.

2.2.2.2.Tapping Natural Rubber Latex
Latex from Hevea trees accumulates in small vessels that spiral around trunks. To
collect latex, workers tap the Hevea tree by shaving off a slanted strip of bark halfway
Chapter 2 Page 12

around the tree, about 0.80 centimetres deep. It takes a few hours for the flowing latex
to dry up from each cut. Workers repeat tapping every other day, shaving the bark
below the previous cut. When the cut is about 30 centimetres above the ground, they tap
the other side of the tree leaving the first side to renew. There are attempts to develop
tapping technology in order to save labour cost including, puncture tapping, which uses
needles to tap instead of cutting the trees and technologies to nourish the tree in order to
produce more latex per tapping.
Preservative chemicals such as ammonia and formaldehyde are added to the tapped
latex in order to keep it from crumbing before being gathered and transported to
manufacturing factories. Production quantity depends on the area cultivated. Output per
hectare depends on premature periods, clone qualities, and growing nurseries. In
troubled economic times, farmers tap more intensely and hence cause damage to long-
term productivity.

2.2.2.3 Producing Rubber Stocks
There are a variety of natural rubber products at this stage. All are produced from fresh
latex which is tapped daily, except in rainy days. Major variations are ribbed-smoked
sheets, block rubber and concentrated liquid rubber.
At the factories latex is sieved to remove dirt. It is then blended with water to maintain a
uniform standard of rubber element which is 30%-40%. Some latex is transformed to
concentrated latex at this stage. Concentrated liquid latex has about 60% of natural
rubber substances. It is used in producing dipped rubber products including elastic
fabric, rubber thread, foams, adhesives and coating. Some latex is processed into a
variety of products, depending on drying condition and pigments added, such as pale
crepe rubber, which is used in footwear industry. Concentrated latex accounts for about
10% of rubber production.
The rest of the latex is transformed into other kinds of intermediate rubber stocks such
as rubber sheets and block rubber. To produce rubber sheets, latex is diluted and then
acid is added. Rubber particles bunch together and the coagulated rubber is then rolled
within 18 hours, to squeeze out water. Every 1.4 kilograms of latex produces 0.5
kilogram of rubber. The rubber is then left to dry and is smoked in smoking houses. The
smoked rubber sheets are collected a week later and packed into bales of different
grades from grade 1 (RSS1) to grade 5 (RSS5). Rubber sheets are used mostly in the tire
Chapter 2 Page 13

industry. Block rubber is made from mixing rubber sheets and coagulated rubber and is
also mostly used in the tire industry.
Some natural rubber farmers transform fresh latex into un-smoked sheets before selling
to factories. The process is to mix fresh latex with certain chemicals, which help the
latex to dry and form into sheets. These are called un-smoked sheets. Un-smoked sheets
are delivered to rubber smoking factories which turn them into smoked sheets.
Block rubbers are produced from mixing certain rubber outputs such as cup lump
(rubbers that are left in utensils that contain fresh latex) and ribbed-smoked rubber.
Block rubbers are called Thai Standard Rubber (TSR) in Thailand, Malaysia Standard
Rubber (MSR) in Malaysia and Indonesia Standard Rubber (ISR) in Indonesia. Block
rubber comprises different grades. Block rubber is used in tire production, mostly in the
USA. Sheet rubber and block rubber are the most consumed types. Indonesia and
Malaysia produce block rubber from most of the latex harvested. Thailand has both
rubber sheets and block rubber.
Natural rubber has been produced for over a hundred years. World production was
45,000 metric tons in 1900 and increased to 8,742,000 metric tons in 2004. Output
dropped during the world wars but has continued growing to date.
Table 2.3 summarizes world natural rubber production from 1960 to 2004. The
production and market share for Thailand, Indonesia, and Malaysia are also illustrated.
Thailand‟s production was only 171,000 tons (8%) in 1960 but it gradually expanded to
3 million tons by 2004 and its market share increased from 8% to 34%. Indonesia
produced 620,000 tons in 1960 it grew to 2 million tons in 2004 with a corresponding
market share decrease from 30% to 23%. Malaysia produced 764,000 tons in 1960 and
its current output fluctuates around one million tons. Its market share was 40% in 1970
but it dropped to 14% in 2004. The three country market share for these major
producers has varied from 76% in 1960 to 79% in 1980 and 71% in 2004.
Most of this production is consumed in the tire sector, as discussed in the next section.
Hence world tire manufacturers have a significant impact on the natural rubber industry
in these countries.



Chapter 2 Page 14

Table 2.3 Natural Rubber Production in Thailand, Indonesia and Malaysia
(1960-2004)
(1,000 tons (% share))
Year World Thailand Indonesia Malaysia 3 Countries
1960 2,040 171.0 (8.4) 620.0 (30.4) 764.0 (37.5) (76.23)
1970 3,140 287.0 (9.1) 815.0 (26.0) 1,269.0 (40.4) (75.51)
1980 3,850 501.0 (13.0) 1,020.0 (26.5) 1,530.0 (39.7) (79.25)
1990 5,120 1,275.3 (24.9) 1,262.0 (24.6) 1,291.0 (25.2) (74.77)
2000 6,730 2,346.4 (34.9) 1,501.1 (22.3) 927.3 (13.8) (70.95)
2004 8,620 2,959.4 (34.3) 2,006.2 (23.3) 1,168.7 (13.6) (71.16)
Source: Compiled from IRSG (various copies)

2.2.2.4 Producing Rubber Products
To produce rubber products, rubber inputs are treated through the processes of
mastication, vulcanization and moulding. The mastication process cuts natural rubber
into pieces and adds particular chemicals such as aniline and zinc oxide, which help to
accelerate vulcanization. Some chemicals act as age-resistors and anti-degradants. They
help the product last longer when exposed to sun light and high or low temperature.
Vulcanization is a process to put sulphur into natural rubber and heat for a specific time.
It helps polymers of rubber molecules transform into a substance that is stronger, more
elastic, does not dissolve in water and recoils when stretched. At the stage of
vulcanization, rubber can be put into moulds for specific end products. Specific
machines are used for each type of rubber formation. For example a calender is used to
form rubber into sheets, an extruder is used to produce tube and rubber foams are made
by adding air to latex before vulcanization. Adding hydrogen peroxide helps extract
water and oxygen causes air bubbles. A dipping method is used to produce a thin sheet
for covering glass, mosaic or metal utensils.

2.3 Uses of Natural Rubber
Natural rubber is used to produce a variety of products. As displayed in Figure 2.1.
From Figure 2.1 it can be seen that latex when transformed to sheet rubber and block
rubber, can be used for intermediate products such as reclaimed rubber and compound
rubber. When vulcanized, rubber can be used to produce a variety of products. The top
Chapter 2 Page 15

volume item is vehicle tires, which includes pneumatic tires, retreads, solid tires, tire
treads, tire flaps, cord and inner tubes. Other items are automotive accessories,
construction products, and other miscellaneous products. Another group of uses is
products produced from concentrated rubber. They are articles of apparel and clothing
accessories including gloves, mittens and mitts and hygienic or pharmaceutical articles.
Thailand produces and exports these products. The relative values of the different
rubber products are illustrated in Table 2.4.
Chapter 2 Page 16

Figure 2.1 Uses of Natural Rubber






Natural Rubber Trees




Fresh Latex





.

(14%)
Concentrated
Latex


(86%)
Processed
Rubber
Smoked Sheet Rubber
Block Rubber
Crepe Rubber
Air-Dried Rubber
Cup Lump
Miscellaneous Types of Rubber







Dipped
Rubber Goods

1. Articles of
apparel and
clothing
accessories
including
gloves,
mittens and
mitts.
2. Hygienic or
pharmaceut
ical articles.

Un-vulcanized
Rubber
Goods

1. Reclaimed
rubber,
2. waste or
parings
and scrap,
3. compound
rubber and
other un-
vulcanized
rubber.

Vulcanized
Rubber Goods

New pneumatic tires, retreaded or
used pneumatic tires, solid or cushion
tires, tire treads and tire flaps, cord,
inner tubes
Automotive Industry : tubes, pipes and
hoses
Construction Industry: conveyor or
transmission belts
Miscellaneous Industries: belting, hard
rubber for example, ebonite.
Other articles of consumer products





Rubber wood

1. Para wood furniture
2. Wood toys
3. Miscellaneous items
Chapter 2 Page 17

Table 2.4 Thai Natural Rubber Products Exports
(fob Value, $US Million, 2004)
HS-
CODE Description $USmill %
40.07 Vulcanised rubber thread and cord 101 5.57
40.08
Plates, sheets, strip, rods and profile shapes, of
vulcanised rubber other than hard rubber
16 0.88
40.09
Tubes, pipes and hoses, of vulcanised rubber other than
hard rubber, with or without their fittings (for example,
joints, elbows, flanges)
72 3.97
40.10
Conveyor or transmission belts or belting, of vulcanised
rubber
23 1.27
40.11 New pneumatic tires 615 33.92
40.12
Retreaded or used pneumatic tires of rubber; solid or
cushion tires, tire treads and tire flaps, of rubber
24 1.32
40.13 Inner tubes, of rubber 38 2.10
40.14
Hygienic or pharmaceutical articles (including teats) of
vulcanised rubber other than hard rubber, with or without
fittings of hard rubber
150 8.27
40.15
Articles of apparel and clothing accessories (including
gloves, mittens and mitts), for all purposes, of vulcanised
rubber other than hard rubber
497 27.41
40.16 Other articles of vulcanised rubber other than hard rubber 271 14.95
40.17
Hard rubber (for example, ebonite) in all forms, including
waste and scrap; articles of hard rubber
6 0.33
Total 1,813 100%
Source: The Customs Department (2006). Values are transformed from baht at 40.22 baht/$US.
According to Table 2.4, natural rubber products yield export income of $US 1,813
million for Thailand. Pneumatic tires (item 40.11) are the top user of rubber consumer
products.
Finally a by-product use of natural rubber is the rubber wood. After some 30 years of
latex yielding periods, the rubber trees have to be re-planted. The replaced trees can be
processed into rubber wood which is highly demanded by the furniture industry as well
as the toy industry.
Chapter 2 Page 18

2.3.1 Uses of Natural and Synthetic Rubber in Tire Sector
One of the most discussed issues in the natural rubber industry is the substitution
between natural rubber and synthetic rubber. In the tire industry the two inputs are
closely related. A typical all season passenger tire (e.g.P195/75R14) which is the most
popular size, weighs about 21 pounds. It has the following approximate ingredients as
displayed in Table 2.5.
Synthetic rubber has endured a competing role with natural rubber since its invention.
Natural rubber consumption had fallen from 70% of total rubber consumption in 1950
to only 30 % in 1980. However, it stopped decreasing following the introduction of
radial tires in 1970s which helped to boost natural rubber consumption.
Natural rubber has done well in the tire sector due of its technical qualities such as
abrasiveness and elasticity. The competing synthetic rubber has specific qualities such
as resistance to heat, ozone and oil. Hence it meets special purpose needs in general
consumption of rubber. Although technology advancement and the attempts to invent
substitute materials for natural rubber have introduced various classes of automobile
and motor cycle tires, they still need an adequate quantity of natural rubber as a basic
ingredient. Truck tires, which have to carry a lot of weight, rely heavily on natural
rubber. Aircraft tires also need high quality natural rubber.
8

Synthetic rubber can be used as substitute for natural rubber if pricing is advantageous.
However, technology is still a limiting factor for substitution. Thus natural rubber is
important for tire making and the tire sector is important for natural rubber since it is a
major rubber consuming industry.









8
IRSG 142/AE.
Chapter 2 Page 19

Table 2.5 Tire Manufacture Ingredients
Ingredient Weight %
Fabric Steel, nylon, aramid
9
fibre,
rayon, fibre glass or polyester
(usually a combination, e.g.,
polyester fabric in the body piles
and steel fabric in the belts of
most radial passenger tires.
1 lb of steel cord for
belt,
1 lb of polyester and
nylon,
1 lb of steel bead wire
14.26%
Rubber Natural rubber (NR)
and
Synthetic rubber (SR)
4 lbs of 8 types of NR
+,
6 lbs of 5 types of SR
19.05%
+
28.57%
47.62%
Reinforcing
chemicals
Carbon black, silica, resins 5 lbs of 8 types of
carbon black
23.81%
Anti-degradants Antioxidants / ozonants paraffin
waxes
3 lbs of 40 different
kinds of chemicals,
waxes, oils, pigments,
etc.
14.31%
Adhesion
promoters
Cobalt salts, brass on wire,
resins on fabrics
Curatives Cure accelerators, activators,
sulphur
Processing aids Oils, tackifiers, peptizers
10
,
softeners
The natural rubber/synthetic rubber share depends on tire types as follows.
Natural Rubber /Synthetic Rubber Shares and Tire Types
Tire Types NR / SR shares
Race tire 35% / 65%
Passenger tire 45% / 55%
Light truck tire 50% / 50%
Off-highway tires (giant/earthmover) 80% / 20%
Source: compiled from http://www.goodyear.ca/tire_school/ingredients.html June 17, 2006


9
Aramid fibers are a class of heat-resistant and strong synthetic fibers. They are used in aerospace and
military applications, for ballistic rated body armor fabric and as an asbestos substitute. The name is a
shortened form of "aromatic polyamide". They are fibers in which the chain molecules are highly oriented
along the fiber axis so the strength of the chemical bond can be exploited.
10
These products are used as processing aids/viscosity reducers for natural and synthetic rubbers.
Chapter 2 Page 20

2.3.2 Natural Rubber and the Tire Industry
Natural rubber products are exported from producing countries to tire producing
countries, as well as being used for some tire manufacturing within the exporting
countries. The top four tire producing countries in the years 1960 - 2000 are US, France,
Japan and Germany. The quantity of natural and synthetic rubber used in these four
countries was 559 thousand tons and 816 thousand tons respectively in 1960. By the
year 2004 the consumption had developed to 1,751 and 1,753 thousand tons of natural
rubber and synthetic rubber respectively. The percentage of natural rubber to synthetic
rubber use was 69% in 1960, dropped to 43% in 1970 and then rose to 100% in 2004.
Table 2.6 summarizes the rubber used in tire sectors of US, France Japan and Germany.

Table 2.6 Natural and Synthetic Rubber Used in US, France, Japan & Germany
Tire Sectors (1960-2004)
(1,000 tons)
Natural Rubber (NR) Synthetic Rubber (SR)

NR
World
NR in
US FR
JA GR
%
SR
World
SR in
US FR
JA GR
%
NR
/
SR
1960 2,120 559 26% 2,350 816 35% 69%
1970 3,035 764 25% 5,625 1,784 32% 43%
1980 3,760 1,041 28% 8,785 1,938 22% 54%
1990 5,200 1,484 29% 9,710 1,904 20% 78%
2000 7,320 1,973 27% 10,800 2,106 19% 94%
2004 8,280 1,751 21% 11,800 1,753 15% 100%
Source: Compiled from International Rubber Study Group

2.4 Natural Rubber Market and Prices
Natural rubber data used in the studied period (1960 -2000) are mostly rubber sheets
whose price per Malaysian ringgit of grade 1 product (RSS1) was the major guiding
price. The average price is 2136.5 ringgit ($US 771.30) / ton with a range 935.00 to
Chapter 2 Page 21

3,956.0
11
. Table 2.7 and Figure 2.2 display the natural rubber prices during the studied
period.

Table 2.7 Natural Rubber Price
(RSS1) (1960-2004)
(Malaysian ringgit/metric tons)
Figure 2.2 Natural Rubber Price
(RSS1)

Year
Natural Rubber Prices
(RSS1)



1960 2,383.0
1970 1,244.0
1980 3,123.0
1990 2,334.0
2000 2,624.0
2004 4,977.0
Source: International Rubber Study Group

2.4.1 Thai Domestic Natural Rubber Prices
Recent prices for natural rubber in Thailand are classified into prices for fresh latex,
unsmoked sheet, ribbed smoked sheets, block rubber and concentrated latex prices.
There are over two thousand local markets, from small regional level to districts to
provinces including farmer cooperatives. Dealers in these markets buy latex and un-
smoked sheets from small holding farmers. The products are then traded to processing
manufacturers and are transformed to concentrated latex, smoked sheets and technically
specified rubber (block rubber). Major types are the smoked sheets (RSS3) and grade 20
technically specified rubber (TSR20). Domestic consumption is approaching 15%.
Some of the processing firms are exporters. There were 321 exporters in the year 2003.
Central markets are set up by the government to support natural rubber prices via
market location. The markets also provide trading facilities such as warehouses and
information. Prices in central markets are more advantageous to natural rubber sellers

11
Average exchange rate for 1960-2000 was 2.77 ringgit per $US with a range of 2.20 to 3.90.

Chapter 2 Page 22

than local markets but there are only a small number of them currently although more
central markets are to be established.
A sample of average yearly prices for the years 1998 – 2007 show how central market
auction trading has helped boost local market prices by an average of 5% (See Table
2.8).
Table 2.8 Natural Rubber Local Market Prices and Central Market Prices
(1998-2007)
(Baht/ ton)
Year (1)
USS3
Local Market
(2)
USS3
Central Market
(Had Yai)
(1) / (2)
1998 23,100 25,680 1.11
1999 18,550 19,770 1.07
2000 22,360 23,420 1.05
2001 21,450 22,530 1.05
2002 27,870 29,150 1.05
2003 38,860 40,170 1.03
2004 44,900 46,660 1.04
2005 53,540 55,230 1.03
2006 69,960 71,350 1.02
2007 70,250 72,140 1.03
Average
Min
Max
39,084
18,550
70,250
40,610
19,770
72,140
1.05
1.02
1.11
Source: Compiled from The Rubber Research Institute of Thailand and The Office of Rubber
Replanting Aid Fund
The futures market in Thailand is The Agricultural Future Exchange of Thailand
(AFET). It started trading in 2004. Both smoked sheet and block rubber are traded in
AFET (The Rubber Research Institute of Thailand, 2007).
At the export level rubber prices are delivered in accordance with their exporting
country ports. The generally recognized and available prices are sheet rubber RSS3
prices, block rubber TSR20 prices, and concentrated latex prices coded in fob Bangkok.
The export prices of ribbed smoked sheet on average is 20% (15%-31%) higher than
Chapter 2 Page 23

fresh latex, 17% (12%-27%) higher than un-smoked sheets, and 10% (5%-18%) higher
than domestic ribbed smoked sheets, as displayed in Table 2.9 and Figure 2.3.
Table 2.9 Thai Domestic Natural Rubber Prices (1998-2007)
(Baht/ton)
Baht/ton
Year
(1)
Fresh
Latex
(2)
USS3
Local
Market
(3)
RSS3
Central
Market
(Had Yai)
(4)
RSS3
fob
BKK
(4)/(1) (4)/(2) (4)/(3)
1998 24,800 23,100 25,680 29,350 1.18 1.27 1.14
1999 18,000 18,550 19,850 23,500 1.31 1.27 1.18
2000 22,310 22,360 23,430 26,660 1.19 1.19 1.14
2001 20,760 21,450 23,280 25,330 1.22 1.18 1.09
2002 26,310 27,870 30,110 32,890 1.25 1.18 1.09
2003 37,930 38,860 41,730 43,650 1.15 1.12 1.05
2004 43,690 44,900 48,090 51,700 1.18 1.15 1.08
2005 52,510 53,540 57,070 60,170 1.15 1.12 1.05
2006 67,880 69,960 74,210 79,860 1.18 1.14 1.08
2007 68,010 70,250 74,110 78,470 1.15 1.12 1.06
Average
Min
Max
38,220
18,000
68,010
39,084
18,550
70,250
41,756
19,850
74,210
45,158
23,500
79,860
1.20
1.15
1.31
1.17
1.12
1.27
1.10
1.05
1.18
Source: Compiled from The Rubber Research Institute of Thailand and The Office of Rubber
Replanting Aid Fund
Figure 2.3 Thai Natural Rubber Prices

Local market grade 3 Unsmoked sheets (U3L)
Central Market grade 3 smoked sheets (U3C)
Export fob Bangkok grade 3 rib-smoked sheets (R3BK)

Chapter 2 Page 24

The sharp rise in natural rubber prices from 2001 is considered to be due to economic
growth especially in China, causing increases in demand for vehicles, tires and natural
rubber input respectively. Also the sharp rise in oil prices since 2001has raised the
relative price of synthetic rubber to natural rubber, which is a competing input in tire
manufacturing (United Nations Conference on Trade and Development, 2009). The
escalation in oil prices also led to price rises in commodities including natural rubber.

2.4.2 Thai Natural Rubber Export Prices
The RSS3 are coded fob Bangkok prices. Table 2.10 depicts the relevant price series in
current world natural rubber markets.

Table 2.10 Thai Natural Rubber Export Market Prices (1996-2004)
($US/ton)
Concentrated
LATEX
fob
BKK
RSS3
fob
BKK
RSS3
TOCOM
RSS3
AFET
TSR20
fob
BKK
TSR20
SICOM
TSR20
CIF
NY
1996 1,091.82 1379.64 1157.06 - 1,321.07 1,136.00 1,420.00
1997 772.54 964.29 950.26 - 952.37 985.00 1,106.00
1998 611.72 709.62 698.98 - 673.61 651.00 776.00
1999 525.05 621.04 613.64 - 598.51 589.79 703.94
2000 572.99 664.18 696.31 - 640.26 629.05 726.46
2001 469.05 570.11 549.18 - 538.83 515.64 614.00
2002 599.39 765.60 795.39 - 754.19 752.79 857.08
2003 850.57 1052.06 1113.04 - 1,012.53 1,005.06 1,121.23
2004 993.54 1285.43 1420.00 1,195.47
#
1,224.76 1,207.61 1,352.06
Source: Compiled from The International Rubber Study, The Rubber Research Institute of
Thailand, The Office of Rubber Replanting Aid Fund and The Agricultural Futures Exchange of
Thailand.
# The Agricultural Futures Exchange of Thailand started its operation in 2004. The record price
here was derived from the May – December average one month forward price 49.60
baht/kilogram at the exchange rate of 40.22 baht / $US.
In addition, natural rubber is also coded in futures markets. Most well-known prices are
in TOCOM (The Tokyo Commodity Exchange), SICOM (Singapore Commodity
Exchange) and the newly opened AFET (The Agricultural Futures Exchange of
Chapter 2 Page 25

Thailand). On the consuming country side the RSS3 prices are related to Japan imports.
TSR20 prices can be found cif in New York as well as European country ports.

2.4.3 Other Export Market Prices
In global export markets each producing country announces market prices. In Thailand,
prices in central markets are related to fob prices. In Indonesia, prices follow SICOM
prices and are discounted by a little. In Malaysia, prices announced by the country‟s
Rubber Board are based on reports from a panel of dealers, packers and latex producers.
In India, official prices are a little bit higher than international prices (Thevar, 2002).
Consuming country market prices are mostly from New York. Prices from future
markets, namely TOCOM, SICOM and AFET also have effects on overall market
prices.
This section has demonstrated the price structure of natural rubber. The high price
mark-up (Table 2.9 and Figure 2.3) is evident. When simultaneously considered with
the concentrated market structure as described in Section 2.5 and Section 2.6, some
potential for buyer market power to exist in the natural rubber industry is identified.
2.5 Thai Natural Rubber Market Structure
Natural rubber has developed from an indigenous product of the Amazon basin to a
global level useful commodity produced from more regions such as the South East Asia,
South Asia, South America and Africa. The supply chain starts from rubber tree
plantation mostly dominated by small holding farmers. Its domestic consumption in
producing countries is minimal. Major users are found in the world automotive industry
in industrialized countries including their multi-national enterprises in various markets
around the world. Hence the market structure of natural rubber supplies has developed
up to the global level as an upstream industry of many elastomer consumer products led
by the tire industry and automobile accessories.
Natural rubber is also significant as a social commodity. It involves more than thirty
million farmers worldwide producing up to 80 % of world natural rubber supply. The
importance of the small holder is increasing. Therefore, natural rubber industry has
social and political consequences (Budiman, 2004).
Hence the industry is important to the producing countries and there is a concern over
the economic efficiency of its trading between exporting countries like Thailand,
Indonesia and Malaysia and consuming countries like the US, France, Japan and
Chapter 2 Page 26

Germany. The critical evidence is that despite the growth in the automobile industry and
tire industry, the natural rubber industry does not reflect a corresponding outcome.
Instead, during recent decades there have been sustainability problems with low natural
rubber prices and hence low income for natural rubber farmers. Although natural rubber
prices have recovered due to some positive factors mainly led by the economic growth
in emerging regions many involved parties are still cautious about its sustainability.
As a producing and exporting country for natural rubber, the market structure of the
natural rubber industry in Thailand is not only on the firm and industry level but being
extended to a country and global level. In Thailand, natural rubber production has been
growing and Thailand has become the top producing country now. Natural rubber is one
of Thailand‟s relevant export earning crops in its agricultural sector. In the year 2007
production of natural rubber reached 3,056,005 tons. Three major stocks are smoked
sheets (31%), technically specified (block) rubber (40%) and concentrated rubber
(22%). In 2004 crude natural rubber export income comprised sheet rubber (36%),
technically specified rubber (40%), concentrated latex (24%) and other types.
In 2005 there were about 1,088,000 natural rubber farms with approximately six million
rubber farmers. The natural rubber industry creates jobs and reduces labour migration
from provinces to cities. There were 1.988 million hectares that are cultivated with
natural rubber trees and 1.588 million hectares are productive areas. Average output was
1,812.5 kilogram /hectare. Natural rubber annual yield is $US 4,000 per family
12
. The
number of employees in government institutions related to natural rubber is 5,241.
Natural rubber export earnings in Thailand was $US2.3 billion in 1995. It dropped to
$US 1.5 billion in 2000 and recovered to $US 3.4 billion by the year 2004. Average
growth was only 1.43%. If not for the booming years of 2003 and 2004, the figure
would be even less. It can be seen that the increasing price in 2003 and 2004 helped to
increase natural rubber income significantly from 1.47% in 1995 to 2.10% in 2004.
Therefore, it is considered essential to have fair natural rubber prices. Thai export
income from natural rubber products comprised income from the group of vulcanized
rubber goods described in Figure 2.1. In the past decade they generated 33% (1995) to
53% (2000) of natural rubber income despite the fact that these rubber products
comprise only 10-11% of total natural rubber production. This is an issue that is
criticized frequently and there are attempts to boost value added to natural rubber rather
than merely exporting it as commodity. The quantity of natural rubber consumed in

12
At the price of 1,500 $US/metric ton
Chapter 2 Page 27

natural rubber consumer products are distributed across vehicle tires (42%), gloves
(19%), elastic products (9%), rubber brands (9%), the rest is used in other
miscellaneous products (Rubber Research Institute, 2007).
Major institutes administering the Thai natural rubber industry are:
- The Rubber Estate Organization - a state enterprise first created for the
purposes of natural rubber planting, processing and marketing including
researching and promoting farmers (The Rubber Estate Organization, 2008);
- The Office of the Rubber Replanting Aid Fund - a state enterprise
established to aid natural rubber tree replanting including supporting farmer‟s
natural rubber plantation, market distribution and farmer organization promoting
(The Office of the Rubber Replanting Aid Fund, 2008);
- The Rubber Research Institute of Thailand - established mainly for
technological research and development and reporting on the results for natural
rubber planting, processing, manufacturing, marketing and liaison with foreign
institutions of natural rubber (The Rubber Research Institute of Thailand, 2008).

2.5.1 Primary Producers Market
Rubber farmers are the first unit in the supply chain. The Thai natural rubber industry
comprises of a lot of small farmers with a homogenous product. Total planting area is
2,083.4 hectares in Estates
13
(which is 15 % of the total) with the rest in small holdings.
Mature area is 76%. The average yield per hectare is 1,812.5 kilograms.
Due to the small size of producing units and the homogeneity of the product,
natural rubber prices fluctuate but generally have followed a downward trend
in real terms. Natural rubber also has limited marketing channels due to
relatively small number of processors and exporters. Like other farmers of
agricultural products, natural rubber farmers are not sufficiently well
remunerated by their market price. Therefore, producing countries such as
Thailand have to provide price support and plantation subsidies. Exporters
have to pay taxes to subsidize plantations.
14


13
An estate is defined to be a plantation if it is more than 40 hectares.
14
Export tax (cess) is 0.90 baht / kilogram: 5% is provided for research and development administration,
10% for operation costs of planting aids and about 85% for planting aid especially replanting specific
natural rubber trees.
Chapter 2 Page 28

The next unit in the supply chain is the distributor channel, which is divided
into 3 levels. The first level is the local or village level. At this level mobile
dealers buy crude rubber, which is un-smoked rubber sheets from small
farmers and sell to secondary markets. The second market level is at the town
level where dealers buy both smoked and un-smoked rubber. Next level is
exporters most of which manufacture the smoked rubber sheets and block
rubbers and export them. Exporters sometime buy from small farmers too.
There are five or six major firms who handle the bulk of exports. Table 2.11
displays concentration in export firms. The concentration ratios inform a rather
high concentration degree of export firms during part of the period.
Consequently this is a potential area where oligopsony power could develop.

2.5.2 Export Market

Table 2.11 Concentration in Rubber Exporters by Number of Firms (1955-2000)
Year 1955 1960 1965 1970 1972 2000
Top 4 firms % share 68 55 74 75 78 40
Total number of exporters 21 25 16 20 18 318
Source: Columns 1 to 5 are obtained from Jumpasut (1981). Last column 2000 is compiled from
The Rubber Research Institute (2001) and The Rubber International (2001).
From 1955 to 1972 there were approximately 20 exporters and market concentration
(CR4 ratio) increased as high as 78%. In 2000 exporter numbers had increased and the
CR4 ratio dropped to 40%. The structure of exporting firms can be assessed from the
four-firm ratio and the Herfindahl- Hirschmann Index found in the year 2000 as
displayed in Table 2.12
15






15
This HHI approach is used by the US Department of Justice for its merger guidelines (section 8.6),
squaring the percentage share of the market in deriving the indices. If the value is below 1,000 the market
is regarded as not concentrated. The market is regarded as highly concentrated if the value is above 1,800
(Ferguson & Ferguson, 1994 pp.41).




Chapter 2 Page 29

Table 2.12 Natural Rubber Exporter Concentration by Company Sale Quantity
(2000)
(Top Ten Thai Natural Rubber Exporters)

Metric tons % Market
share
Cumulative
% market
share
Teck Bee Hang Co., Ltd 328 15.14 15.14
Sri Trang Agro-Industry Public Co., Ltd. 203 9.37 24.51
Thai Hua Rubber Public Co., Ltd. 177 8.17 32.68
Southland Rubber Co., Ltd. 165 7.62 40.30
Vong Bandit Co. Ltd. 149 6.88 47.18
B. Right Rubber Co., Ltd. 129 5.96 53.14
Thai Tech Rubber Co., Ltd. 96 4.43 57.57
Tong Thai Rubber Co., Ltd. 75 3.46 61.03
Southland Resource Co., Ltd. 60 2.77 63.80
Sang Tong Rubber Co., Ltd. 55 2.54 66.34
Others 729 33.66 100%
Total 2,166 CR4 40.3 HHI 570.4
Source: The Rubber International volume 3, no. 30 June 2001
Note: CR4 = ¯ (percent market share of 4 firms), HHI = ¯ (% market share)
2
.
According to Table 2.12 the four firm concentration ration in Thai natural rubber
exporting firms is only 40.3%, and the HHI is 570.4. This does not indicate high
concentration. However, some studies of the Thai natural rubber industry indicate high
concentration and complicated links (e.g. cross share holding among firms). The links
are also country border crossing among producer countries in the region (Songprasert,
1992). Therefore, firm names might not be a valid distribution unit here.
Anyhow products from thousands of latex producers have flowed through dealers and
are concentrated in only a few hundred of exporting firms, among which 40% of the
product is managed by only four firms. Therefore, natural rubber trading has increasing
concentration throughout the channels from farmer‟s fresh latex to manufacturer firms‟
processed outputs. The concentration trend is transferred to the global market level as
natural rubber exports are managed by a few exporting firms, including their affiliates
across countries.

Chapter 2 Page 30

2.5.3 Tire Manufacturing Market
The motor vehicle tire industry is the most important natural rubber consumer industry
and hence is closely linked to sustainability and welfare issues in the natural rubber
industry in Thailand. Not all tire manufacturing is undertaken in the home countries of
the major tire manufacturers. These manufacturers have also set up subsidiary plants in
natural rubber producing countries such as Thailand. An examination of tire
manufacturing firms in Thailand reveals a mixture of both local and foreign owned
companies (Export Import Bank of Thailand, 2006). From Table 2.13, Siam Michelin
Co. Ltd is the largest firm representing almost half of the market capitalisation of tire
manufacturers. CR4 is 72.7 % and HHI is 2,662.4 surpassing the guideline of 1,800.

Table 2.13 Thailand Tire Manufactures Capital Concentration (2003)
#



Capital investment
% share

Cumulative
% market
share
Million
baht
Million
$US
Siam Michelin Co. Ltd. 8,447.3 203.60 48.21 48.21
Otani Tire Co. Ltd. 1,528.4 36.84 8.72 56.93
Lion Tires (Thailand) Co. Ltd. 1,576.8 38.00 9.00 65.93
Siam Tire Prapadaeng Co. Ltd. 1,192.7 28.75 6.81 72.74
Goodyear (Thailand) Co. Ltd. 1,079.8 26.03 6.16 78.90
Thai Bridgestone Co. Ltd. 970.0 23.38 5.54 84.44
Inoue Rubber (Thailand) Co. Ltd. 963.0 23.21 5.50 89.94
SR Tire Co. Ltd. 784.1 18.90 4.48 94.42
Techno Asia Tire Co. Ltd. 498.9 12.02 2.85 97.27
V Rubber Co. Ltd. 479.6 11.56 2.74 100%
Total 17,520.6 422.29 CR4 72.7; HHI 2,662.4
Source: compiled from Export Import Bank of Thailand (2006)
#
Data are for the year 2003. Exchange rate was 41.49 baht/$US
However, the dominance of the major multinational tire manufacturers extends into
markets such as Thailand. Siam Michelin and Siam Tire Prapadaeng are majority owned
subsidiaries of Michelin Group of France. Goodyear (Thailand) is 60% owned by the
US Goodyear company, and Thai Bridgestone is 60% owned by the Japanese
Bridgestone company. Inoue Rubber Company has majority ownership from its parent
Chapter 2 Page 31

company incorporated in Japan and Lion Tires is a subsidiary of the Vittoria Group of
Italy. Otani Tire is a 100% Thai owned company and is a specialist producer of large
and heavy duty commercial tires; Lion Tires is a specialist producer of bicycle tubes and
tires and Inoue Rubber is a specialist producer of motorcycle tires and tubes.
Production costs for vehicle tire comprises raw materials (60%), wages (12%),
depreciation (8%), energy and public service 4% and other inputs 16%. Natural rubber
is an important component of the raw materials.

2.6 Global Level Natural Rubber Market Structure
At the global level, world natural rubber production averaged 62,800 tons for the time
period under study and increased to 9.7 million tons in 2007.

2.6.1 World Primary Production
Figure 2.4 displays global natural rubber production quantity. Output dropped during
the two World Wars but then continued growing.

Figure 2.4 World Natural Rubber Production (1900-2004)
World Rubber Production
0
2000
4000
6000
8000
10000
1880 1900 1920 1940 1960 1980 2000 2020
1
,
0
0
0

t
o
n
s
World Rubber Production

Table 2.14 demonstrates similar situations with the structure of natural rubber farming
in Thailand Indonesia and Malaysia.
Chapter 2 Page 32

Table 2.14 Small Holdings and Estate Areas under Rubber Plantation
(1,000 hectares, 2004)
Country Total Estates Small Holding Mature area Yield / hectare
(kilogram)
Indonesia 3,262.0 493.0
15%
2,769.0
85%
76% 839.0
Thailand 2,083.4 200.0
10%
1,883.4
90%
80% 1,812.5
Malaysia 1,282.0 126.5
10%
1,155.5
90%
93% 1,300.0
Source: compiled from The Rubber Study Group and The Rubber Research Institute of
Thailand.
Clearly the farming stage is dominated by small holdings: above 85% of the total in
each country. Mature areas account for over 75% in all countries. Malaysia has the
highest proportion of small holding shares and almost all areas are mature, reflecting its
being the earlier producing country. Thailand‟s farms have the highest average yield
followed by Indonesia and Malaysia.

2.6.2 World Export Market
The world net imports market structure for the year 2004 is displayed in Table 2.15.

Table 2.15 World Net Exports Market Structure (2004)
Natural Rubber Net Exports
2004
1,000 tons % Market
share
Cumulative
% market
share
Thailand 2,627.4 42.11 42.11
Indonesia 1,875.1 30.05 72.16
Malaysia 679.9 10.90 83.06
Vietnam 351.0 5.63 88.69
Cote D Ivoire 136.0 2.18 90.87
Liberia 111.5 1.79 92.66
India 71.2 1.14 93.80
Cameroon 53.0 0.85 94.65
Chapter 2 Page 33

Table 2.15 (continue)
Guatemala 52.9 0.85 95.50
Philippines 43.9 0.70 96.20
Sri Lanka 40.6 0.65 96.85
Myanmar 30.5 0.49 97.34
Nigeria 24.0 0.38 97.72
Cambodia 11.0 0.18 97.90
Other Countries 132.0 2.12 100%
Total 6,240.0 CR4 88.7; HHI 2,838.3
Source: Compiled from The Association of Natural Rubber Producing Countries.
At the global level, total net exports in the world market for natural rubber was 1.83
million tons in 1950 and increased to 6.24 million tons in 2004. Major exporting
countries were Thailand, Indonesia, and Malaysia. Since 2000 there have been
significant emerging supplying countries such as Vietnam, Laos, Cambodia and
Myanmar. The world level overall export industry concentration can be viewed from the
selling countries concentration in world natural rubber markets as displayed in Table
2.15. The outcomes indicate CR4 = 88.7% and HHI = 2,838.3 indicating market
concentration. However, since each producer country‟s supply has a degree of
specialized product, such as Thailand for ribbed smoked sheets, Indonesia for block
rubber and Malaysia for concentrated latex, the effects of concentration could be partly
understated. It was not until the 1990s that Thailand had diversified non-latex natural
rubber exports from smoked sheets into both smoked sheets and block rubber.
This poses the possibility that concentration in the exporting country suppliers of
natural rubber may offset the concentration in the buyers‟ side of the market that is
considered below (Scherer & Ross, 1990).

2.6.3 Natural Rubber Export Country and Buying Country Concentration
When considered from the buyer country side, concentration for each particular
exporting country namely Thailand, Indonesia and Malaysia results is as follows.

Chapter 2 Page 34

2.6.3.1 Thailand
Thailand exported natural rubber to many countries in the regions of North America,
Asia Pacific and Europe. Table 2.16 summarizes the export destinations for Thai natural
rubber during 1975-2000, accompanied by the corresponding four-country
concentration ratio and (CR4) and the Herfindahl-Hirschman index. During 1975-2000
Thai gross natural rubber exports were dominated by Japan (38.4%), US (12.1%),
France (12.0%) and other countries in EU (9.5%). The CR4 is 72.0 % and the HHI is
1939.5. Overall outcome indicates buyer concentration.

Table 2.16 Gross Exports from Thailand to Natural Rubber Consuming Countries
(1975 – 2000)
(mill tons)
% Market
share
Cumulative
% market
share
Japan 10,344 38.39 38.39
US 3,256 12.08 50.47
France 3,240 12.02 62.49
EU 2,567 9.53 72.02
Singapore 1,685 6.25 78.27
Malaysia 1,484 5.51 83.78
USSR 694 2.58 86.36
Taiwan 652 2.42 88.78
China 418 1.55 90.33
Other countries 2,605 9.67 100%
Total 26,945 CR4 72.0; HHI 1,939.5
Source: Compiled from The Association of Natural Rubber Producing Countries.

2.6.3.2 Indonesia
Indonesia export natural rubber to US, Singapore and EU. The corresponding buyer
shares are displayed in Table 2.17. The CR4 during 1975-2000 for Indonesia was
81.1%. The HHI was 2,494.2, well over the benchmark level of 1800. The top four
buyers were US (42.9%), Singapore (22.3%), EU (11.3%), and Japan (4.5%).
Indonesia natural rubber export market structure is displayed in Table 2.17.
Chapter 2 Page 35

Table 2.17 Gross Exports from Indonesia Natural Rubber to Consuming Countries
(1975-2000)
(mill tons)
%
Market
share
Cumulative
% market
share
US 12,275 42.92 42.92
Singapore 6,384 22.32 65.24
EU 3,227 11.28 76.52
Japan 1,295 4.53 81.05
USSR 694 2.43 83.48
Other countries 4,724 16.52 100%
Total 28,599 CR4 81.1; HHI 2,494.2
Source: The Association of Natural Rubber Producing Countries

2.6.3.3 Malaysia
Malaysia exports natural rubber to EU, Singapore and US. The buyer countries‟ shares
are informed by Table 2.18.
Table 2.18 Gross Exports from Malaysia to Natural Rubber to Consuming
Countries (1975-2000)
(mill tons)
%
Market
share
Cumulative
% market
share
EU 9,335 26.92 26.92
Singapore 5,204 15.01 41.93
US 3,636 10.49 52.42
Republic of Korea 2,411 6.95 59.37
China 2,151 6.20 65.57
Japan 1,651 4.76 70.33
USSR 1,425 4.11 74.44
Australia 156 0.45 74.89
Other countries 8,708 25.11 100%
Total 34,677 CR4 59.4; HHI 1,186.4
Source: The Association of Natural Rubber Producing Countries
Chapter 2 Page 36

The CR4 during 1975-2000 for Malaysia is 59.4 %; HHI is 1,186.4. The four top buyers
are EU (26.9%), Singapore (15%), US (10.5%) and Republic of Korea (7%). Results do
not indicate potential high concentration. However, in the studied period Malaysia is
found to decrease its natural rubber production and becomes one of the importing
countries from Thailand.
When viewed from the importing country side, during 1975-2000 the combined
quantities of Thai, Indonesian and Malaysian natural rubber export to Japan, USA and
EU are as follows.
The USA imported 99.99 % of its natural rubber from Asia, with 13.3% from
Singapore, which is re-export trading since Singapore does not produce natural rubber.
The remaining 86.7% was attributed to Thailand, Indonesia and Malaysia as: 13.7%,
55.3% and 17.7% respectively. The EU imported 80.3% of its natural rubber from Asia,
with 15.5% from Singapore. The remaining 64.8% was imported from Thailand,
Indonesia and Malaysia as: 10.7%, 13.6% and 40.4% respectively. Japan imported
98.6% of its natural rubber from Asia, with 7.7% from Singapore. The remaining 90.9%
was imported from Thailand, Indonesia and Malaysia as: 70.5%, 8.3% and 12.1%
respectively.
It can be seen that the USA imported most of its natural rubber from Indonesia, the EU
from Malaysia and Japan from Thailand. This may reflect consumption purposes as the
USA uses a lot of block rubber and it is mostly produced by Indonesia. Thailand
produces mainly sheet rubber which is used by Japan for tire manufacturing.
Hence, global natural rubber consuming countries impact on Thailand, Indonesia and
Malaysia because they are essential consumers of natural rubber output from these
countries. The USA has the most impact on Indonesia, France and Europe on Malaysia
and Japan on Thailand.
Table 2.19 summarizes the specific trading feature between countries as follows.
Chapter 2 Page 37

Table 2.19 Export Shares of Natural Rubber Producing Countries and Natural Rubber
Imports of Consuming Countries
From Exporting
Country:
To Importing Countries (% of Total Imports)
US. EU JAPAN
Thailand 13.68 10.73 70.49
Indonesia 55.34 13.63 8.28
Malaysia 17.67 40.44 12.1
Sub Total 1 86.69 64.80 90.87
Singapore 13.30 15.54 7.73
Sum Total 2 99.99 80.34 98.6
Other 0.01 19.66 1.4
Sri Lanka < 1%
Sources: compiled from International Rubber Study Group, Rubber Statistical Bulletin and
Quarterly Natural Rubber Statistical Bulletin, various copies. All rates are average rates between
the years 1975-2000.

2.6.4 World Tire Market
At the world level, rubber products are divided into tire sector consumption and general
sector consumption. Tire sector consumption comprises natural rubber and synthetic
rubber that are used in all kinds of vehicle tires production. General sector consumption
comprises natural rubber and synthetic rubber that are used to produce products other
than tires. Most general sector products are used in the automotive sector e.g. rubber
parts and accessories used in vehicles.
Table 2.20 displays natural rubber and synthetic rubber used in selected tire sectors
where data are available: USA, France, Japan, Germany, UK, Italy, and India.
Accordingly, tire sector consumption of natural rubber is almost 50% of total
consumption. It reduced to 32% in the year 1970 at the time of the synthetic rubber
boom. Then it recovered to 37% by the 1990s, which is the time of surging oil prices
and synthetic rubber prices. In 2004 tire sectors share of total natural rubber
consumption was 33%. In contrast, the tire sector‟s consumption share in synthetic
rubber increased to 25% by 1970s and reduced to 12% in 2004. In 2000 the tire sector
consumption of natural rubber was around 30% plus less than 15% for synthetic rubber.


Chapter 2 Page 38

Table 2.20 Global Tire Sector Consumption of Natural and Synthetic Rubber
(1946-2004)
(1,000 tons)
Year
Natural Rubber
Use in Selected
Tire Sector
% to World
Natural Rubber
Consumption
Synthetic
Rubber Use in
Selected Tire
Sector
% to World
Natural Rubber
Consumption
1946 291.8 49.46 601.1 36.49
1950 679.4 39.79 363.5 14.30
1960 721.8 34.05 969.0 21.68
1970 956.1 31.50 2,168.8 25.04
1980 1,261.1 33.54 1,882.9 14.96
1990 1914 36.81 2,126.2 14.34
2000 2,482.4 33.91 2,391.0 13.17
2004 2,725.8 32.92 2,441.5 12.16
Source: Calculated from The International Rubber Study Group
The world level tire industry comprises several conglomerates that operate at a
multinational level. Prominent firms usually provide direct investment in new affiliates
and/or mergers with local country firms. Table A.2.1 in Appendix 2.1 reports the details
of such groups.
16
Accordingly, the tire industry is covered by only a few business
groups, causing concentration in the market. In addition the group members have
established links among each member. Following sections evaluate the concentration
degrees in the tire industry at world level.

2.6.4.1 Tire Industry Concentration in Natural Rubber Consumption.
Within the one-third of natural rubber consumption by tire sector as revealed in Table
2.21, the quantities of natural rubber used are concentrated in the top four countries. The
CR4 is 76.9 %. HHI is 2164.6. Results provide concentration evidence.


16
By 2000, world employment in tire industry totals to 296,216 employees. It is made by USA (19%),
France (14%), China (10%), Japan (6%) and Germany (6%).
Chapter 2 Page 39

Table 2.21 Concentration in Natural Rubber Consumption by Tire Producing
Countries
1960-2000 total use (1,000 tons) %
Market share
Cumulative
% market
share
US 22,359 37.00 37.00
Japan 13,807 22.85 59.85
France 5,370 8.89 68.74
Germany 4,944 8.18 76.92
India 4,107 6.80 83.72
UK 3,731 6.17 89.89
Italy 2,842 4.70 94.59
Brazil 2,729 4.52 99.11
China 540 0.89 100%
Total 60,429 CR4 76.9; HHI 2,164.6
Source: Compiled from International Rubber Study Group.

2.6.4.2 Tire Industry Concentration by Country Sale Volume.
In 2000, the top four countries for tire sale volumes are Japan (30.46%), US (21.97%),
France (19.04%) and Germany (7.15%). The CR4 is 78.6% and HHI is 1,876.7. Results
indicate high concentration. Table 2.22 displays the results.

Table 2.22 Concentration in Tire Sale Volume by Producing Countries
Year 2000 $US mill
%
Market
share
Cumulative
% market
share
Japan 21,124.6 30.46 30.46
US 15,237.6 21.97 52.43
France 13,200.0 19.04 71.47
Germany 4,955.0 7.15 78.62
Italy 2,711.5 3.91 82.53
Korea 2,482.5 3.58 86.11

Chapter 2 Page 40

Table 2.22 (continued)
China 2,462.5 3.55 89.66
India 2,076.0 2.99 92.65
Taiwan 1,027.0 1.48 94.13
Russia 466.0 0.67 94.80
Other Countries 3,599.1 5.19 100
Total 69,341.8 CR4 78.6;HHI 1,876.7
Source: Compiled from Tire business (2002).

2.6.4.3 Tire Industry Concentration by Company
When considered by company sale volume, as displayed in Table 2.23, the four top tire
companies are Bridgestone Corp (19.8% ), Groupe Michelin (19%), Goodyear Tire and
Rubber Co. Ltd (18.4%) and Continental A.G. (7.2% share). The CR4 is 64.4 and the
HHI is 1,200.3. Other companies have less than 5% shares.

Table 2.23 Concentrations in Tire Sale Volume by Producing Companies (2000)
Company
Mill
$US
% market share
Cumulative %
market share
Bridgestone Corp. 13,750.0 19.83 19.83
Groupe Michelin 13,200.0 19.04 38.87
Goodyear Tire & Rubber Co. Ltd 12,725.0 18.35 57.22
Continental A.G. 4,955.0 7.15 64.37
Sumitomo Rubber Industries Ltd 2,783.0 4.01 68.38
Pirelli S.P.A. 2,600.0 3.75 72.13
Yokohama Rubber Co. Ltd. 2,514.0 3.63 75.76
Cooper Tire & Rubber Co. 1,802.6 2.60 78.36
Toyo Tire & Rubber Co. Ltd. 1,322.6 1.91 80.27
Kumho Industrial Co. Ltd. 1,235.0 1.78 82.05
Others 12,454.6 17.96 100%
Total 69,341.8 CR4 64.4; HHI 1,200.3
Source: compiled from Tire Business (2002)
Chapter 2 Page 41

Overall results do not indicate extremely high concentration. However, global tire
manufacture is one industry that has had many mergers, resulting in groups of
conglomerate corporations that operate across countries. Examples are Goodyear,
Bridgestone, Michelin, and Continental, each of which has several majority-owned
subsidiaries abroad. They also have joint ventures across their groups, e.g. Continental
and Michelin, Goodyear and Toyo, and Continental and Yokohama. Details are
presented in Appendix 2.1. Hence the raw concentration ratios measured by company
name understate the position.
The above tables demonstrate a pattern of concentration in the tire manufacturing
industry with four dominant companies (Michelin, Bridgestone, Goodyear, Continental)
that are headquartered in four developed countries (France, Japan, USA and Germany
respectively). However, although these companies and their respective home countries
dominate the global tire manufacturing industry and the global consumption of natural
rubber, there is not total concordance of production and country location in this
industry. Tire manufacture is located in a number of countries, including, as
demonstrated in Table 2.13, natural rubber producing countries such as Thailand. The
dominant manufacturing companies retain significant control of the global industry
however by ownership of multiple subsidiary manufacturing companies both within and
without their home countries (see Appendix 2.1).
It is not possible to completely disentangle the company-country production data that
has been taken from different sources. Precise data on the country location of all tires
produced are not available. However, the data do provide strong evidence of
concentration in the global tire manufacture - natural rubber consumption industry
whether measured by company level data or country level data. There is also a strong
correlation between company level concentration and company home country level
concentration data. The home countries of the four top producers have 78.6% of the tire
market by sales volume (Table 2.22) and 76.9% of the natural rubber inputs into tire
manufacture (Table 2.21). The corresponding top four companies have 64.4% of the tire
market by sales volume (Table 2.23).

2.7 Conclusion
This chapter has outlined the supply chain for natural rubber industry at domestic and
global levels. In summary the key findings are as follows. The Havea tree produces up
Chapter 2 Page 42

to 99% of world natural rubber. The tree was introduced to some Asian and African
countries. Current major producing countries are Thailand, Indonesia and Malaysia.
During WWII, natural rubber production was restricted and synthetic rubber was
invented. Since then rubber consumption has comprised both natural rubber and
synthetic rubber.
Planting natural rubber takes 5-7 years for the tree to mature. Latex can be transformed
to different types of rubber stocks. Sheet rubber and block rubber are the most
consumed types. Indonesia and Malaysia produce block rubber from most of the
products. Thailand has both rubber sheets and block rubber.
Vehicle tires are the most prominent natural rubber product. A vehicle tire consumes 4
pounds of natural rubber and 6 pound of synthetic rubber on average. The ratio varies
by tire type and size. Natural rubber and synthetic rubber are substitutable to a degree
according to use and relative costs. During 1960-2000 the major tire industry countries
consumed 25-29% of the world‟s total natural rubber production and 19-35% of world
total synthetic rubber consumption.
Natural rubber is economically relevant since it generates considerable export income. It
is also important socially since it supports millions of small holder producing units (85-
90%) of all plantations. The natural rubber market in Thailand comprises local markets,
town markets and export markets. Central markets help support the prices in local and
town markets. Export market product is traded in fob Bangkok prices. Thai natural
rubber futures are traded in The Agricultural Futures Exchange of Thailand. Other
relevant prices are the TSR20 New York cif prices, the TOCOM futures, and SICOM
Futures.
Thailand, Indonesia, Malaysia and Vietnam were the top four net exporting countries in
2004 (42%, 30%, 11% and 6% respectively). The CR4 is 89% and the HHI is 2,838.
For the period of the study, the top four buying countries from Thailand were Japan
(39%), USA (12%), France (12%) and other EU countries (10%). The overall CR4 is
72%. The top four buyers for Indonesia were US (43%), Singapore (22%), EU (11%)
and Japan (5%). Malaysia‟s top four buyers were EU (27%), Singapore (15%), US
(11%) and Republic of Korea (7%). Results are supported by high HHI. There is a
potential for concentration on the exporting country side to be diminished by the
concentration effects on the importing side. This could be further diminished due to
Chapter 2 Page 43

each individual supplying country being closely tied to an individual buyer country.
Hence oligopsony market power is a potential feature in these markets.
Tire manufacturing is the relevant natural rubber consuming industry for this study. In
Thailand domestic tire firms consume up to 43% of locally consumed natural rubber,
but locally consumed natural rubber is only 10%-11% of the country‟s total natural
rubber production. At world level, natural rubber consumed in the tire sector is
concentrated in USA (37%), Japan (23%), France (9%) and Germany (8%). The CR4 is
77% and HHI is 2,165.
The top four producers based on country sale volume for the year 2000 were Japan
(30%), US (22%), France (19%) and Germany (7%). The CR4 is 79% and HHI is
1,877. The top four producers based on company sales volume for the year 2000 were
Bridgestone Corp (20%), Groupe Michelin (19%), Goodyear Tire & Rubber (18%) and
Continental A.G. (7%). CR4 is 64% and HHI is 1,200.
In conclusion, although natural rubber trading is a small economic item in each
producing country, it is significant for each producing country, impacting upon many
cultivating farmers. Throughout our study there are several areas in the natural rubber
industry that have potential for market power from the buyer side. The natural rubber
producer industry at the country level is concentrated in the hands of a few
manufacturers. Secondly, the natural rubber export industries are dominated by
particular buyer countries for each seller country namely: Japan for Thailand, US for
Indonesia and EU for Malaysia. As such there is potential for market power to be
exercised by the supplier countries of natural rubber could be counterbalanced by the
market power on the natural rubber buyer side. Finally, the natural rubber consumer
industry such as vehicle tire manufacture is concentrated in the hands of a small group
of conglomerate enterprises that cross national borders. As such there is potential for
market power to be exercised by the tire manufacturing countries on the global level tire
market (oligopoly). This concentration is also reflected in country level data with the
major developed countries dominating the consumption of natural rubber for tire
manufacture and the consumption of the manufactured tires. Hence there is potential for
market power to be exercised in the natural rubber markets from the buyer side
(oligopsony) and this potential can be analysed via company level or country level data.
The general information presented in this chapter establishes a basis for further
development of the thesis. In Chapter 3, the theoretical concepts required for economic
Chapter 2 Page 44

analysis and measurement of market power by the global tire industry over the natural
rubber industry are examined. It surveys microeconomic theory of market structure,
theoretical and empirical literature of a variety of methods to assess market power of
oligopoly as well as oligopsony. In addition, empirical studies of the tire industry and
natural rubber industry are reviewed. Given the potential for market power to be
exercised by the tire manufactures either as the buyers in the input market (the supplier
side of the natural rubber input market) or the seller in the output market (the consumer
side of the tire output market), a theoretical model that accommodates the measurement
of both oligopsony and oligopoly is adopted in Chapter 4 .

Chapter 3 Page 45

Chapter 3
Market Power and the Natural Rubber Industry

3.1 Introduction
Chapter 2 has provided the industry background for natural rubber industry and tire
industry. This chapter provides the specific theoretical background for market power
analysis in input markets (oligopsony market power) required to analyse the
performance of the tire industry in the natural rubber market. The first parts of the
chapter reviews the theory dealing with market power in output and input markets. In
subsequent parts the approach to theoretical and empirical basis for the measurement of
oligopsony is examined. In the last parts of this chapter related studies on the tire
industry and the natural rubber industry are reviewed. Conclusions drawn from this
chapter form the basis for the development in Chapter 4 of a general model for
oligopsony market power analysis and its empirical counterpart for application to the
global tire industry and the global natural rubber market.

3.2 Competitive and Non Competitive Markets
The essential characteristics of a perfectly competitive market are the presence of a
great number of sellers and buyers, a standard product, free entry and exit and complete
access to information and technology. As such an individual firm operating within
perfectly competitive markets has no influence over price in either its output or input
markets – it is a price taker in both markets. In output markets, the long run equilibrium
condition for profit maximization for the firm is to supply at the production level where
long run marginal cost, product price and long run average total cost are equal. In input
markets the firm will employ factors to the point where the marginal cost of
employment is equal to the marginal return from the factor. This occurs where the input
price paid for the factor is equal to the value of its marginal product to the firm. This
implies a Pareto efficient outcome in that: resources are used most efficiently to produce
the goods and services most desired by society; the goods and services are produced at
minimum cost and identical resources receive identical prices.
In contrast, an imperfectly competitive market comprises a small number of sellers or
buyers. A firm in the output market faces a downward sloping demand curve. It is no
longer a price taker. The profit maximization condition for this firm is to produce an
Chapter 3 Page 46

output where marginal cost equals marginal revenue but marginal revenue will be less
than product price. In the long run, the firm might not produce at the minimum average
cost and will likely earn economic profits (price exceeds average cost). With
imperfectly competitive input markets the firm will no longer be so small as to have no
influence on price. Again it will no longer be a price taker and as such will face an
upward sloping supply curve for each factor. These outcomes imply that resources are
not used efficiently to produce the goods and services desired by society and identical
resources do not receive identical prices.

3.3 Equilibrium Conditions in Input Markets
Price and employment conditions for inputs are different for different combinations of
input and output markets. For a firm in a competitive market the demand curve for an
input is the value of its marginal product (i.e. w = VMP). The firm producing for a
perfectly competitive output market is a price taker and hence VMP = P.MP where P is
the price for its output product.
However, the demand curve for an input from a firm producing for an imperfectly
competitive output market is its marginal revenue product (MRP) curve (i.e. w = MRP).
The distinction derives from the demand curve facing the firm in its product market: as
P = MR in a perfectly competitive market, then VMP = P.MP = MR.MP = MRP. For
the firm selling its product into an imperfectly competitive market its demand curve is
downward sloping and MR < P and hence MRP < P.MP.
The supply curve facing a firm for an input can also vary across market types. The
supply curve for the firm in a perfectly competitive input market is perfectly elastic (a
horizontal line). This is due to the firm being a price taker in the input market. However,
the supply curve for an input in an imperfectly competitive input market will be upward
sloping as the buyer will no longer be a price taker. Its relative market buying power
will be such as to influence the input supply price. Hence the effective supply curve for
the firm will be the marginal resource cost (MRC) curve where MRC > w (the input
supply price). The difference being the extra cost required to supply infra-marginal units
when the price of the marginal unit increases.
Assuming a linear demand curve for inputs, Figure 3.1 illustrates the position for firms
in a competitive input market with a market input supply curve that is infinitively
elastic. If output market is competitive also, then the equilibrium level of input
Chapter 3 Page 47

employment is where market input supply price (w) equals the value of marginal
product (VMP). The resulting input quantity employed is xcc, at price wcc. If the output
market is non-competitive, the equilibrium level of input employment is where input
supply intersects marginal revenue product (MRP) curve. The quantity employed is
xcm, at price wcm = wcc.

Figure 3.1 Input Employment in a Competitive Input Market

Figure 3.2a illustrates the equilibrium conditions for input employment when the input
market is non-competitive and the supply curve is upward sloping. If output market is
competitive, the employment level is determined by the intersection of the marginal
resource cost (MRC) and the value of marginal product (VMP). The quantity employed
is xmc, at price wmc. If the output market is non-competitive, the equilibrium will be
where marginal resource cost (MRC) intersects marginal revenue product (MRP). The
employment will be xmm, at price wmm.
Figure 3.2b compares the input employment results between competitive input market
and non-competitive input market. The employment in a competitive input market is
xcc, at price wcc if the output market is competitive (where S = VMP). The input
employment in a competitive input market is xcm at price wcm=wcc if the output
market is non-competitive (where S = MRP). The input employment is xmc, at price
wmc for a non-competitive input market and a competitive output market (MRC =
VMP). The input employment is xmm, at price wmm for a non-competitive input market
and a non-competitive output market (MRC = MRP).
VMP
Input Quantity
Input Price
Input inverse supply (S)
xcm
MRP
xcc
wcc
=
wcm

Chapter 3 Page 48


Figure 3.2a Input Employment in a Non-Competitive Input Market













Figure 3.3b Comparing Input Employment in Competitive and Non-Competitive
Input Markets


The two equilibrium levels of input employed in non-competitive input markets (xmc
and xmm) are less than xcc in the case of competitive input markets and the prices (wmc
and wmm) are less than wcc in the case of competitive input markets. Table 3.1
summarizes the four cases of input employments.

VMP
Input Inverse Supply (S)
MRC
Input Quantity
MRP
wmm
xmc
Input Price
xcc
xcm
wmc
xmm
wcc=wcm
VMP
Input Inverse Supply (S)
MRC
Input Quantity
MRP
wmm
xmc
wmc
Input Price
xmm
mm

Chapter 3 Page 49

Table 3.1 Optimality Conditions for Input Employment and Input Price in
Various Types of Market Structure
Input Market
Structure
Output Market
Structure
Optimality Conditions

1 Perfectly
Competitive
Perfectly
Competitive
w = wcc = VMP;
x = xcc,
2 Perfectly
Competitive
Imperfectly
Competitive
w = wcm = wcc = MRP;
x = xcm < xcc
3 Imperfectly
Competitive
Perfectly
Competitive
MRC = VMP;
w = wmc < wcc, wcm;
x = xmc < xcm < xcc
4 Imperfectly
Competitive
Imperfectly
Competitive
MRC = MRP;
w = wmm < wmc < wcc, wcm;
x = xcm =xmm < xmc < xcc

These outcomes represent a social welfare deterioration caused by the absence of
perfect competition in the input market. They represent Pareto inefficient outcomes. The
greater the degree of non competitiveness across the two markets, the greater will be the
degree of Pareto inefficiency and social welfare deterioration. The only Pareto efficient
outcome for the input market is that generated by a perfectly competitive input market
linked to a perfectly competitive output market for the product produced by the input in
question.
The focus of this study of potential market power of tire manufacturers in the input
market for natural rubber is on the third and fourth cases in Figure 3.2a. (i.e., non-
competitive input markets with competitive output markets (oligopsony/competitive)
and non-competitive input markets with non-competitive output markets
(oligopsony/oligopoly). Both cases involve an oligopsony outcome whereby the source
of the non-competitive market structure is assumed to derive from the market power of
the buyer of the input rather than the seller of the input. As described in Chapter 2,
specifically sections 2.4 to 2.6, the history and structure of the natural rubber industry
does not support a proposition of market power residing with the natural rubber sellers
even during the periods of INRO operation. Hence the possibility of an oligopolistic
market structure with countervailing buyer and seller market power, or even the extreme
bilateral monopoly case is not explored in this section. Instead as oligopsony is the
Chapter 3 Page 50

proposition to be tested the next sections examine in more detail the theoretical base for
empirical analysis of oligopsony market power.

3.4 Oligopsony Analysis
A simple approach to oligopsony analysis is to adapt standard tests for output market
power (oligopoly) for input market power testing (oligopsony). A structural change
approach is also found in the literature as is the conjectural variation approach that has
the Cournot model as its theoretical foundation.
Conventional tests for the presence of oligopoly include market concentration ratios
such as the CR4 and the Herfindahl-Hirschman Index (HHI).Whereas the attractions of
this approach include their ease of application, critics argue that the concentration ratios
and the Herfindahl-Hirschman Index do not inform about market entry conditions and
the competitive behaviour of market participants (Ferguson & Ferguson, 1994 pp. 43-44
and Salvatore, 1997 pp.416-419).
The Lerner Index (Lerner, 1934) has been adopted as a basic general measurement of
market power in output markets. Since a monopolist can restrict output hence raising
prices, this basic general measurement of market power is derived as
p
MC p
L
÷
= where L is the Lerner index, p is the product price and MC is the producing
firm‟s marginal cost. The Lerner index can be converted to
n
1
= L where n is the direct
demand elasticity (
q
p
p
q
c
c
), q is the producing firm‟s output).
17
Thus, the higher the
difference between price and marginal cost, the greater is the Lerner index of market

17
Proof: based on Martin (1994) pp.25-27.
Marginal revenue is )
1
1 ( ) 1 (
.
n
÷ =
c
c
+ =
c
c
+ =
c
c
= p
p
q
q
p
p
q
p
q p
q
q p
MR where MR is marginal
revenue, p is market product price, q is individual firm‟s product quantity, and n

is the absolute value of
the conventional direct demand elasticity (
q
p
p
q
c
c
). In addition, based on profit maximization condition,
marginal revenue (MR) = marginal cost (MC). It implies that )
1
1 (
n
÷ = = p MR MC and
n
n 1
)
1
1 (
=
÷ ÷
=
÷
=
p
p p
p
MC p
L

Chapter 3 Page 51

power. In addition, the higher the demand elasticity for the product, the less is the
market power.
However, it is argued that sometimes a high Lerner index does not imply high profits
because the firm might be benefitting from a low average cost at that specific
production level. Another issue is that prices might be altered by limit pricing, or by
attempts to avoid legal scrutiny. It is also argued to be in a static context, not
incorporating the shifts over time of demand and costs (Salvatore, 1997).
The Lerner index is constructed on the output market optimality condition (MR = MC).
For inputs the marginal rule has to be adapted to accommodate the input market
optimality condition (MRP = MRC). The Lerner index does not identify whether the
procurement for the input employed is via a competitive input market (input supply
curve is a horizontal line) or non-competitive input market (input supply curve is
upward sloping). These two market structures have different implications for price level
and output product quantity as described in previous sections.
Hence, in the context of a potential imperfectly competitive input market, such as
natural rubber market in this thesis, the Lerner index in its strict form is not directly
applicable to an oligopsony market. But its principle does lend itself to equivalent
measures for input markets as is discussed below.
To consider oligopsony market power, buyer side market power theories are required.
Studies that do include influences from the buyer side‟s market power can be classified
according to approaches on: buyer concentration, structural changes and market power
analysis, and Cournot models with conjectural variation. They are discussed as follows.

3.4.1 Buyer Concentration Approach
Studies of the impacts of buyer concentration on seller‟s profits are based on the
concept of countervailing power proposed by Galbraith (1952) who argued that the
conflict of interest between firms of equal power on different sides of the market could
be a factor limiting the exercise of market power. Lustgarten (1975) estimated the price-
cost margins of 327 four-digit US manufacturing industries as a function of seller
market structure variables (seller concentration and capital-sales ratio) and buyer market
structure variables (buyer concentration and purchase per firm per year, the dispersion
of sales across buying industries) whereas the buyer concentration ratios were computed
from the nation‟s input-output table and weighted by each industry‟s share on total
Chapter 3 Page 52

inputs. Results indicated that seller concentration variables had positive impacts on
price-cost margin. The impacts of buyer market structure variables on price-cost margin
were found negative. This implies that concentration on the buying side of the market
limits control of price on the supplying side of a market and hence price is lower. This
result supports the countervailing argument. However, the study did not contemplate
any welfare losses resulting from buyer concentration.
Decreases in profitability due to buyer concentration (as defined by the price-cost
margin) were found for a group of low seller concentration manufacturers but not for a
group of oligopolist manufacturers (Kelly & Goss, 2000). This study was applied to US
retailers‟ manufacturing suppliers. The study argued that the finding was contradictory
to economic theory which predicts that buyer concentration effects will be confined
largely to firms in oligopolistic industries because economic profits are available to be
redistributed to buyers with market power. A more recent study also found that the
number of buyers is a source of countervailing power (Engle-Warnick & Ruffle, 2005).
In this experiment, a two buyer session (case) was found to achieve significantly lower
prices than four buyers. Furthermore, it was found that the source of the price gap,
compared to other factors, is the number of buyers. This was identified in the
experiments of two-buyer cases where the monopolist adopts cautious or conservative
pricing for fear of provoking demand withholding, thus resulting in lower price than for
the four buyer case. The results are argued to provide the basis for a behavioural theory
of buyer countervailing power where the number of buyers may be a key parameter.
In addition, it was found that cost-important inputs (i.e. inputs that are highly relevant to
production) had negative impacts on price-cost margins. This implied that purchasing
industries tended to bargain down prices of inputs that were relevant to production more
than less important inputs. Relatively unimportant inputs were likely to have higher
margins (Bradburd 1982). The effect of buyer concentration can be offset by output
transfers under administrative control (Newmark 1989) and vertical integration (Martin
1986).

3.4.2 Structural Changes and Market Power Analysis
An example of a second approach to oligopsony market power was provided by an early
study by Just & Chern (1980) who argued that cost information is usually inadequate to
be applied to the testing of Lerner measure. However, one can obtain indirect evidence
Chapter 3 Page 53

of market power from market behaviour. If there is an exogenous shock on one side of
the market which is perfectly competitive, the resulting demand and supply, (i.e. price
and quantity equilibrium), should remain unaffected. However, if there is any market
power on the other side, the price cost relation will shift. The study by Just & Chern
(1980) was of the US tomato processing industry during the 1970s. During that time
there was an exogenous shift in the supply side due to the replacement of labour input
by machines. Hence variable costs were replaced by fixed costs. Supply was shifted to
the right and became more inelastic. The estimated demand was found to shift
downward and became more inelastic. However, competitive market theory would
indicate a price fall and quantity increase due to rightward supply curve shifts.
Consequently, it was concluded that the outcomes were evidence of oligopsony power
and price leadership behaviour in the tomato processing industry.
Limiting factors in this approach include correct identification of the possible causes of
the shifts and its sensitivity to specification errors in the demand and supply functions.
Bresnahan (1987, 1989) used the demand and supply structural approach to trace for
collusion in the automobile market. The analysis was based on the structure of the
residual demand curve facing the automobile manufacturing firms. Although it was a
study on oligopoly aspects, it provided a basis for an expansion to an oligopsonistic
analysis as for example in Durham & Sexton (1992) who analysed the oligopsonistic
market power potential via an inverse residual supply on the specific input to the
employer firm. If the residual supply comprises, in addition to input price elasticity, an
element of the reaction function of rival input suppliers, then it is considered that the
output producing firm facing this residual supply curve is capable of exploiting market
power on the input supplier.
Parallel to these examples of the structural changes approach is the conjectural variation
approach discussed in next section.

3.4.3 Cournot Model with Conjectural Variation Approach
The basic Cournot model is a well known simultaneous quantity setting model (Varian
1996). However, the Cournot model is criticized for two aspects: first for the
assumption that a firm perceives that the other firm‟s output is independent of its own
quantity setting decision and secondly for the assumption that a firm maximizes its own
profits without cooperative or collusive behaviour with other firms.
Chapter 3 Page 54

In order to generalize the basic Cournot model, some variations on the model‟s theme
are proposed. They allow for cost differences between oligopolists, quantity leadership
and limit pricing behaviour, conjectural variations and cooperation (Martin 1996).
Within the conjectural variation framework, the Cournot model is extended to relax the
assumption that a particular firm expects that rival firms do not adjust their outputs in
response to its own output changes. Consequently, the extended model allows for an
individual firm‟s expectation that the other firm (in the duopoly model), or firms (in the
n-firm model) might adjust their outputs with respect to the firm‟s output. The Cournot
model with conjectural variation is depicted in Table 3.2.

Table 3.2 Cournot Model with Conjectural Variation
Let t
I
be firm I’s profit. p the market product price, c
i
firm i’s cost function, mc
i
its marginal
cost. q
i
the firm’s

output and Q the market output. n is the product demand elasticity (
Q
p
p
Q
c
c
).
Q
i
is the sum of rivals’ output changes (
¯
=
c
c
j i
i
j
q
q
), where q
j
is other firm’s output).
(1) Cournot General Model (n-firms, cost differences)

) (
i i i i
q c pq ÷ = t
(2) 0 = ÷
c
c
+ =
c
c
i
mc q
Q
p
p
q
i
i
i
t

(3)
n
1
· =
÷
Q
q
p
mc p
i i

Cournot General Model with Conjectural Variation (n-firms, cost differences)
(2a) 0 ) 1 ( = ÷
c
c
+
c
c
+ =
c
c
i
mc q
q
Q
Q
p
p
q
i
i
i
i
i
t

(3a) ) 1 (
1
i
i i i
q
Q
Q
q
p
mc p
c
c
+ · · =
÷
n


Source: Compiled from (Scherer & Ross, 1990)
From Table 3.2, firm i‟s profit in the Cournot general model is depicted by equation (1).
The optimality condition is derived in equation (2). Equation (3) manipulates (2) into
price-cost margin measurement of market power, which equals to market output
elasticity weighted by firm i‟s market share. When modified with conjectural variation,
the optimality condition is equation (2a), which allows for firm i‟s expectation (
i
i
q
Q
c
c
)
about rivals‟ responses to its output changes. The derived price cost margin measure
Chapter 3 Page 55

(Lerner index) is depicted by equation (3a), where the term ) (
i
i
q
Q
c
c
becomes an indicator
for market performance, as summarized in Table 3.3.

Table 3.3 Conjectural Variation and Market Performance
Firm i’s Conjecture

Market
Performance

1 Firm i expects rival firms to totally offset its output
changes. Result resembles a perfect competitive
equilibrium condition i
i
q
Q
c
c
= -1
p
mc p
i
÷
= 0
2 Firm i expects rival firms to offset some of its output
changes.
i
i
q
Q
c
c
< 0
p
mc p
i
÷
= 0
3 Firm i expects rival firms not to respond to its output
changes, being a basic Cournot case.
i
i
q
Q
c
c
= 0
p
mc p
i
÷
= 0
4 Firm i expects rival firms to match some of its output
changes.
i
i
q
Q
c
c
> 0
p
mc p
i
÷
= 0
5 Firm i expects rival firms to fully match its output
changes. This is a collusive behaviour and it equates to
a monopoly equilibrium condition.
(
*
1
n
=
÷
p
mc p
i
if
Q
q
Q
q
q
Q
i
i
i
i
) 1 ( ÷
=
c
c
) where
*
n is output
demand elasticity:

Q
p
p
Q
c
c

i
i
q
Q
c
c
= 1
*
1
n
=
÷
p
mc p
i

Source: Compiled from (Scherer & Ross, 1990)
From Table 3.3
i
i
q
Q
c
c
varies from -1 to 1, reflecting rivals moving from offsetting to
matching firm i‟s output and equilibrium output falls while price rises. If conjectural
variation is zero, it implies that the firm expects that other firms do not react to its
output changes, reflecting a basic Cournot oligopoly model. If conjectural variation is 1
it implies that the firm expects its rivals to change output by the same amount. This
reflects an oligopoly with full collusion case (if the firm‟s market share is less than 1) or
a monopoly case (if the firm is the sole producer in the market). If the conjectural
variation is -1, it implies that the firm expects that other firms react by fully offsetting
Chapter 3 Page 56

its output changes and market output is not affected by its output. This is the same
characteristic for a competitive output market.
Of interest is the use of alternative measures for conjectural variation. For example
whereas Azzam (1997) employs a conjectural variation elasticity defined for its rivals
output responses as defined in Tables 3.2 and 3.3, Appelbaum (1982) defines the firm‟s
conjectural variation elasticity as
Q
q
q
Q
j
j
.
c
c
being the “… conjectural elasticity of total
industry output with respect to the output of the j‟th firm …” (p289). This alters the
interpretation of the measure values in Table 3.3 as is illustrated in Table 3.4.

Table 3.4 Comparing Conjecture Variation Definitions and Resulting Implications
Market Structure Firm i’s
Conjecture
Market Performance

S&R, Az Appelb, C&T
1 Firm i expects rival firms to
totally offset its output changes.
Result resembles a perfect
competitive equilibrium condition
i
i
q
Q
c
c
= -1 0 =
c
c
i
q
Q

0 =
÷
p
mc p
i

2 Firm i expects rival firms to
offset some of its output
changes.
i
i
q
Q
c
c
< 0
1 0 <
c
c
<
i
q
Q

0 >
÷
p
mc p
i

3 Firm i expects rival firms not to
respond to its output changes,
being a basic Cournot case.
i
i
q
Q
c
c
= 0 1 =
c
c
i
q
Q

4 Firm i expects rival firms to
match some of its output
changes.
i
i
q
Q
c
c
> 0
1 0 <
c
c
<
i
q
Q

5 Firm i expects rival firms to fully
match its output changes. This
is a collusive behaviour
outcome. It equates to a
monopoly equilibrium condition.
i
i
q
Q
c
c
= 1 1 =
c
c
i
q
Q

Q=q
i

*
1
n
=
÷
p
mc p
i

where
*
n is output
demand elasticity:

Q
p
p
Q
c
c

Notes: S&R = Scherer & Ross (1990), Az = Azzam (1997), Appelb = Appelbaum (1982), C&T
= Chang & Tremblay (1991)
From Table 3.4 Appelbaum (1982) and Chang & Tremblay (1991) define conjectural
variation as
i
q
Q
c
c
where Q is the sum of all firms‟ outputs, i.e. total market output. If the
Chapter 3 Page 57

market is competitive firm i would not expect market output to be affected by its output
changes because they would be offset by rival firm reactions, hence its conjectural
variation to market output is zero, whereas it is -1 in Scherer & Ross (1990) & Azzam
(1997). In case 2, firm i expects rival firms to partially offset its output changes and its
conjectural variation is between zero and 1, whereas it is between < 0 in Scherer & Ross
(1990) & Azzam (1997). In the Cournot case, firm i expects rival firms do not react to
its own output change hence the conjecture to total market output change by its own
output changes is 1, whereas it is zero in Scherer & Ross (1990) & Azzam (1997) and
the conjectural elasticity is simply the firm‟s market share. In case 4, firm i expects rival
firms to partially match its output changes and its conjectural variation is between zero
and 1, whereas it is > 0 in Scherer & Ross (1990) & Azzam (1997). In the monopoly
case the quantity of total market output changes is solely based on firm i and hence its
conjectural variation to market output and corresponding conjectural elasticity is 1. This
is the same for Scherer & Ross (1990) & Azzam (1997).
Therefore, firm i‟s conjectural variation varies from zero to 1. The corresponding
assessment of market performance by
p
mc p
i
÷
is identical in both approaches. The
approach can be analogously applied to an identification of firm i‟s conjectural variation
in input markets.
To expand the Cournot conjectural variation oligopoly model to an oligopsony model,
one must incorporate a measure of input market power, which can be achieved from
literature in oligopsony model discussed in section 3.5. The literature on oligopsony
market power that uses conjectural variation is generally found in markets for labour
and commodities, especially agricultural products. Both markets share a common
feature in that there are many homogenous suppliers versus a small number of buyers.
In most studies the concept of shadow price is employed. This is the optimal price in
perfectly competitive markets, as introduced in section 3.2. Consequently market power
is measured as the deviation of actual price from the shadow price in perfectly
competitive markets. Shadow price is the value of marginal product (VMP) that is
produced from the specific input. If resource price is less than the VMP, then there is
evidence of input price distortion, which indicates a less than competitive market for
outputs and/or inputs. Given the dominance of this theoretical framework, in the
oligopsony literature we examine examples of studies of oligopsony market power in
the next section.
Chapter 3 Page 58

3.5 Studies of Oligopsony Market Power Analysis with Conjectural
Variation Approach
Following an extensive literature review, no study was found to have been undertaken
of the impact of oligopsony, using the model extended from Cournot oligopoly with
conjectural variations, by the global tire industry on the Thai natural rubber industry.
Nevertheless, the literature does include a number of studies of market power in a
variety of industries that provide a basis for this research. These studies include
applications for oligopoly (output markets) and oligopsony (input markets). Key
examples are as follows.
Appelbaum (1982) provided an important early study using the conjectural variation
approach to assess the potential of oligopoly market power in output markets. Many
studies in the analysis of oligopoly and oligopsony have been based on this paper (for
examples: Schroeter, 1988; Azzam & Pagoulatos, 1990; Chang & Tremblay, 1991 and
Azzam, 1997). Appelbaum applied a measurement of oligopoly power to four industries
in the US, namely the textile, rubber, electrical machinery and tobacco industries during
1947-1971. Although it did not accommodate estimation of input market power, this
study is a heavily cited paper that provided a base for extensions to estimate both output
market and input market power. The measure developed by Appelbaum was based on
the definition of oligopoly being the difference between price and marginal cost.
Manipulation converted this definition to a measure that becomes the value of output
market conjectural elasticity times the elasticity of the inverse demand for input
18
.
Therefore, it was argued that the degree of deviation from a perfectly competitive
market is determined by the combination of these two elasticities. Hence Appelbaum
identified the importance of both market demand and conjectural elasticity in generating
market power. Schroeter & Azzam (1990, 1991) extended the conjectural variation
models from single homogeneous product industries to joint production of two demand-
related products. They examined the issue of marginal cost, oligopoly and oligopsony
market power and price risk components. They incorporated a degree of price
uncertainty component in price margins and argued that ignoring this component would
lead to erroneous inferences of imperfectly competitive conduct in the product market.

18
n u · =
÷
i
P
MC P
where u
i
is the firm‟s conjectural elasticity in output market and n is output
demand elasticity derived from an inverse demand function.
Chapter 3 Page 59

The link between market power, cost-efficiency and concentration was examined by
Azzam (1997) with a model that examined the concept of trade off between market
power and cost efficiency from a policy perspective. Lopez, Azzam & Espana (2002)
proposed that market power and its effects on market efficiency are mixed. Their study
applied the conjectural variation approach to oligopoly power to food industries in the
US. They linked the oligopoly power effects in output prices and cost-efficiency effects
of industrial concentration. They found that concentration increases were related to
oligopoly power in 81% of the industries studied and to significant gains in cost
efficiency in 34% of the industries. Combining oligopoly and cost efficiency effects,
concentration decreased prices in 9.4%, increased prices in 68.7% and had no effect on
prices in 21.9% of the industries.
As stated above the approach developed by Appelbaum (1982) has been extended to
include input market power. A good example is found in Schroeter (1988) who
converted marginal cost into an expression including input prices
19
. The factors that
link marginal cost to input prices are the input supply elasticity and the firm‟s
conjectural variation in input market. Thus Schroeter extended the market power
concept to include two market components. One is the measurement of oligopoly power
in the output market: the ratio of firm output conjectural elasticity and price elasticity of
output demand; the other for measuring oligopsony power in the input market being the
ratio of firm output conjectural elasticity and price elasticity of input supply. Schroeter
applied his measure to the US beef packaging industry (1951-1983) and concluded that
it was not competitive since the output conjectural elasticity was non-zero. However,
the degree of output and input market power was small.
Azzam & Pagoulatos (1990) criticized Schroeter for his assumption of fixed proportions
between outputs and inputs thus forcing the corresponding conjectural elasticities for
inputs and outputs to be identical. They allowed inputs to be used in variable
proportions in their study of market power in the US meat packaging industry (1959-
1982). They found that both output and input conjectural elasticities were not zero thus
the industry was imperfectly competitive.

19

i
i
M
i
mc w p ' ) 1 ( ) 1 ( + + · = + ·
c
u
n
u
where p is output price,

w
M
is the price of input and c

is price
elasticity of an inverse supply for input

, mc’
i
is other inputs‟ marginal cost , q
i
is the firm‟s output and u
i

is the firm‟s conjectural elasticity
) (
Q
q
q
Q
i
i
c
c
.

Chapter 3 Page 60

Chang & Tremblay (1991) used the conjectural variation approach to develop an index
of oligopsony/oligopoly power. The index measures the extent that input price paid by a
firm deviates from the value of marginal product for the input. The index was also able
to be transformed to an industry level. It could also be reduced to the Lerner index or
the Herfindahl-Hirschman index. They extended these models to duopsony cases
(Chang & Tremblay, 1994) but did not provide an empirical application.
Durham & Sexton (1992) studied the oligopsony market power of tomato processors on
a group of competing regional farmers in California. They extended Bresnahan‟s
approach on the demand side (3.4.2) to Appelbaum‟s approach on the supply side
(3.4.3). The results found the processors‟ market power potential was not high and they
argued that this was due to increasing extensive rivalry between processors in
neighbouring regions.
Murray (1995) argued that previous studies were restricted by difficulties in measuring
VMP. His study of market power in the wood and sawlog industry incorporated the
estimation of VMP within a system of estimating equations based on a profit function
and shadow prices. His estimates for the average conjectural elasticities during the years
1958-1988 were non-zero but low (0.04 for sawlog industry and 0.2 for pulpwood),
indicating some oligopsony power. Despite these low values for market power, the
corresponding price distortion was as high as 0.24 because the sawlog supply had a low
elasticity. The pulpwood industry had a similar price distortion degree, 0.29, despite
higher oligopsony power because its supply elasticity was higher (0.17 for sawlog and
0.54 for pulp paper). A deficiency of this study was the absence of analysis of market
power on the output side and output market power tends to be a part of the overall effect
as demonstrated by Chang & Tremblay (1991) whose model is further developed in
Chapter 4 based on alternative interpretations of various components of the original
model. Different market power index measures are derived and subsequently
reinterpreted to provide a country level model for examination of the global tire
manufacturing industry and its link to a country level natural rubber industry.
Further examples of the conjectural variation approach that are of interest to this study
include the following. Huang &Sexton (1996) applied the conjectural variation
approach to measure returns to the mechanical potato harvesting in Taiwan. It was
found that imperfect market competition had distorted the benefit distribution of
innovation from farmers to marketing firms – an outcome predicted by oligopsony
theory. Alston et al. (1997) extended the model of Huang &Sexton (1996) to assess the
Chapter 3 Page 61

effects of supply shifting generated from research-induced technical changes on
participants in the agribusiness when markets are oligopolistic and oligopsonistic. It
was found that the total benefits were reduced by imperfect competition and the share
shift from producers and consumers to processors. Azzam (1998) applied the
conjectural variation framework to test the relationship between captive supplies and
open-market prices under imperfect competition. Alternatives to the conjectural
variation approach were considered necessary to identify factors other than market
power. Muth & Wohlgenant (1999) criticized the use of fixed proportions in production
functions and proposed a model with variable proportion technology which could be
applied to markets in which data for some inputs are not available. Their results
indicated lower levels of market power than those found in previous studies and they
argued that imposing restrictions such as fixed proportion technology on the structural
model tends to overstate the estimated results.
Sexton (2000) provided an extensive review and evaluation of empirical research of
market power in the US agricultural sector. Higaki et al. (2001) studied the state of
competition in the Japanese wholesale tomato market. Zhang & Sexton (2002) utilized
the conjectural approach as part of an analysis for the decreased effects that agricultural
food producer received due to oligopsony market power. Weerahewa (2003) applied the
conjectural variation approach to assess the degree of oligopoly and oligopsony power
the tea-processing industry in Sri Lanka, India Kenya and oligopoly power from US,
U.K. and Canada. Wilcox & Abbott (2004) tested for multinational corporations‟
potential oligopsony market power in the West African nations‟ farm level cocoa bean
markets. Anders (2005) applied the conjectural variation approach to assess the
oligopoly and oligopsony market power in German regional retail meat markets. Lloyd
et al. (2006) tested for the presence of downstream market power exerted by
supermarkets in vertically related UK food markets.
Sun (2006) applied the conjectural variation framework to evaluate the impact of US
regulations on the forest product industry which comprises landowners, loggers, millers,
retailers and consumers in the supply chain. It was found that the policy had welfare
transferring impacts with consumers experiencing much of the welfare loss from the
regulation policy. Hockmann (2007) assessed the degree of competition in milk
purchasing by the processing industries in Hungary during the transition period. A low
level of oligopsony market power was found despite a high level of domestic buyer
concentration. O‟Donnell et al. (2007) estimated the degree of competition in 13
Chapter 3 Page 62

Australian grains and oilseeds industries. They found evidence of market power by the
flour and cereal food product, beer and malt and other food product industries as buyers
of wheat, barley, oats and triticale from farmers.
Most of the studies identified above found evidence of oligopsony market power.
Although they approached the measurement of market power using a variety of
methods, one point of commonality was the employment of duality theory and shadow
price concepts. Typically under the application of duality theory, either Shephard's
Lemma or Hotelling's Lemma were invoked to generate input demand and output
supply functions. The shadow price was drawn from optimality conditions for profit
maximization. Oligopsony/oligopoly power was defined as the deviation of the input
price actually paid from the value of its marginal product. Their findings support the
claim that the higher the degree of imperfect competition, the higher is the degree of
oligopsony/oligopoly market power and vice versa. Hence an analysis of market
competitiveness (i.e. conjectural elasticities in output and input markets as well as the
elasticities of demand for inputs and supply of outputs) is needed to obtain a valid
measurement of market power.
These studies share a general methodology: from a profit function optimality condition
they derive hypothesis tests for the presence of any oligopsony behavior together with
measurement of the degree of oligopsony market power. Their differences derive
mainly from their cost and profit function specifications.
Table 3.5 summarizes some relevant issues arising from these studies.
Chapter 3 Page 63

Table 3.5 Relevant Conditions in Oligopsony Studies
Schroeter (1988)
20

Profit function
) , ( w q c q w q p
i i i M i i
÷ · ÷ · = t

Optimality condition

i
i
M
i
mc w p ' ) 1 ( ) 1 ( + + · = + ·
c
u
n
u

Hypothesis test for competitive market
performance

0 =
i
u

Market power measurement

c
u
i
l =

Azzam & Pagoulatos (1990)
21

Profit function
¯
=
· ÷ · =
M
k
kj k j j
x w q p
1
t

Optimality condition

) 1 ( ) 1 (
1 1
c
o
n
u
j
j x
j
w MP p + · = · ÷ ·

Hypothesis test for competitive market
performance

0 = =
j j
o u

Market power measurement

n
u
j
for output market,
c
o
j
for input market


20
Given n firms in the industry: t
i
is firm i‟s profit, p is market product price, q
i
is the firm‟s

output, w
M
is
material input price, input is a fixed proportion to output, c
i
is the firm‟s cost function, mc
’i
is firm i‟s
marginal cost from other input, w is a vector of other inputs‟ prices, u
i
is the firm‟s conjectural elasticity
) (
Q
q
q
Q
i
i
c
c
, n

is the value of output demand elasticity (
Q
p
p
Q
c
c
) and c is the material input supply
elasticity (
Q
w
w
Q
M
M
c
c
).

21
Given n firms in the industry, t
j
is firm j‟s profit. p is market product price, q
j
is the firm‟s

output, w
k
is
input price, x
k
is input k, k= 1,..¸m, x
1j
is the specific input used by firm j,.
kj
j
kj
x
q
MP
c
c
= is input x
kj
‟s
marginal product. u
j
=
) (
Q
q
q
Q
j
j
c
c
, o
j= ) (
1
1
1
1
X
x
x
X
j
j
c
c
, n

is the absolute value of output demand elasticity
(
Q
p
p
Q
c
c
) and c

is the input elasticity (
1
1
1
1
X
w
w
X
c
c
). X
1
is the specific input.

Chapter 3 Page 64

Table 3.5 (continued)

Chang & Tremblay (1991)
22

Profit function
i i i i
rk x w q p ÷ · ÷ · =
1 1
t

Optimality condition

0
1 1
1
1
1
1
1 1
w x
dx
dX
dX
dw
p
x
q
q
x
Q
dQ
dQ
dQ
dp
i
i i
i
i
i
i
i
= ÷ · · ÷ ·
c
c
+ ·
c
c
· ·

Hypothesis test for competitive
market performance

1
1
=
i
u and 0
3 2
= =
i i
u u

Market power measurement
c
|
n
o
c
|
i
i i
i
i
VMP
w VMP
+
+
=
÷
1
) (
1

Azzam (1997)
23

Profit function
) , ( )) ( ( v t
i i i i
q c q Q w p ÷ · ÷ =
Optimality condition

i i
i
mc
w
Q
q
w p + + · · + = ) 1 ( u
c

Hypothesis test for competitive
market performance

1 ÷ =
i
u

Market power measurement

mc
H
w
w p
M +
O + ·
=
÷
=
n
) 1 ( ) (


Source: Compiled from Schroeter (1988), Azzam & Pagoulatos (1990), Chang & Tremblay
(1991), Azzam (1997).

22
Given n firms in the industry, t
i
is firm i‟s profit, p is market product price, q
i
is the firm‟s

output, x
1i
is
a specific input, w
1
is the specific input price, k is capital input,
,
r is rental costs, VMP = value of marginal
product, u
i 1
is VMP‟s coefficient, u
i 2
is
i
q
Q
c
c
, u
i 3
is
i
x
X
1
1
c
c
, o
i
is
Q
q
q
Q
i
i
c
c
, |
i
is
i i
x
X
x
X
1
1
1
1
c
c
, n is the
value of output demand elasticity (-
Q
p
p
Q
c
c
) and c is the input supply elasticity (
1
1
1
1
X
w
w
X
c
c
).

23
Given n firms in the industry, t
i
is firm i‟s profit, p is market product price, q
i
is the firm‟s

output, w(Q)
is the input price where input is a fixed proportion of output, c
i
is the firm‟s cost function, v is a vector of
other inputs‟ prices. c is the input supply elasticity (
Q
w
w
Q
c
c
), mc
i
is firm i‟s marginal cost,
i
j
q
q
c
c
is firm
i‟s expectation about firm j‟s responses to its input changes, j = 1,…..n.
¯
=
c
c
=
n
i j i
j
i
q
q
u
,
¯
¯
·
= O
i
i
i
i
i
q
q
2
2
) ( u
,
a weighted average of the n firms‟ conjectural variations.



Chapter 3 Page 65

To summarize this general methodology, consider the following model. Assume a
certain industry has n firms where: t
i
is firm i‟s profit, p is market product price, q
i
is
the firm‟s

output, c
i
is the cost function, MC
xk
is the marginal cost for inputs x
ki
, with
price w
k
for k = 1,..m, x
1j
is a specific input, w
1
is the specific input‟s price, MP
x1i
is the
input x
1i
‟s marginal product, VMP is the value of marginal product, o
i
is the output
conjectural elasticity
Q
q
q
Q
i
i
c
c
, |
i
is the input conjectural elasticity
i i
x
X
x
X
1
1
1
1
c
c
, n is the
value of output demand elasticity (-
Q
p
p
Q
c
c
) and c is the input supply elasticity (
1
1
1
1
X
w
w
X
c
c
). The Optimality condition for firm i‟s factor employment is that its marginal
revenue product (MRP) = marginal resource cost (MRC).
1. In firm i‟s output market:
) 1 ( ) 1 ( ) 1 (
) 1 (
) (
1
1
1
1
n
o
n
o
n
o
i i
i
i
i
i
i
i i
i
i
i
i
i
VMP MPx p
x
q
p
x
q
Q
q
q
Q
Q
p
p
Q
p
x
q
q
Q
Q
p
q p
MP MR MRP
+ · = + · · = + ·
c
c
· =
c
c
· ·
c
c
·
c
c
· + =
c
c
·
c
c
·
c
c
+ =
· =

2. In firm i‟s input market, the MRC can be derived as follows. Let c
i
be the firm‟s
cost function,
) 1 (
) 1 (
1
c
|
i
k
k
k
k
k
k
k
k
k
k
k
k
k
k
k
k
k
i
xk
m
k
k k i
w
X
x
x
X
w
X
X
w
w
x
x
X
X
w
w
x
c
MC
x w c
+ =
·
c
c
· ·
c
c
+ =
·
c
c
·
c
c
+ =
c
c
=
=
¯
=

For the specific input use by firm i: x
1ti
, the MCx
1i
is
) 1 (
1 1
c
|
i
i
w MCx + =
Chapter 3 Page 66

3. From firm i‟s optimality condition for input employment MRP = MRC,
) 1 (
n
o
i
VMP + = ) 1 (
1
c
|
i
w + .
This condition can be manipulated to provide for specific purpose analysis depending
on the purpose of each particular study. For instance, as will be developed in Chapter 4,
Chang & Tremblay (1991) derive
VMP
w VMP
k
÷
c
|
n
o
c
|
i
i i
+
+
=
1
in order to measure the degree
of oligopsony market power. The symbols for elasticity variables for output market (n
and o) and input market (c and |) were adopted from the original Chang & Tremblay
(1991) model whereas discussions elsewhere in this thesis are discussed in the reverse
order of input market / output market (oligopsony / oligopoly).
The weakness and strength of the conjectural variation approach are extensively
addressed in the literature. One limitation of these models is their application of firm
level model to industry level data. However, it is possible to use industry-level data in
place of firm-level data, given certain conditions. These conditions include a specific
level of marginal costs, marginal revenue and conjectural elasticities. That is the firms
in the industry are assumed to have linear and parallel expansion paths and therefore
values of marginal products and marginal costs are constant and equal across firms.
This is the so-called Gorman Polar form of production technology. This approach
allows different firms to have different cost curves but the curves are all linear and
parallel (Appelbaum, 1982). In equilibrium each firm equates marginal costs to its
perceived marginal revenue hence, their conjectural elasticities are guided along with
this condition and hence equal across firms.
Another critique for the framework is that it is a static analysis. Accordingly, given
other things remain static, it analyses whether output price, marginal resource cost and
input price are equal or not. But it should be noted that this requires some particular
conditions for the framework to be effective. For instance, the more mature the market,
the more constant the consumers‟ taste, the more saturate the level of technological
change, the more likely is the validity of the results. (Ferguson & Ferguson, 1994).
There are some limits to this structure-conduct-performance approach. In particular, it
tends to encounter problems with respect to the concepts of concentration and barriers
to entry. Concentration ratios make sense only when the large firms are distinctly large.
Chapter 3 Page 67

High profits may arise from efficiency due to their ability to operate at the minimum
efficiency scale. Finally, accounting measures of performance may not properly reflect
economic profits and costs such as in the case of long-lived capital assets (Carlton &
Perloff, 2000).
It is claimed that the net effects of the oligopoly and oligopsony market power can be
enhancing, weakening or indeterminate depending on the functional forms employed.
For instance Chen & Lent (1992) claim that use of linear output demand and linear
input supply models produces indeterminate effects.
The conjectural variation approach is criticized as weak by Hall (1988) because it
depends on the level of error variance and the returns to scale of the production
function. However, his alternative total factor model was seen to have weaknesses in
determining the degree of monopsony market power unless it was restricted to constant
returns to scale (Hyde & Perloff, 1994).
According to Hyde & Perloff (1994), the conjectural variation approach is weak
because it depends on the model specification, the level of error variance and the returns
to scale of the production function. They made a comparison between the structural
approach and the total factor production approach pioneered by Hall (1988). The results
indicated that the structural (conjectural variation) approach worked well if it was
properly specified and the variance of the error structure was not too high. The ability of
the model to distinguish various types of market structure was found to depend on the
returns to scale of the production function. The Hall‟s method worked well when
production function was constant returns to scale, otherwise there would be serious
biases; another weakness was that Hall‟s method was inadequate if one expected to
determine the degree of monopsony power.
Corts (1999) argued that the conjectural variation approach fails to measure market
power accurately. He pointed to the problems associated with assuming a firm‟s
observed behaviour captures the firm‟s conjectured views on its competitors‟ behavior.
At best this approach thus provides an average as against a marginal measurement of the
conduct parameter. He further commented that, despite increased criticism from a
theoretical viewpoint, the conjectural variation approach to generation of market power
measures was extremely popular for empirical studies (Corts, 1999, p228).
Chapter 3 Page 68

In response to these arguments some robustness tests were developed to compare the
results from conjectural testing with results from directly measured price-cost margins
(Genesove & Mullin, 1998 and Wolfram, 1997).
Alternative approaches to estimation of market power and industry conduct include a
latent modelling of structure model (Mccluskey & Quagrainie, 2004) and a
nonparametric measure (Love & Chumway, 1994). Alternative approaches such as these
can be used to compare with conjectural variation measures.
There may be other explanations for the price-cost margin results other than the effects
of concentration and market power. These could be regarded as structural changes in
social factors such as taste and healthy lifestyle concerns as well as economic factors
such as input substitution and technological progress. However, such factors could be
transformed into variables for application as exogenous variables in conjectural
variation models if deemed appropriate.
The issue of technology plays at least two roles in market power analysis. First via its
latent effects on cost efficiency that would widen the price cost margin by more than the
effect of market power and secondly via its cost saving effects that could be considered
as a trade off for welfare losses stemming from market power cases. Recent examples
include Morrison-Paul (2001a, 2001b) which carefully formulated various functional
forms to capture the cost structure of the US beef industry. The cost efficiency effect
was captured by the elasticity of total cost with respect to output. Azzam (1997)
measured the cost efficiency effect of marginal changes in price-cost margin by
industry concentration whereas Azzam et al. (2004) separated the cost efficiency effect
from the market power effect via the estimation of a total factor productivity growth
function. However, Sexton (2000) found that the gains from cost efficiency were
insufficient to cover welfare losses arising from oligopoly and oligopsony market
power.
The conjectural variation approach is appealing for the ability to identify the conduct of
firms in a general range covering competitive case, intermediate case, Cournot case and
monopsony (monopoly) case. Hence it has been frequently used and continues to be
gradually refined. Examples include Levinsohn (1993) who linked the conjectural
variation framework to an output growth function generated by a Taylor expansion. The
model was used to assess whether international trading has helped to curtail domestic
market power in certain import competing manufacturing industries. Hall (1988) and
Chapter 3 Page 69

Crespi et al. (2005) employed this framework to test for oligopsony market power in US
rice milling. Azzam et al. (2004) applied a total factor productivity growth model to
provide comparison tests for market power with results from a conjectural variation
approach.
The impact of exogenous shocks on key variables in conjectural variation models have
been examined by Chen & Lent (1992). Other refinements and applications include:
consideration of market power throughout each stage of the market supply chain from
the farm to the retail consumer; the distribution of welfare losses across consumers,
producers and marketers and estimation of social dead weight losses deriving from
market power. Studies of that illustrate such refinements and extended applications
include: Huang & Sexton (1996) Alston et al. (1997); Sexton (2000); Sexton & Zhang
(2001), Zhang & Sexton (2002) and Weldegebriel (2004).
The conjectural variation approach has also been applied to a wide range of applications
including examples at the macroeconomic level such as international trade agreements
in order to identify optimal trade conditions and optimal tax levels (Kiyono, 2006) and
to identify trade effects on domestic currency exchange rates (Yu, X, 2007).
Other applications that do not focus directly on market power assessment but are
implicitly linked to imperfect competition in a vertically coordinated market involving
such activities as: bidding procurement, contract- pricing procurement, processing,
wholesale selling and retail marketing, are found in Crespi & Sexton (2004), bidding,
(Xia & Sexton (2004), contract pricing and Saghaian (2007) wholesale and retail
markets.
For example the bidding for cattle in the US beef packing industry was found non
competitive (Crespi & Sexton, 2004). The common practice of contract- pricing in the
US cattle procurement tends to be based on the spot price. When the same set of buyers
operates in both the contract and cash markets, this practice will curtail prices in the
spot market, hence causing anticompetitive impacts (Xia & Sexton, 2004).
A study of price dynamics (the speed of price adjustment in wholesale market compared
to retail market) following demand shocks (due to food safety scares) using
cointegration analysis found that the wholesale market price was six times less flexible
than the retail market price hence reflecting a less competitive market at the wholesale
level with a tendency to absorb more of demand shocks than the retail market
(Saghaian, 2007). Although these studies did not explicitly employ the conjectural
Chapter 3 Page 70

variation approach, they all focused on the potential for market power along specific
supply chains.
In conclusion, acknowledging the weaknesses and restrictions of the Cournot model
with conjectural variation approach, the approach is still appealing to use for analysis,
not only for market power but also other aspects such as optimal tax levels and country
level optimal trade agreements. However, to apply this approach still requires some
extensions to the standard models
With respect to the pricing and market structure addressed in Chapter 2 Section 2.4 to
2.6, the natural rubber supply chain, specifically at the level of tire manufacturing,
demonstrates a potential for the tire industry oligopsony power on the natural rubber
industry as well as tire industry oligopoly market power on the tire consumers. In
contrast, the literature discussed above comprises studies that are mostly of oligopoly or
oligopsony alone. Only a few studies analysed oligopoly and oligopsony simultaneously
such as Schroeter (1988) and Azzam & Pagoulatos (1990). Nonetheless, they did not
estimate explicit output production functions to derive the exact marginal productivity
required in a conjectural variations approach. Even studies that had referred to the need
for directly estimated marginal productivity, did not present any empirical analysis
(Chang & Tremblay, 1991).
Thus, this thesis applies the theory of oligopsony by simultaneous analysis of
oligopsony / oligopoly of the natural rubber and tire industries using explicit estimation
of marginal productivity from an output production function. The findings from this
section are adopted in the next chapter for the development of a general theoretical
model for transformation into an empirical model to test for market power in the tire
and natural rubber industries. Accordingly, the next sections in this chapter provide a
survey of studies in the global tire and natural rubber markets.


3.6 Empirical Studies of the Tire Industry

3.6.1 Tire Production

Tire production can be considered to be divided into two categories of vehicles: cars and
commercial vehicles. Both are determined by the quantity of vehicle production and the
number of vehicles in-use. A new passenger car needs five tires. A new commercial
Chapter 3 Page 71

vehicle is estimated to need an average 6.8 tires (Burger & Smit, 1997). The demand for
tires on new cars is not related to the price for tires as tires represent only a small
portion of the costs of a vehicle. It is the replacement tire demand that is determined by
tire prices because users can delay the replacement if prices are high (Carree & Thurik,
2000). These figures produced by Burger & Smit (1997) provide a useful framework by
which one can trace the consumption of natural rubber for vehicle tire production,
which in turn, is led by vehicles production and vehicles in-use. The outcomes they
found for US, France, Japan and Germany can be summarized in Table 3.6.

Table 3.6 Tire Production
Passenger car tire production (tire units per vehicle per year)
Country Vehicle
production
Vehicles
in-use
U.S. 8.11 -
France 8.33 -
Japan 3.20 -
Germany 6.86 -
Commercial vehicle tire production (tire units per vehicle per year)
Country Vehicle
production
(units)
Vehicle
in-use
(units)
U.S. 5.79 -
France 3.62 -
Japan 5.15 1.56
Germany 2.94 1.82

Table 3.6 illustrates that using the identity of new vehicle tires plus replacement tires
equal to total tire production, each passenger car produced generates 8.11 units of tire
production in the US, 8.33 units in France, 3.20 units in Japan and 6.86 units in
Germany For vehicles in-use, they were only able to estimate a ratio of 1.56 tires per
vehicle per year in Japan and 1.82 tires per vehicle per year in. Other factors considered
were the impact of technology and learning for which they applied a time trend to proxy
the effect of learning-by-doing, based on the commonly accepted reason that cost
Chapter 3 Page 72

reduction always improves over time (Carree & Thurik, 2000).
24
A second major factor
was the introduction of the radial tire in the 1970s that led to a reduction in tire
replacement need. The impact of the radial tire was less for commercial vehicle tires
than for passenger car tires.
No production function estimations were found in this or any other study of tire
production and hence there are no previous estimates of the marginal productivity of
natural rubber for tire production for use as benchmarks for the estimates produced in
this study.

3.6.2 Tire Demand
Previous studies of tire demand are found in Jovannovic & MacDonald (1994) and
Carree & Thurik (2000). Jovannovic & MacDonald (1994) used an inverse demand
function with a constant elasticity to model the tire demand equation for the time period
1913-1973. It was found that tire demand had a price elasticity of 0.76. Carree & Thurik
(2000), in a study of the life cycle of the US tire industry, extended the results of
Jovannovic & MacDonald (1994) using the same data in parts of their model. They used
output, price and a net entry system of equations estimation to obtain an average price
elasticity of demand for tires of 0.48.
The estimation results for these two studies are reported in Table 3.7. The estimated
price elasticities of -0.76 and -0.48, are useful benchmarks for the model results
reported for this study in subsequent chapters.
Table 3.7 Tire Demand Elasticity
Study Region/time Model Elasticity
Jovanovic &
Macdonald
(1994)
U.S.
(1913-1973)
1
1
0
) (
d t
t
d
p
Q
÷
=

Q
t
= tire quantity
p
t
= tire prices.
-0.76
Carree &
Thurick
(2000)
U.S.
(1913-1973)
t
Q
t t t t t
S P a QUAL a a M a Q c + + + + = )) log( (
3 2 1 0

Where Q
t
is tire output, M
t
is motor vehicle output,
P
t
is tire real price index, S
t
is motor vehicles
registered for 1 year or longer.
-0.48
25


24
Since the first commercial tire was produced in 1906, the value of year – 1905 is employed to address
learning-by-doing effects.

25
This is calculated from average tire demand and motor vehicle registered.
Chapter 3 Page 73


3.7 Empirical Studies of the Natural Rubber Industry.
This section reviews a number of studies on natural rubber production and price that are
of relevance to this study.

3.7.1 Natural Rubber Supply Elasticity
Burger & Smit (1997) studied the natural rubber market policy and outlook. They
concluded that natural rubber is a competitive industry and that an important aspect of
natural rubber industry structure is that farming is mostly in small holdings (which are
less than 40 hectares). For definition purposes Estates are classified as having more than
40 hectares.
Natural rubber supply has elements of actual production and normal production. Normal
production is determined by the yielding quality of natural rubber trees and the planted
area. Yielding quality depends on tree vintages, as natural rubber trees take 7 years to
mature and stop producing latex upon reaching 30 years of age. It also depends on
technological progress. Therefore, normal production is a function of natural rubber tree
quality and area planted:

t
t
t
t
t t i
a y f q · · =
¯ ÷
) (

where:

i
q = normal production of natural rubber.
t = year of planting
t = year of tapping
f(t) = embodied technical progress function
y
t-t
= ideal yield profile, age = t- t
a
tt
= area of vintage t still remaining in year t.
Supply behaviour in the long-term is thus similar to that found with perennial crops, i.e.
current investment decision making in the production of natural rubber is based on
expectations about future prices.
In the short-term, actual production should be equivalent to total production less normal
production, hence the net changes in production is the response to weather and
economic factors, which have direct impact on tapping behaviour and uprooting.
Chapter 3 Page 74

Typically, when in the rainy season it is difficult to tap the natural rubber trees hence
outputs are reduced. In addition, when price increases, formers tend to tap more latex
for more income and uprooting and replanting are postponed.
To obtain projections for natural rubber supply, Burger & Smit (1997) used a two-stage
estimation technique to obtain a natural rubber supply function. In the first stage the
world natural rubber price was regressed on a vector of exogenous variables such as a
price-index of minerals, ores and metal, the total world consumption of rubber (natural
rubber plus synthetic rubber), and the calculated normal levels of production in the
world. The estimated values for natural rubber supply elasticity are provided in Table
3.8

Table 3.8 Natural Rubber Supply Price Elasticity
Country
Natural Rubber
Supply Price elasticity
Thailand 0.22
Indonesia: Smallholdings 0.29
Malaysia: Estate and Small Holding
26
0.14

These estimates provide useful benchmarks for the analysis in Chapter 5.

3.8 Natural Rubber and Price Stabilization
As described in Chapter 2, during 1980-2000, the International Natural Rubber
Organization (INRO) operated a buffer stock of natural rubber in order to stabilize its
prices. Accordingly, Na Ranong & Triumvorakul (2002) found that INRO was able to
generate some profits from the buying and selling of its stocks, (except for the INRO‟s
last term) and achieve a degree of prices stability. However, the problem for INRO was
the conflict of interest between importing (buyer) and exporting (seller) members and
the resultant prices which were not advantageous for natural rubber producers.


26
The elasticity for Malaysia was based on price / per capita income.
Chapter 3 Page 75

3.8.1 Natural Rubber Prices and Currency Exchange Rates
Burger, Smit & Vogelvang (2002) studied the effects of the 1997 exchange rate
depreciation in major producing countries on natural rubber prices. They found that the
combined effects of falls in the Thai baht, the Indonesia Rupiah and the Malaysian
ringgit was a drop in the world price for natural rubber by 15%. Given that the
combined real currency depreciation was 40%, the 15% fall in world price was argued
to have raised the real domestic price by 25%.

3.9 Conclusion
This chapter has provided the background theory for oligopsony/oligopoly analysis. It
began by reviewing the theory of production and price in output markets and
employment and price in input markets. The analysis was first framed for a perfectly
competitive market that was then used as a benchmark to evaluate production and
employment in imperfectly competitive markets. Consequently, the deviation from the
competitive standard is considered potential evidence of market power. A review of the
literature on measuring market power identified three approaches: buyer concentration,
effects from structural changes and the conjectural variation approach.
The conjectural variation approach is considered to be of most relevance for the
approach adopted in this thesis. Typically studies using this approach adopt a duality
theory approach namely the application of Shephard's Lemma and Hotelling's Lemma to
derive demand functions for inputs and supply functions for outputs respectively. The
degree of oligopsony/oligopoly power is defined as the deviation of actual input prices
from the value of their marginal products (shadow price) with the shadow price being
derived from the profit maximization conditions.
Findings support the claim that the higher the degree of imperfect competition, the
higher is the degree of oligopsony/oligopoly market power and vice versa. Hence, an
analysis of input and output market competitor behaviour, that is conjectural variation in
output and input markets, is needed as well as the elasticities of demand for inputs and
supply of outputs, to obtain a valid measurement of market power.
Following discussion of the theoretical background, this chapter has provided an
industry background into aspects of tire production and tire demand. In a review of
natural rubber supply studies it was found that tire demand has two components namely
demand from new vehicle production and demand for replacement tires. New vehicles‟
Chapter 3 Page 76

demand for tires does not have a price effect since it is a small item relative to the cost
of the whole vehicle. Demand for tires from vehicles in-use responds to tire prices.
Previous estimates of US tire demand elasticity are -0.76 (Jovanovic & Macdonald
1994) and -0.48 (Carree & Thurik, 2000).
The studies also concluded that the natural rubber industry is competitive. Supply is
price sensitive as farmers can vary tapping intensity and tree uprooting rates in
responses to price changes despite the fact that in the long term natural rubber planting
is based on perennial crop theory. Previous estimates of natural rubber elasticity for
Thailand, Indonesia and Malaysia are 0.22, 0.29 and 0.14 respectively (Burger & Smit
1997). The International Natural Rubber Organization (INRO) was found to have had a
degree of stabilization on natural rubber price during its existence.
Together with the background study of the markets for tires and natural rubber provided
in Chapter 2, the findings in this chapter assist the development of a general theoretical
model, and its corresponding empirical application in Chapters 4 and 5 to analyse the
degree of market power that global tire industry might exercise on the global natural
rubber market.
Chapter 4 Page 77

Chapter 4
A General Model of Oligopsony Market Power

4.1 Introduction
The theoretical concepts of market power and economic analysis were identified in
Chapter 3. This chapter develops a theoretical model from which a market power index
is derived. This model and its market power index forms the basis for the empirical
analysis of oligopsony power for global tire and natural rubber industries found in the
next chapter.
The theoretical model is derived from that developed by Chang & Tremblay (1991).
The market power index derived from their model comprises a series of elasticities that
all are potentially estimable even though Chang and Tremblay themselves do not apply
their index to empirical example. In this study, the market power index developed by
Chang and Tremblay is extended via identification of four different interpretations
according to alternative interpretations of various components of the original model.
Application of the four derived market power index measures is then reinterpreted to
provide for application to a global/country level model for examination of the global tire
manufacturing industry and its link to a country level natural rubber industry.
In the subsequent chapter, the theoretical model developed in this chapter is converted
to an empirical form for estimation. Market power indexes are then derived for each of
the four alternative model interpretations to evaluate whether oligopsony market power
is present at a country level for natural rubber inputs into the global tire manufacturing
market.

4.2 The General Model
A foundation concept for the measurement of market power is the Lerner index: that
market power is the difference in output price and marginal cost divided by output
price. Accordingly, many subsequent studies have extended the basic Lerner concept in
a variety of different ways. The Lerner index can be shown to be consistent with other
market power measures such as concentration ratios, market shares, and the Herfindahl-
Hirschman index. It also provides for measurement of both oligopsony and oligopoly
power simultaneously.
Chapter 4 Page 78

This study is based on the particular model developed by Chang & Tremblay (1991).
Their theoretical approach requires modelling both product and input markets for a
specific output and input commodity. It comprises an output product demand function,
the output product production function and the input supply function. The market power
index (based on the Lerner measure) is derived from the firm‟s optimality condition for
profit maximization with respect to the employment of the specific input. The derived
index is then able to be interpreted for a number of different market structures.
The model is found to be suitable for achievement of the aim of this study which is the
measurement for any possible existing market power in the global tire industry on the
natural rubber industry. Owing to the fact that world tire manufacturing is controlled by
a small number of multinational companies headquartered in the world‟s major
economies, whereas their natural rubber input are imported from other lesser developed
countries, this model is capable of modification from the original design application at
an industry/firm market power analysis level to a global/country market power analysis
level.
The Chang & Tremblay model and its variant versions developed for this study are
derived as follows.

Output Demand Function
The output commodity is assumed homogeneous and produced by i producing firms.
The inverse demand function for this output commodity is given by.
(4:1) p(Q) P =
Where: P is output price,
¯
=
i
q Q is market output and
i
q is the output of firm i for i =
1, 2, 3…n firms in the industry. A non-competitive output market is possible if n is
small enough such as when entry may be blocked by technology, which requires some
minimal scale sufficiency.

Input Supply Function
To produce this commodity, firm i requires inputs x
ki
, where k = 1 … m. In this study
the specific input of interest (x
1i
) is natural rubber which is from this point on denoted as
xr
i
. The firm also employs some other inputs which are traded in competitive markets.
Chapter 4 Page 79

As in the output case, if n is small, then non-competitive buyer behaviour is possible in
the market for xr
i
. Let the inverse market supply of the specific input XR be given by:
(4:2) )
1
(XR h WR =
Where: WR is the per unit price of XR and XR=¯xr
j
is total supply of the specific input
XR

from j supplier firms. In addition: 0 ,
dXR
dWR
.

Output Production Function
Let the production function of the firm be
(4:3) )
ki i i
(x f q =
According to economic theory, the problem of the firm is to choose the optimal level of
inputs, including xr and all other inputs such as physical capital in order to maximize
the firm‟s profit.
27


4.2.1 Optimality Condition and the Derivation of Market Power Index for Model 1
The firm‟s profit function comprises:
(4:4)
¯
=
· · · =
m
k
ki k i i i
x W - xr WR - q P π
2

where t
i
denotes firm i‟s profits,

W
k
and x
k
, k = 2,….m are the vectors of prices and
quantities of other inputs respectively. Output prices (P) and input prices (WR) are
market determined prices as identified in (4:1) and (4:2). Hence (4:4) can also be
represented as:
(4:4a) ( ) ( )
¯
=
· · · =
m
k
ki k i i i
x W - xr XR h - q Q p π
2
1

The input employment levels that maximize the firms‟ profits are derived from the
conditions 0 =
c
c
i
i
xr
π
and 0 =
c
c
i k
i
x
π
respectively. Given that input xr is the focus of our
model we derive the optimality condition for purchase of xr as follows.

27
For capital the input price would be the rental price of capital.

Chapter 4 Page 80

(4:5) 0 WR xr
dxr
dXR
dXR
dWR
P
xr
q
q
xr
q
dq
dQ
dQ
dP
i
i i
i
i
i
i
i
= ÷ · · ÷ ·
c
c
+ ·
c
c
· · ; for input xr
i.

As discussed in Chapter 3, our index for measuring input price distortions is defined as
the difference between the value of the marginal product of the input (VMP) and the
input price (WR) divided by the value of the marginal product (VMP). This can be
presented in the following form.
( )
( )
XRi
XRi
i XR
MP P
- WR MP P
MPI ÷
; where VMP is given by P(MP
XRi
).
Our market power index for XR namely MPI
XRi
is derived by rearranging the optimality
condition (4:5) such that it comprises measurable variables in the form of marginal
products and elasticities. First we rearrange (4:5) as follows.
(4:6)
0 WR WR
XR
xr
dxr
dXR
WR
XR
dXR
dWR
P
xr
q
P
xr
q
Q
q
dq
dQ
P
Q
dQ
dP
i
i i
i
i
i i
i
= ÷

·

· ÷

·
c
c
+

·
c
c

·

·
Within (4:6) we can identify a number of standard variables and denote these variables
as follows.
Q
q
dq
dQ
i
i
i
· ÷ o : is the i‟th firm‟s output conjectural elasticity with respect to total
industry output.

XR
xr
dxr
dXR

i
i
i
· ÷ | : is the i‟th firm‟s input conjectural elasticity with respect to the
industry‟s total factor demand for XR.
P
Q
Q
P
η ·
c
c
÷ : is the inverse price elasticity of demand for product Q as derived from the
inverse demand curve.
WR
XR
XR
WR
ε ·
c
c
÷ : is the inverse price elasticity of supply for input XR

as derived from the
inverse supply curve.
i
i
XRi
xr
q
MP
c
c
÷ : is the marginal product of the XR of the i firm.
Chapter 4 Page 81

Substitution of these elasticity terms into (4:6) provides for the following more
convenient expression.
(4:7) 0 . . WR WR MP P MP P
i XRi XRi i
= ÷ · · ÷ + · · | c o n
Rearranging (4:7) gives
( ) ( ) 1 1 . + · = + ·
i i XRi
WR MP P | c o n
Bringing key variables to the right hand side yields:
1
1
. + ·
+ ·
=
i
i
XRi
MP P
WR
| c
o n

Multiply both sides by -1 and add (P.MP
XRi
/ P.MP
XRi
) to both sides.
i
i
XRi XRi
XRi
MP P
WR
MP P
MP P
| c
o n
· +
+ ·
÷ = ÷
1
1
1
. .
.

Simplify as follows:
(4:8)
i
i i
XRi
XRi
MP P
WR MP P
| c
o n | c
· +
· ÷ ·
=
÷
1 .
.

This now provides us with a market power index that is expressed in terms of four
elasticities
(4:8a)
i
i i
XRi
XRi
XR
XRi
XRi
MP P
WR MP P
VMP
WR VMP
MPI
i
| c
o n | c
· +
· ÷ ·
=
÷
=
÷
=
1 .
.


For empirical application, the market power index in (4:8a) requires estimation of each
of the four elasticities: (c,n, o
i
, |
i
,). Four approaches are identified for estimation of
MPI
XRi
. The first approach (empirical Model Number 1), we denote as MPI
XRi1
such
that:
(4:9)
1
1 1
1
1
i
i i
XRi
MPI
| c
o n | c
· +
· ÷ ·
=
The values for n and c will be derived from empirical estimation of equations (4:1) and
(4:2) respectively. The values for o
i1
and |
i1
can be derived by the estimation of the
optimality equation (4:5) in the following format.
Rewrite (4:5) as:
(4:10.1) 1
31 1 21 11
i
i i
xr q P WR
. . .
· ÷ · + · = u u u
Chapter 4 Page 82

Where:
(4:11.1)
i
dq
dQ
=
21
u
(4:12.1)
i
dxr
dXR
=
31
u .
(4:13.1) P
xr
q
P
i
i
i
·
c
c
=
.

(4:14.1)
i
i
i
i
q
xr
q
dQ
dP
q ·
c
c
· =
.
1

(4:15.1)
i
i xr
dXR
dWR
xr · =
.
1
Three key components of the variables in (4:10.1) are: the slope of the output demand
curve (
dQ
dP
); the slope of the input supply curve (
dXR
dWR
) and the marginal product of the
input xr
i
(
i
i
xr
q
c
c
) which are estimated from equations (4:1), (4:2) and (4:3) respectively.
After estimating equation (4:10.1) the values for u
21
and u
31
are then used to calculate
the two conjectural elasticities o
i
and |
i
as:
(4:16.1)
Q
i
21 1 i
q
· =u o
(4:17.1)
XR
xr
i
31 1 i
· =u |
Substituting the estimates for n, c, o
i1
, |
i1
allows the market power index in (4:9)
1
1 1
1
1
i
i i
XRi
MPI
| c
o n | c
· +
· ÷ ·
= to be obtained.
The null hypothesis of input market efficiency (no market power) can be stated in terms
of the three coefficients in 4:10.1 as H
0
: u
11
= 1, u
21
= u
31
= 0. If H
0
is not rejected then:
P
xr
q
WR
i
i
·
c
c
= and hence the input xr
i
is being paid the value of its marginal product.
Further, if u
21
= u
31
= 0, then o
i1
= |
i1
= 0 and MPI
XRi1
= 0, thus indicating a perfectly
competitive input market. Rejection of Ho indicates the presence of non competitive
markets. In particular, significant positive values of u
21
indicate the presence of
Chapter 4 Page 83

oligopoly in the output market and significant positive values of u
31
indicate the
presence of oligopsony in the input market. The interpretation of MPI and the presence
of various market structures are considered in more detail later in this chapter.

4.2.2 Reconciliation of the Derived Market Power Index and the Chang &
Tremblay Index
The derived MPI in (4:9) above differs from that developed by Chang &Tremblay
(1991) article. Critical differences arise due to interpretation of the elasticities n and ε
and the subsequent construction of the MPI. Chang &Tremblay defined output
commodity demand elasticity as:
Q
P
P
Q
·
c
c
÷ . This is the conventional price elasticity of
demand for a normal demand curve (Q = p(P)). In the market power index derived for
this study demand elasticity is defined as:
P
Q
Q
P
c
c
as reflects its estimation from an
inverse demand curve P = p(Q). Hence n as defined for the inverse demand curve
becomes -1/n = n* for the Chang & Tremblay model. Similarly the input supply
elasticity (ε) in the derivation above is defined as
WR
XR
XR
WR
c
c
as reflects its intended
derivation from the inverse supply curve WR=h
1
(XR). However, Chang &Tremblay
defined ε as:
XR
WR
WR
XR
c
c
, as would be derived from a normal supply function. Hence ε as
defined for the inverse supply curve becomes 1/ ε = ε* for the Chang &Tremblay
model.
As a consequence Chang &Tremblay (1991) express their market power index as:
(4:8b)
*
1
* *
2
ε

η


ε

MPI
i
i i
i XR
|
o |
+
+
= ;
in contrast to the market power index model 1 derived for this study as:
(4:8a)
i
i i
XR
i
MPI
| c
o n | c
· +
· ÷ ·
=
1

The mix of inverse and direct elasticities raises both theoretical and estimation
questions that are not addressed by Chang &Tremblay (1991) who recommended that
the direct elasticities (n* and ε*) be derived from econometric estimations of inverse
Chapter 4 Page 84

demand curves (that is as n and ε) and then inverted to obtain n* and ε*. It is not
considered valid to assume -1/n = n* and 1/ ε = ε*. These elasticities are derived from
different functional forms with different theoretical foundations in respect of the causal
relationships between dependent and independent variables. Econometric assumptions
can be violated by incorrect model specifications. The assumption that inverse
elasticities are equivalent to direct elasticities by implication assumes that inverse
functional forms are equivalent to direct functional forms.
However, it is possible to derive the Chang and Tremblay index without transgressing
the theoretical foundations. This index we refer to as Model 2 and its derivation is as
follows.

4.2.3 Optimality Conditions and Derivation of Market Power Index for Model 2

To derive the Chang and Tremblay index described in section 4.2.2, a direct version of
tire demand is given by:
(4:18) Q = q(P)
Where Q is market output, P is output price and
Q
P
P
Q
η ·
c
c
÷
*
is the direct price elasticity
of demand for product Q as derived from the direct demand curve.
(4:19) XR=h
2
(WR)
Where XR is the market supply of the specific input, WR is the per unit price of XR and
XR
WR
WR
XR
ε ·
c
c
÷
*
: is the direct price elasticity of supply for input XR

as derived from the
direct supply curve.
The value for the market power of Model 2, namely MPI
XRi2
is
(4:20)
*
1
* *
2
2 2
2
ε

η


ε

MPI
i
i i
i XR
|
o |
+
+
=
For empirical application, analogous to that adopted for Model 1, estimate equations
(4:18) for n
*
, equation (4:19) for c
*
and in parallel to Model 1, estimate equation
(4:10.2) and calculate the conjectural elasticity estimates:

o
i2
, and |
i2
.
Chapter 4 Page 85

(4:10.2) 2
32 2 22
2
12
i
i
i xr q P WR
. . .
· ÷ · + · = u u u
Where:
(4:11.2)
i
dq
dQ
=
22
u
(4:12.2)
i
dxr
dXR
=
32
u .
(4:13.2) P
xr
q
P
i
i
i
·
c
c
=
.
2

(4:14.2)
i
i
i
i
q
xr
q
dP
dQ
q ·
c
c
·
|
.
|

\
|
=
.
1
2
, where
|
.
|

\
|
dP
dQ
1

dQ
dP
,
(4:15.2)
i
i xr
dWR
dXR
xr ·
|
.
|

\
|
=
.
1
2 , where
|
.
|

\
|
dWR
dXR
1

dXR
dWR
.


After estimating equation (4:10.2) the values for u
22
and u
32
are then used to calculate
two conjectural elasticities as:
(4:16.2)
Q
i
22 2 i
q
· =u o
(4:17.2)
XR
xr
i
32 2 i
· =u |
Substituting values for n
*
,

c
*
, o
i2
, and |
i2
into (4:20), a value for the MPI
XRi2
is derived.

4.2.4 The Derivation of Market Power Index for Model 3
An alternative approach to the derivation of the conjectural elasticities
i
o and
i
| is
possible. Consider the following approach that uses direct estimation of the i‟th firm‟s
(or in this case the i‟th country‟s) observed response to industry changes. This is then
used to develop a proxy measure for the individual firm‟s conjectures on industry
responses to its behaviour. Fundamentally this approach simply measures the average
response, over the studied time period, in each individual firm‟s (or country‟s) market
share of the global industry. Given:
(4:21) ) (q f Q
i 2
=
Chapter 4 Page 86

(4:22)
) (
3 i
xr f XR =

For i = US, France, Japan and Germany. The values:
(4:23)
Q
q
dq
dQ
α
i
i
i
· =
3
; and,
(4:24)

β
i
3
XR
xr
dxr
dXR
i
i
· = ; can then be derived. The market power index is:
(4:25)
3
3 3
3
1
i
i i
XRi
MPI
| c
o n | c
· +
· ÷ ·
=
For empirical application, we estimate the following equations: equation (4:1) for n,
equation (4:2) for c, equation (4:21) for o
i3
, and equation (4:22) for |
i3
. Substituting
values for:n, c, o
i3
and |
i3
into the market power expression (4:25), delivers a value for
the market power index for Model 3.

4.2.5 The Derivation of Market Power Index for Model 4
For this model the conjectural elasticity values from (4:23) and (4:24) are applied to
direct versions for tire demand (4:18) and natural rubber supply (4:19), to provide the
market power index:
(4:26)
*
1
* *
3
3 3
4
ε

η


ε

MPI
i
i i
i XR
|
o |
+
+
= .
For empirical application, we estimate equation (4:19) for n
*
, equation (4:20) for c
*
,
equation (4:21) for o
i3
, and equation (4:22) for |
i3
. Substituting these values provides
the Market Power Index (4:26), for Model 4 which provides for an alternative
estimation approach for the Chang and Tremblay version of the market power index in
(4:8b).

4.3 Interpretation of the Market Power Index
The market power index (MPI
XRi
) measures the economic rents, i.e. a portion of the
value of the marginal product which is not covered by market prices hence could be
gained by the oligopsonist and oligopolist firms. Consequently, it implies that the
Chapter 4 Page 87

pricing mechanism is not perfect and thus inefficiency might be evident in input and
output allocation.
The index has some useful properties that should be examined. Firstly, by its definition,
the value of MPI
XRi
ranges from 0 to 1. It is 0 when input XR receives a price that equals
the value of its marginal product: WR=P·MP
XRi
. It approaches 1 as the input price
approaches 0. Between these two extreme cases, the higher the MPI
XRi
, the greater is the
inefficiency in resource allocation.
Secondly, the MPI
XRi
index is general since it covers a variety of market structures.
Accordingly, Table 4.1 illustrates diverse types of market structures and their impact on
the value of the MPI
XRi
index. It can be seen that the index is general in that it covers
cases like the Lerner case (competitive input market and monopoly output market), the
Cournot equilibrium case (equal market shares in either markets) and the Robinson
classic case (monopsony input market and monopoly output market).
28
It can be seen
also that the level of MPI
XRi
is determined by the values of n, c, o
i,
and |
i
. Consequently
inefficiency in resource allocation is increased by low values of n, and c, and high
values of o
i,
and |
i
.







28
From Chang & Tremblay (1991) pp. 407, when defining the industry market power index for input
(natural rubber) market as
¯
· ) (
XR
xr
MPI
i
XRi
, it approaches the Herfindahl-Hirshman index in the
input market if 1
) (
=
+
i
i
dxr
dXR
| c
. Similarly, when defining the industry market power index for output (tire)
market as
¯
· ) (
Q
q
MPI
i
XRi
it approaches the Herfindahl-Hirshman index in the output market if
1 =
n
i
dq
dQ
.
Chapter 4 Page 88

Table 4.1 Market Power Index and Market Structures
Market structure: Input / Output MPI
General Model (4:8a)
i
i i
i XR
ε
η ε
MPI
|
o |
· +
· ÷ ·
=
1

|
i
= 0
1: |
i
=0, o
i
=0 Competitive / Competitive 0
2: |
i
=0, 0<o
i
<1 Competitive / Oligopoly
i i XR
η MPI o · ÷ =
3: |
i
=0, o
i
=1
Competitive / Monopoly
(Lerner case)
η MPI
i XR
÷ =
0< |
i
<1
4: 0<|
i
<1, o
i
=0 Oligopsony /Competitive
i
i
i XR
ε
ε
MPI
|
|
· +
·
=
1

5: 0<|
i
<1, 0<o
i
<1
Oligopsony / Oligopoly

1
12
1
11
X
x
X
x
= or
Q
q
Q
q
2 1
= ,
implies Cournot case of
equal market shares.
i
i i
i XR
ε
η ε
MPI
|
o |
· +
· ÷ ·
=
1

6: 0<|
i
<1, o
i
=1 Oligopsony / Monopoly
i ε
η ε
MPI
i
i XR
|
|
· +
÷ ·
=
1

|
i
= 1
7: |
i
=1, o
i
=0 Monopsony / Competitive
ε
ε
MPI
i XR
+
=
1

8: |
i
=1, 0<o
i
<1 Monopsony / Oligopoly
ε
η ε
MPI
i
i XR
+
· ÷
=
1
o

9: |
i
=1, o
i
=1
Monopsony / Monopoly
(Robinson case) ε
η ε
MPI
i XR
+
÷
=
1



4.4 Application of the Model to Global Natural Rubber and Tire Industries
Characteristics of the tire industry and natural rubber industry render it appropriate to
shift the model from an industry/firm level to global/country level. The nature and
background of the tire industry as discussed in chapter 2 outlined how the industry
began a hundred years ago and has since passed through phases of invention, production
innovation and structural change. Key amongst these were the invention of cord tires
and straight-side tires which replaced clincher tires in 1913, the invention of the
Banbury mixer in 1916 to mix rubber with other compounds, the use of rayon as the
Chapter 4 Page 89

fabric from which tire cords were made in 1930s, the subsequent replacement of rayon
by nylon and the invention of synthetic rubber as a substitute for natural rubber in the
1940s, the invention of the tube tire in 1950s, the subsequent replacement of nylon by
polyester and the invention of belted biased tire design in 1960s, and radial tires in the
1970s.
Advances in technology and management improvements, such as the advent of mass
marketing methods, (French 1991) generated lower marginal costs, higher output and
lower prices. Firms that did not have sufficient production scale could not afford these
technologies; consequently, they could not survive the competition (Gort & Klepper
1982, Jovanovic & MacDonald 1994, Klepper & Kenneth 2000 and Carree & Thurik
2000). Accordingly, marginal costs tend to be similar among firms and a few prominent
firms dominate the world tire industry, e.g. Goodyear in the USA, Michelin in France,
Bridgestone in Japan and Continental in Germany who produce and supply tires all over
the world.
As the tire producing countries do not produce natural rubber, this input is imported
from supplying countries. Specifically, during the time studied by this thesis (1960-
2000), countries such as Malaysia, Indonesia and Thailand supplied natural rubber to
the key tire producing countries: namely the USA, France and Japan. Therefore, the
world tire industry comprises a few multinational producers that not only are operating
in a global industry but are also purchasing inputs such as natural rubber from country
level suppliers.
The presence of a global industry structure also raises the question as to whether the
global tire manufacturing industry has the potential to exert market power over the
natural rubber industry at a country level. For empirical analysis, data are also more
readily available at a country level. These data also reveal a country-wise pattern of
natural rubber exports from supplying countries to tire manufacturing countries in that
the destination of most of natural rubber exports from Thailand is Japan, from Indonesia
is the USA and from Malaysia is the European Union.
However, the application of a firm level model to country level model poses theoretical
as well as conceptual and empirical considerations. The literature argues it is possible to
substitute industry-level data for firm-level data if the firms in the industry are assumed
to have linear and parallel expansion paths such that the values of marginal products and
marginal costs are constant and equal across firms. This is the so-called Gorman polar
Chapter 4 Page 90

form of production technology. It allows for different firms to have different cost curves
but the curves are all linear and parallel (Appelbaum 1982). With many small
competing natural rubber producers this is not considered an unreasonable assumption.
Hence, in equilibrium each firm equates marginal costs to its perceived marginal
revenue and their conjectural elasticities are hence equal across firms.
29

A detailed analysis of the data available for empirical analysis was undertaken in
Chapter 2. Data deficiencies were identified with respect to specific location of all tires
produced. The dominance of the industry by major producers with manufacturing plants
in both within and without their home countries via subsidiary and joint venture
companies was demonstrated. It was concluded that there was potential for market
power to be exercised in the natural rubber markets from the buyer side (oligopsony)
and this potential could be analysed via either company level or country level data.
The general model is thus capable of application from its original industry/firm level to
global industry/country level. This application requires all industry level variables to be
reinterpreted as global variables and firm level variables to be reinterpreted as country
level variables.
Figure 4.1 illustrates the flows of natural rubber from producing countries to its various
production uses in a global industry context. In addition, tire production is usually
classified by vehicle type namely: passenger car tires, commercial vehicle tires, truck
tires, bus tires and off-highway tires. Passenger car tire and commercial vehicle tires are
the two most important types.
As depicted by Figure 4.1, a portion of natural rubber production from country j such as
Thailand, Indonesia, Malaysia and other producing countries is consumed domestically.
The rest is exported to destination countries such as the USA, France, Japan, Germany
and other consuming countries. In the destination countries, some of the imported
natural rubber is consumed in the general sectors such as construction and irrigation.
The rest are employed by the tire sector, which is the major portion used to produce
passenger car tires and commercial vehicle tires.



29
However, it can be argued that conjectural elasticities are not constant over time. This is due to the
changing structure of the industry. Accordingly, the aggregate value of the conjectural elasticities over
time changes too (Gohin 2003).
Chapter 4 Page 91

Figure 4.1 The Flows of Natural Rubber from Producing Countries
Country j’s Natural Rubber Production
| |
Country j’s
Domestic Natural
Rubber
Consumption
Country j’s Natural Rubber Exports to
Destination Country i
|
Natural
Rubber
Consumption
in Country i’s
General
Sector
Natural Rubber
consumption in
Country i’sTire
Sector
|
Tire Production in Country i
¹
Passenger car tires
+
Commercial vehicle tires
=
most of tire production

4.5 Conclusion and Summary
This chapter has described a general model for the derivation of a market power index
that can be used to assess the oligopsony/oligopoly power of global tire manufacturing
countries consuming natural rubber inputs from supplying countries. The model is
based on the model developed by Chang and Tremblay (1991). This model is extended
to incorporate 4 different interpretations which we labelled as models 1 to 4. These
models are designed for empirical application as described in the next Chapter.
A summary of the different market power index models and the different approaches to
their empirical application is summarized in Figure 4.2.
Model 1: the derivation of the market power index starts from Step A. The inverse tire
demand function is estimated in order to obtain the tire price elasticity. In Step B the
natural rubber supply equation is estimated in order to retrieve the natural rubber price
elasticity. In Step C each specific country‟s tire production equation is estimated, to
yield a natural rubber marginal product for tire production in each country. In Step D
the estimated coefficients are used to transform tire price, tire demand and tire sector
Chapter 4 Page 92

natural rubber inputs. In Step E all of the three transformed variables are employed to
estimate the optimality equation. This gives estimates for the u’s. In Step F the
estimated coefficients (u‟s) are used to calculate each firm‟s conjectural variation
elasticities, both in the product market and in the input market. Finally, in Step G the
market power index for Model 1is calculated as
1
1 1
1
1
i
i i
XRi
MPI
| c
o n | c
· +
· ÷ ·
=
Model 2: the derivation of market power index starts from Step A. The direct tire
demand function is estimated in order to obtain the tire price elasticity. In Step B the
direct natural rubber supply equation is estimated in order to retrieve the natural rubber
price elasticity. In C. each specific country‟s tire production equation is estimated, to
yield a natural rubber marginal product for tire production in each country. In Step D
the estimated coefficients are used to transform tire price, tire demand and tire sector
natural rubber consumption. In Step E all the three transformed variables are employed
to estimate the optimality equation. Then in Step F the estimated coefficients are used to
calculate each firm‟s conjectural variation elasticities, both in the product market and in
the input market. Finally, in Step G the market power index for Model 2 is calculated
as:
*
1
* *
2
2 2
2
ε

η


ε

MPI
i
i i
i XR
|
o |
+
+
= .
Model 3: An alternative approach to derive the market power index is to directly
estimate each firm‟s conjectural elasticities in the product and input markets in Step H.
The estimated values for conjectural elasticities are
3 i
α

and

3 i
| . Model 3 comprises
Steps A, B, H and I. The market power index is thus derived as:
3
3 3
3
1
1
i
i i
XR
i
MPI
| c
o n | c
· +
· ÷ ·
= .
Model 4: Model 4 comprises Steps A, B, H and I. The corresponding market power
index is derived as:
*
1
* *
3
3 3
4
ε

η


ε

MPI
i
i i
i XR
|
o |
+
+
= .
Chapter 4 Page 93


Figure 4.2a Summary Derivation of the Market Power Index for Model 1 and
Model 2
Steps

A
Model 1 & 3
Inverse Tire Demand
(4:1) p(Q) P = ;
P
Q
Q
P
·
c
c
= n
Model 2 & 4
Direct Tire Demand
(4:18) q(P) Q = ;
Q
P
P
Q
·
c
c
=
*
n
B
Model 1 & 3
Inverse Rubber Supply
(4:2) )
1
(XR h WR = ;
WR
XR
dXR
dWR
= c
Model 2 & 4
Direct Rubber Supply
(4:19) )
2
(WR h XR = ;
XR
WR
dWR
dXR
=
*
c
C
Model 1 & 2
Tire Production Function and Marginal Products
(4:3) )
i i i
(xr f q = →
xr
q
MP
i
i
i XR
c
c
=
| |
D
Model 1
Calculate variables i
i
xr , q , P
. . .

P
xr
q
P
i
i
i
·
c
c
=
.

;
i
i
i
i
q
xr
q
dQ
dP
q ·
c
c
· =
.
;
i
i xr
dXR
dWR
xr · =
.

Model 2
Calculate variables i
i
xr , q , P
. . .

P
xr
q
P
i
i
i
·
c
c
=
.
2
;
i
i
i
i
q
xr
q
dP
dQ
q ·
c
c
·
|
.
|

\
|
=
.
1
2

i
i xr
dWR
dXR
xr ·
|
.
|

\
|
=
.
1

| |
E
Model 1
Estimate Optimality Condition
(4:10.1)
i
i
i xr q P WR
. . .
· ÷ · + · =
31 21 11
u u u
→ u
21
and u
31

Model 2
Estimate Optimality Condition
(4:10.2)
i
i i
xr q P WR
. . .
· ÷ · + · =
32 22 2 12
u u u
→ u
22
and u
32

| |
F
Model 1
Calculate Conjectural Elasticities
Q
i
21 1 i
q
· =u o ;
XR
xr
i
31 1 i
· =u |
Model 2
Calculate Conjectural Elasticities
Q
i
22 2 i
q
· =u o ;
XR
xr
i
32 2 i
· =u |
| |
G
Model 1
Calculate MPI
XRi1

(4:9)

1
1 1
1
1
i
i i
XRi
MPI
| c
o n | c
· +
· ÷ ·
=
Model 2
Calculate MPI
XRi2

(4:20)
*
1
* *
2
2 2
2
ε

η


ε

MPI
i
i i
i XR
|
o |
+
+
=
| |
Chapter 4 Page 94


Figure 4.3b Summary Derivation of the Market Power Index for Model 3 and
Model 4

H
Model 3 & 4
Direct Estimation of Conjectural Variation Elasticities
Tire Market: (4:21)
) (q f Q
i 2
=

→ (4:23)
Q
q
q
Q
α
i
i
i
·
c
c
=
3

Natural Rubber Market: (4:22)
) (
3 i
xr f XR =

→ (4:24)
XR
xr
dxr
dXR
β
i
i
i
· =
3

| |
I
Model 3
Calculate MPI
XRi3

(4:25)
3
3 3
3
1
1
i
i i
XR
i
MPI
| c
o n | c
· +
· ÷ ·
=

Model 4
Calculate MPI
XRi4

(4:26)
*
1
* *
3
3 3
4
ε

η


ε

MPI
i
i i
i XR
|
o |
+
+
=





























Chapter 5 Page 95


Chapter 5
Data Analysis and Empirical Estimation

5.1 Introduction
This chapter provides the empirical application of the general model developed in
Chapter 4. The approach adopted was summarized in the concluding section of Chapter
4. Regression analysis was employed for the analysis. The first step requires
specification of functional forms for estimation of each of the general model equations.
However, model specification is contingent on data characteristics so variables for each
equation are analysed and tested for nonstationarity prior to functional specification.
Estimation results are reported and the required elasticities for each version of the
market power index are obtained and used to derive market power indexes on a country
basis.

5.2 Data Tests for Nonstationarity
Time series data are typically nonstationary. That is they do not exhibit time invariant
mean, variance and serial correlation found with stationary data series. Nonstationary
data can generate spurious regression results when using OLS estimation techniques
(Ramanathan, 1998). Standard approaches to testing for nonstationarity were applied to
all key variables. Results using both Dickey-Fuller (DF & ADF) and Phillips-Perron
(PP) tests confirm nonstationarity across all series. However, further testing confirmed
all series were stationary in first difference form (integrated to order one I(1)). The
results were consistent for all variables using PP tests but a small number of variables
failed to reject the null hypothesis of nonstationarity using the DF and ADF approach.
Test results are summarised in Appendix 5.1
Nonstationary data series may still exhibit a long run relationship. If two or more series
are I(1) and a linear combination of them is stationary then the series are said to be
cointegrated and hence exhibit a long run relationship. Testing for cointegration is
undertaken by assessing whether or not the residuals from an OLS estimation of the
relationship are stationary. This is undertaken by application of DF, ADF and / or PP
approaches to the residuals of the OLS regression. Rejection of the null of
nonstationarity in the residuals is used to confirm that OLS estimation can be used to

Chapter 5 Page 96

identify the long run relationship (Enders, 1995; SHAZAM, 1997 and Ramanathan,
1998 ). This approach was applied to all the major functional relationships and the
results confirmed the presence of a cointegrating relationship.
A further extension of the cointegration concept involves the estimation of an error
correction model that can be used to identify the short run relationship between the
particular series. Significantly a negative error correction coefficient is required in such
a model to confirm the relationship and its adjustment to the long run equilibrium
relationship is not explosive (Ramanathan, 1998). Tests on error correction models for
the major functional forms found correctly signed error correction coefficients. These
results also support the cointegration test findings of a long run relationship. A
summary of the test results is found in Appendix 5.2 and estimation results for error
correction models of inverse and direct natural rubber supply functions are found in
Appendix 5.3.
Given the focus of this study is long term and requires estimation of long run
elasticities, the estimation approach uses OLS estimations of long run relationships
rather than short run error correction model relationships.

5.3 Estimation of the Tire Demand Function
Tire demand is modelled in both inverse and direct form. The inverse demand function
(5:1), models tire price (P) as a function of world tire production output (Q), world
vehicle production (VP) , the interaction of world vehicle in-use (VI) and Q, and US per
capita income (GDPPUS).
(5:1) ) ln( ) ln( ) ln( ) ln( ) ln( ) ln(
14 13 12 11 10
GDPPUS Q VI VP Q P · + · · + · + · + = ¸ ¸ ¸ ¸ ¸
A log-log functional form is employed for (5:1), from which we derive the slope
Q
P
VI
Q
P
)]. ln( [
13 11
ì ¸ n + =
c
c
= ' ; and the inverse elasticity:
) ln(
) ln(
) ln(
13 11
VI
Q
P
P
Q
Q
P
· + =
c
c
= ·
c
c
= ¸ ¸ n ;
For the direct tire demand model, the world tire demand (Q) is modelled as a function of
tire price (P) and the corresponding vector of shifting variables comprises world vehicle
production (VP), world vehicle in-use (VI) and a time trend (T).

Chapter 5 Page 97

(5:2) ) ln( ) ln( ) ln( ) ln( ) ln(
24 23 22 21 20
T VI VP P Q · + · + · + · + = ¸ ¸ ¸ ¸ ¸
A log-log functional form is employed for (5:2), from which we derive the slope n
*
' =
P
Q
P
Q
21
¸ =
c
c
and the direct elasticity
21
*
) ln(
) ln(
¸ n =
c
c
= ·
c
c
=
P
Q
Q
P
P
Q

Variables that are employed to estimate the demand functions are summarised in Table
5.1

Table 5.1 Variable Description for the Estimation of the Tire Demand Function
Variable Description
P Tire prices: US tire price index deflated by US consumer price index, base year:
1995=100
Q World tire production
VP World passenger car and commercial vehicle production
VI World passenger car and commercial vehicles in-use.
GDPPUS US per capita income deflated by US consumer price index. Base year 1995 = 100
T A time trend.
Tire production is classified as passenger car tires plus commercial vehicle tires since
data records for some countries such as China, Russia and the Republic of Korea, did
not have separate data until recent years. The summation is also based on the
consideration that natural rubber and synthetic rubber input ratios used in passenger car
tire and commercial vehicle tire are very close viz: 55% / 45% and 50% / 50%
respectively. In contrast the ratios vary more significantly for special tires such as racing
tires (35% / 65%) and off-highway tires (80% / 20%). Accordingly the selected
definition for tire production is also more suitable for tire production function
estimation.
Data for natural rubber and synthetic rubber consumption in tire manufacture are
available for USA, France, Japan, Germany, Italy, Spain, U.K., Brazil and India. A
significant omission from the data is China and hence despite its significant
consumption since 1990s China is excluded
30
.

30
Of course, natural rubber consumption data could be used in place of natural rubber used in tire sector
in such cases.


Chapter 5 Page 98

As previously noted, each new car requires at least five tires. Therefore, tire production
should be determined by both vehicle production and vehicles in-use. US per capita
income is used as a proxy for income factor determining demand for tires.
Summary statistics for the tire demand variables are displayed in Table 5.2.

Table 5.2 Summary Statistics for Tire Demand
Variable Mean Standard Deviation Minimum Maximum
P 71.83 25.94 35.70 100.00
P (Deflated) 145.92 35.27 81.26 199.10
Q (mill) 674.92 246.34 231.00 1,147.80
VP (mill) 37.46 12.00 13.35 54.90
VI (mill) 408.77 197.63 116.18 748.00
GDPPUS ($) 22,501.00 4,114.00 14,576.00 30,923.00
These data are represented graphically in Figures 5.1 to 5.6.
Figures 5.1 to 5.6: Tire Demand Variables
Figure 5.1 Tire Price Index (P)


Figure 5.2 Tire Price Index (P)
(deflated by US consumer price
index)


Chapter 5 Page 99

Figure 5.3 World Tire Production (Q)
(mill)

Figure 5.4 World Passenger Car &
Commercial Vehicle Production (VP)
(mill.)




Figure 5.5 World Passenger Car and
Vehicle In-use (VI) (mill.)

Figure 5.6 US Per Capita Income
(GDPPUS) ($US deflated)




5.3.1 Estimation Results for Tire Demand
Inverse Tire Demand Estimation Results (Equation 5:1)
Estimation results for equation (5:1) are shown in Table 5.3. The estimation was
undertaken using the non-linear algorithm in SHAZAM V9.0 with second order
autocorrelation correction.
31
The estimated results in Table 5.3 for price elasticity are
derived from -3.0837 + 3.0922·ln(VI). The income elasticity is -5.6291, indicating that,
at the global level, a tire is an inferior good with respect to US per capita income.

31
The regression estimations in Chapter 5 were undertaken using the non-linear algorithm in SHAZAM
V9.0. This algorithm provides standard tests for autocorrelation (DurbinWatson and Lagrange Multiplier)
that were used to determine an appropriate order of autocorrelation correction to apply each individual
equation. Heteroscedasticity is a more serious problem for cross sectional than time series data however
standard diagnostic tests provided by the SHAZAM algorithm did not reveal any significant problems.
Multicollinearity was tested by careful examination of the impact of variations in model specification on
coefficient estimates, R
2
and t-statistics. An error term is not identified for all equations in this Chapter.


Chapter 5 Page 100

Overall price elasticity is determined by quantity demanded and vehicles in-use. The
average value during 1962-2000 is -3.3439. It ranges from -6.5875 to -1.2152. The
corresponding direct demand elasticity is -0. 3804. It ranges from -0.8229 to -0.1518.
The slope
dQ
dP
= ' n is -4.9624. It ranges from -20.5900 to -0.3979.
The inverse demand function estimated as (5:1) can be compared to that estimated by
Carree & Thurik (2000, p.260):
Q
t t t t t
S P a QUAL a a M a Q c + · · + · + + · = )) log( (
3 2 1 0


where Q is output of tires, M is output of motor vehicles, QUAL is a quality index
applied as a dummy variable (QUAL = year – 1930 for the period 1913-1930 and 0
afterward), P is the price index of tires and S is the number of motor vehicles registered.
Carree & Thurik expected a
0
to be greater than five because each new vehicle needs at
least 5 tires. They compensated the potential negative effects of tire quality (QUAL) and
tire prices (P) on tire output (Q) by assigning a
1
, which they expected to be positive and
greater than these two negative effects.

Equation (5:1) applies a simpler structure to estimate an inverse demand curve. The
argument that each new vehicle needs at least 5 tires is applied by fixing ¸
12
= 5. This
reflects the need to deduct 5VI from total tire output in the demand equation because it
will not be altered by tire price changes.

Table 5.3 Equation (5:1) Inverse Tire Demand Function Estimation Results
) ln( ) ln( ) ln( ) ln( ) ln( ) ln(
14 13 12 11 10
GDPPUS Q VI VP Q P · + · · + · + · + = ¸ ¸ ¸ ¸ ¸
Coefficient
(t-value)
Constant ¸
10
-0.1738
(-1.9589)
Tire quantity (Q) ¸
11
-3.0837
(-5.039)***
Vehicle production (VP)
¸
12

5.0000
#

Vehicles in-use ·Tire quantity (VI.Q) ¸
12
3.0922
(4.709)***
US per capita income (GDPPUS) ¸
13
-5.6291
(-5.152)***

Chapter 5 Page 101

Table 5.3 (continued)
Durbin-Watson 2.0164
R
2
0.8080
Inverse demand elasticity (n)
Mean
Min to Max

-3.3439
-6.5875 to -1.2152
Slope=n´ =
dQ
dP
= (n)· (P/Q)
Mean
Min to Max



- 4.9624
-20.5900 to - 0.3979
Direct demand elasticity (n
*
=1/n)
Mean
Min to Max

-0.3804
-0.1518 to -0.8229
*** denotes rejection of null hypothesis at less than 1% level of significance,
** denotes rejection of null hypothesis at 5% level of significance,
* denotes rejection of null hypothesis at 10 % level of significance.
#
denotes imposed value

Direct Tire Demand Estimation Results (Equation 5:2)
The direct tire demand function models world tire demand (Q) as a function of tire price
(P), world vehicle production (VP), world vehicles in-use (VI) and a time trend (T).
T is included in equation 5.2 in order to address the net effect of tire demand growth
(which increases overtime due to the growth in population as well as economic
transaction) and tire demand decreases (due to tire quality improvement, as argued by
Carree & Thurik (2000, p.260) who proposed that tire quality has been improving
overtime and help users to postpone new tire demand). GDPPUS did not display
significant results in our estimation for equation 5.2.
The equation is estimated in log-log form and estimation results are displayed in Table
5.4. The estimation was undertaken using SHAZAM V9.0 via OLS with second order
autocorrelation correction. From Table 5.4, the results indicate that the direct price
elasticity of world tire demand is -0.3705. The slope of the demand function with
respect to price is -3.1439.



Chapter 5 Page 102

Table 5.4 Equation (5:2): Direct Tire Demand Estimation Results
) ln( ) ln( ) ln( ) ln( ) ln(
24 23 22 21 20
T VI VP P Q · + · + · + · + = ¸ ¸ ¸ ¸ ¸
Coefficient
(t-value)
Tire Quantity (Q)
Constant ¸
20
-1.1022
(-4.606)***
Tire price (P) ¸
21
-0.3705
(-5.034)***
Vehicle production (VP) ¸
22
0.4956
(6.008)***
Vehicles in-use (VI) ¸
23
-0.2424
(-2.226)**
Time trend (T) ¸
24
0.3600
(4.551)***
Durbin-Watson 1.9700
R
2
0.9955
Direct demand elasticity n
*
-0.3705

dQ
dP
= (1/n
*)
*(P/Q)
-3.1439
*** denotes rejection of null hypothesis at less than 1% level of significance,
** denotes rejection of null hypothesis at 5% level of significance,
* denotes rejection of null hypothesis at 10 % level of significance.
Table 5.5 compares the estimated results above with the results from other studies.
Jovanovic & Macdonald (1994) estimated direct US market tire elasticity as -0.76 but
they were derived from inverse functions. Carree & Thurik (2000) estimated direct US
tire market elasticity as -0.48 for the same period. In contrast, this study estimates two
values for direct world tire market elasticities. The first value is estimated from an
inverse tire demand, that is -0.38. The second value is estimated from a direct tire
demand and the value is -0.37.




Chapter 5 Page 103

Table 5.5 Comparative Estimates of Tire Demand Elasticities
Study Region Direct elasticity
Jovanovic & Macdonald (1994) U.S.A.
(1913-1973)
-0.76
Carree & Thurik (2000) -0.48
This study:
Inverse demand function (1/n)
Direct demand function (n
*
)

World
(1960-2000)

-0.3804
-0.3705
The inverse elasticity and direct elasticity estimated from this section will be employed
to measure market power in following sections.

5.4 Estimation of the Natural Rubber Supply Function
Natural rubber supply is modelled in both inverse and direct form. The inverse natural
rubber supply function (5:3) models natural rubber price (WR) as a function of world
natural rubber supply (XR), world natural rubber supply (XR
t-2
) with a two-year lag, the
interaction of rain quantity (RAIN) and world natural rubber supply XR, the synthetic
rubber price (WS
t-3
) with a three year lag, the interaction of the presence of International
Natural Rubber Organization (INRO) and world natural rubber supply XR, the currency
exchange rates of Japan (ERJA), Thailand (ERTH), Singapore (ERSP), the
concentration ratio for the tire industry (RQM) and a time trend (T).
(5:3)
) ln( ) ln( ) ln( ) ln( ) ln( ) ln(
)
3
ln( ) ln( ) ln( ) ln( ) ln( ) ln(
120 19 18 17 16 15
14 13 2 12 11 10
T RQM ERSP ERTH ERJA XR INRO
t
WS XR RAIN XR XR WR
t
· + · + · + · + · + · ·
+
÷
· + · + · + · + =
÷
ì ì ì ì ì ì
ì ì ì ì ì

A log-log functional form is also applied for (5:3), from which we derive the slope: c' =

dXR
dWR
=
XR
WR
INRO RAIN · · + + } ) ln( {
15 13 11
ì ì ì ; and the inverse elasticity:
) ln(
) ln(
XR
WR

WR
XR
dXR
dWR
c
c
== = INRO RAIN · + +
15 13 11
) ln( ì ì ì .
For the direct natural rubber supply function (5:4), world natural rubber supply (XR) is
modelled as a function of natural rubber price (WR), the interaction of the presence of
the Natural Rubber Organization (INRO) and natural rubber price WR, the interaction of
Japan‟s currency exchange rates (ERJA) and natural rubber price WR, Thai currency
exchange rate (ERTH), a structural change dummy variable for a change in the mix of

Chapter 5 Page 104

natural rubber and synthetic rubber following introduction of the radial tire (DRXSM)
and a time trend (T).
(5:4)

T DRXSM
ERTH WR ERJA WR INRO WR XR
· + ·
+ · + · · + · · + · + =
26 25
24 23 22 21 20
) ln( ) ln( ) ln( ) ln( ) ln( ) ln(
ì ì
ì ì ì ì ì

A log-log functional form is employed for (5:4), from which we derive the slope:
c
-
'=
dWR
dXR
=
WR
XR
ERJA INRO · · + · + )} ln( {
23 22 21
ì ì ì and the natural rubber supply
direct elasticity
) ln(
) ln(
*
WR
XR

XR
WR
dWR
dXR
c
c
= = c = ) ln(
23 22 21
ERJA INRO · + · + ì ì ì .
Variables that are employed to estimate the natural rubber supply functions are
summarized in Table 5.6.
Table 5.6 Variable Descriptions for the Natural Rubber Supply Function
The variables for natural rubber supply functions are selected on the following basis.
Natural Rubber Prices (WR)

32
To divide the country currency exchange rates (ERJA, ERTH and ERSP ) by their CPI is to remove the
inflationary component of local country nominal exchange rates caused by ordinary economic
transactions as well as government monetary and fiscal policies.
WR
Natural Rubber Price: RSS1 natural rubber prices, fob Malaysia ringgit/ton,
transferred to $us/ tons and deflated by US consumer price index, 1995 = 100
XR World Natural Rubber Production
RAIN Rainfall quantity in millilitres.
WS
t-3
Synthetic rubber price lagged by 3 years
INRO The International Natural Rubber Organization
ERJA
Japan’s currency exchange rates (100Yen/US$), deflated by Japan’s consumer price
index 1995=100.
32

ERTH
Thailand’s currency exchange rates (Baht/US$), deflated by Thailand’s consumer
price index 1995=100.
ERSP
Singapore’s currency exchange rates(S$/ $US), deflated by Singapore’s consumer
price index 1995=100.
RQM
Top seven countries’ quantity /total quantity ratio. Top seven tire producing countries
are US, France, Japan, Germany, Italy, UK and India.
T A time trend
DRXSM
Structural change dummy variable for a change in the mix of natural rubber and
synthetic rubber following introduction of the radial tire .(1970 -2000 = 1)

Chapter 5 Page 105

Natural rubber has local prices, export prices (fob), import prices (cif) and futures
market prices. Local prices are derived from local central markets. Export prices are
announced by producing countries daily. Major import prices are in London, New York,
Japan and Singapore. The natural rubber futures market prices which are frequently
referred to are prices from: The Tokyo Commodity Exchange (TOCOM), the Singapore
Commodity Exchange (SICOM) and the Agricultural Exchange of Thailand (AFET).
Natural rubber prices are classified according to product types such as ribbed-smoked
sheets (RSS1 to RSS5), blocked rubber or standard rubber and concentrated latex.
Prices of each of type are closely related. A number of natural rubber price series are
candidates for the natural rubber price variable (WR).
First, some studies such as Burger & Smit (1997) investigated individual country
natural rubber supplies and adopted local country prices deflated by local country
consumer price indexes. Secondly, SICOM‟s RSS3 rubber prices can be applied for WR
since most rubber used in the tire industry is RSS3 type and much trading is done
through Singapore. However, the RSS3 price series is not readily available for early
periods. Thirdly, RSS1 prices can also represent natural rubber prices. The series is
continuous, able to be traced back to 1960 and it is a price of sheet rubber, which has
been applied in tire manufacturing
33
. Therefore, this thesis applies the fob Malaysia
Ringgit price series for RSS1 as data for WR. It is then transformed to $US and deflated
by the US consumer price index, which is considered the best reflection of global
inflation.
World Natural Rubber Production (XR)


World natural rubber production is dominated by the three largest producers namely:
Thailand, Indonesia and Malaysia. There are three alternative variables for world
natural rubber production: actual natural rubber production, natural rubber exports and
natural rubber used in tire sector. This thesis adopts the data from all countries‟ natural
rubber production data. Natural rubber exports and natural rubber used in the tire sector
have been tested but results indicate that they do not produce statistically significant
relationships to natural rubber prices as well as natural rubber production.
Other studies have used alternative data. According to Burger & Smit (1997), natural
rubber production is affected from two factors. The first factor is normal production
which is determined by the quantity of planted areas plus planting technology including

33
Block rubber is applied in tire industry too but less so than sheet rubber until recent years.

Chapter 5 Page 106

vintages of the trees. The second factor is from tapping intensity which responds to
natural rubber prices and other economic factors such as income. Therefore, the natural
rubber supply data used in estimation should be the relative quantity of actual
production to normal production. In addition, when considering the production data,
Burger, Smit & Volgelvang (2002) argue that the nature of data gathering in natural
rubber producing countries is based on exports. Consequently, natural rubber
production is derived from the sum of exports, domestic consumption and domestic
stocks. Thus production data involves some elements of consumption and does not fully
represent production. This study applied a time trend to incorporate for normal
production, which develops along with time trend. Lagged production tends to increase
stocks hence decreases price.
Other variables that affect natural rubber prices (i.e. supply shifters for natural rubber)
are considered as follows.

Rain quantity in millilitres (RAIN)
Data for the rain variable can be measured by rain quantity. Rain prevents natural
rubber tapping hence reduces natural rubber supply. However, it has been argued that
farmers often compensate by tapping more frequently. Data for rain quantity is adopted
from Thailand since Thailand, Malaysia and Indonesia are all in the same climate zone,
namely the tropical zone. Besides, Thai natural output is the largest during the study
period. Thus, the quantity of rainfall in Songkhla, which is a major natural rubber
producing province in Thailand, is adopted for the estimation variable.
Synthetic Rubber Prices (WS)
A Proxy for Synthetic Rubber Prices is adopted from the Export value of the copolymer
of styrene and butadiene (SBR) from the USA (International Rubber Study Group,
various issues). Synthetic rubber is considered a competing input to natural rubber,
although only to a certain extent. Whenever synthetic rubber prices are not competitive,
natural rubber would be used more, following more natural rubber tree cultivation.
Price Stabilization Regulatory (INRO)
INRO was established to stabilize natural rubber prices. It acted as a buffer when price
was on a down trend. A dummy variable for the presence of the International Natural
Rubber Organization (INRO) is applied to the natural rubber supply equation. INRO is

Chapter 5 Page 107

expected to eliminate price fluctuations, and hence should have intervening effects on
the relation between natural rubber price and production.
Currency Exchange Rates (ERJA, ERTH, ERSP)
Generally, a depreciation of a country‟s currency decreases that country‟s imports and
increases that country‟s exports. This might apply to natural rubber import behaviour.
During the period of study, except for Thailand in 1997 onwards, producing countries‟
currencies were quite stable. However, they are tested in the model too. Data for each
country‟s currency exchange rate per $US are employed.
Increases in the currency exchange rates of Japan and Singapore (100 Yen/US$ and
S$/US$) should be a positive shifting factor as they should render the natural rubber
price more profitable. On the other hand it might lead to selling of natural rubber in
futures markets namely: the Osaka market and the Tokyo Commodity Exchange
(TOCOM) in order to gain from future exchange rate fluctuations and thus depressing
rubber prices. As the Thai exchange rate (Baht/$US) increases, the natural rubber price,
which used to be intuitively set as 1$US/kilogram, becomes less profitable hence should
have downward shifting effects. Singapore‟s currency exchange rate affects natural
rubber prices in both exporting and importing aspects since Singapore re-exports natural
rubber to third countries. Impacts on natural rubber prices are also possible through the
future commodity exchange market namely the Singapore Commodity Exchange
(SICOM).
The Concentration of Tire Producers (RQM)
The concentration ratio for the seven top tire producing countries in total world tire
production (CR7 concentration ratio) is used to measure changes in competitiveness of
the tire manufacturing industry. The seven countries are the US, France, Japan,
Germany, Italy, U.K. and India.
34

The Structural Changes in the Natural Rubber / synthetic Rubber Consumption Rates
(DRXSM)
A structural change in the manufacturing mix of natural rubber and synthetic rubber
occurred when radial tires were introduced. This is accommodated in the natural rubber
supply estimation by a dummy variable dating from the introduction of radial tires in
1970.

34
These are the top seven countries that data are available from the International rubber Study Group.

Chapter 5 Page 108

Technology (T)
Technological progress overtime is represented by a time trend. Technology advances
overtime increase yields per area. Hence natural rubber supply is increased and this has
downward shifting effects on natural rubber prices. The time trend also helps to address
growth in the area planted and the normal production as against actual production of
natural rubber (Smit, 2001).
Summary statistics for these natural rubber supply variables are displayed in Table 5.7.

Table 5.7 Summary Statistics for Natural Rubber Supply Function
Variable Mean Standard Deviation Minimum Maximum
WR (fob Mal.ringgit/ton) 2,136.50 684.29 935.00 3,956.00
$US 798.99 311.05 327.74 1582.40
$US (deflated) 1709.60 745.03 563.91 3956.20
XR (1,000 tons) 4,109.40 1,442.30 2,040.00 6,840.00
RAIN (millimetres) 2,053.90 456.89 1,288.10 3,268.60
WS (US$/ton) 821.20 267.42 395.00 1,331.00
(deflated) 1737.80 666.05 930.38 3515.10
ERJA (100 Yen/US$) 237.88 98.84 94.06 360.00
(deflated) 618.50 593.05 94.06 1968.40
ERTH (Baht/US$) 24.00 5.20 20.34 41.36
(deflated) 62.71 35.65 23.93 130.66
ERSP (S$/US$) 2.32 0.57 1.41 3.06
(deflated) 3.06 0.98 1.42 4.63
RQM (CR7 Ratio) 0.68 0.07 0.56 0.79
Figures 5.7-5.21 illustrate the data graphically.

Chapter 5 Page 109


Figure 5.7 Natural Rubber Price
(WR) (fob Malaysia Ringgit/ton)


Figure 5.8 Natural Rubber Price
(WR) ($US/ton)




Figure 5.9 Natural Rubber Price
(WR) (deflated by US consumer
price index) ($US/ton)

Figure 5.10 World Natural Rubber
Production (XR) (1,000 tons)




Figure 5.11 Rainfall (RAIN)
(millimetres)

Figure 5.12 Synthetic Rubber Price
(WS) ($US/ton)


Chapter 5 Page 110

Figure 5.13 Synthetic Rubber
Price(WS) (deflated by US CPI)
($US/ton)

Figure 5.14 Japan’s Currency
Exchange Rate (ERJA)
(100 Yen / $US)


Figure 5.15 Japan’s Currency
Exchange Rate (deflated by
Japan’s CPI) (ERJA)
(100 Yen / $US)

Figure 5.16 Thai Currency
Exchange Rate (ERTH) (Baht/$US)



Figure 5.17 Thai Currency
Exchange Rate (deflated by Thai
consumer price index) (ERTH) (Baht
/ $US)

Figure 5.18 Singapore’s Currency
Exchange Rate (ERSP) (S$ / $US)


Figure 5.19 Singapore’s Currency
Exchange Rate (deflated by Singapore
consumer price index) (ERSP)
($S/$US)

Figure 5.20 CR7 Concentration
Ratio in World Tire Production
(RQM)

Chapter 5 Page 111


Figure 5.21 The Ratio of Natural
Rubber and Synthetic Rubber
Consumption in World Tire Sectors
(RXSM) (Ratio)




The natural rubber price dropped to its bottom level in the year 1972 and then recovered
until 1980. During the presence of INRO, prices fluctuated through cycles of 5-6 years.
This might reflect attempts to restrict prices within a range of 800-1,200 $US/ton. When
considered in real terms, Figure 5.9 displays a downward movement in natural rubber
prices except for two peaks in 1973 and 1979. Based on the 1995 price, natural rubber
prices dropped from 3,956 $US in 1960 to 563 $US in 1999.

5.4.1 Estimation Results of the Natural Rubber Supply
In equation (5:3), the endogenous variable, natural rubber price (WR) is regressed on
natural rubber production quantity (XR) and a vector of shifting variables comprising:
two-year lagged natural rubber production (XR
t-2
), rainfall (RAIN), three-year lagged
synthetic rubber prices (WS
t-3
), the presence of the International Natural Rubber
Organization (INRO), Japan‟s currency exchange rates (ERJA), Thailand‟s currency
exchange rate (ERTH), Singapore currency exchange rate (ERSP), the CR7

Chapter 5 Page 112

concentration ratio (top seven tire producing countries market share RQM), and a time
trend (T). The equation is estimated in log-log form.
Three variables that did not provide significant estimates were the number of raining
days (rain quantity provided statistically significant results), planted area and palm oil
prices. Rubber trees take about six years to become mature and produce natural rubber
therefore natural rubber output should have a 6-7 year lag behind cultivation. However,
the planted area did not produce significant results as the data series is not continuous.
Palm oil was considered relevant as a substitute product since the late 1970s but various
measures for palm oil were found to be not significant.

Inverse Natural Rubber Supply Function (Equation 5:3)
Estimation results for equation (5:3) are shown in Table 5.8 The estimation was
undertaken using the SHAZAM V9.0 via OLS with first order autocorrelation
correction. Estimated results indicated that whereas quantity supplied is positively
related to natural rubber price, other variables have negative effects on natural rubber
prices. Two variables have lagged effects on natural rubber prices. They are natural
rubber production, lagged by two years, and synthetic rubber price, lagged by three
years.
Price elasticity to quantity supplied is derived as 3.4930 – 0.7369·ln(RAIN) –
0.3106·(INRO). The overall average inverse price elasticity is c = 3.3405, with a range
from 2.9063 to 3.8368. The average slope
dXR
dWR
= ' c = 3.4980 with a range from 0.5785
to 9.2983. The direct supply elasticity is
c
c
1
*
= = 0.3005 with a range from 0.2606 to
0.3441.
Table 5.8 Equation (5:3) Inverse Natural Rubber Supply Function Estimation
Results
) ln( ) ln( ) ln( ) ln( ) ln( ) ln(
)
3
ln( ) ln( ) ln( ) ln( ) ln( ) ln(
120 19 18 17 16 15
14 13 2 12 11 10
T RQM ERSP ERTH ERJA XR INRO
t
WS XR RAIN XR XR WR
t
· + · + · + · + · + · ·
+
÷
· + · + · + · + =
÷
ì ì ì ì ì ì
ì ì ì ì ì

Coefficient
(t-value)
Constant ì
10
3.9583
(11.950)***

Chapter 5 Page 113

Table 5.8 (continued)
Natural Rubber Quantity (XR) ì
11
3.4930
(10.860)***
Quantity supply lagged by 2 years (XR
t-2
) ì
12
-1.1008
(-3.832) ***
Natural rubber quantity * rainfall quantity (XR·RAIN) ì
13
-0.7369
(-5.608) ***
Synthetic rubber price lagged by 3 years ( WS
t-3
) ì
14
-1.0549
(-5.587) ***
Natural rubber quantity * INRO (XR·INRO) ì
15
-0.3106
(-2.243) **
Japan’s currency exchange rates (ERJA) ì
16
-0.2289
(-2.491) **
Thailand’s currency exchange rates (ERTH) ì
17
-0.9361
(-6.044) ***
Singapore’s currency exchange rates (ERSP) ì
18
-0.6001
(-7.348) ***
CR7 concentration ratio
35
(RQM) ì
19
-5.1890
(-9.374) ***
Time trend (T) ì
110
-0.2092
(-13.770)***
Durbin-Watson 1.9675
R
2
0.9848
Inverse supply elasticity (c)
Mean
Min to Max

3.3405
2.9063 to 3.8368
Slope=c´=
dXR
dWR

Mean
Min to Max


3.4980
0.5785 to 9.2983
Direct supply elasticity c
*
=1/c
Mean
Min to Max

0.3005
0.2606-0.3441
*** denotes rejection of null hypothesis at less than 1% level of significance,
** denotes rejection of null hypothesis at 5% level of significance,
* denotes rejection of null hypothesis at 10 % level of significance.



35
Top seven tire producing countries are US, France, Japan, Germany, Italy, UK and India.


Chapter 5 Page 114

Direct Natural Rubber Supply Function (Equation 5:4)
Equation (5:4) estimates a direct natural rubber supply function. World natural rubber
production (XR) is regressed on natural rubber price (WR) with a vector of shift
variables comprising: the presence of the International natural Rubber Organization
(INRO), Japan‟s currency exchange rate (ERJA), Thailand‟s currency exchange rate
(ERTH), changes in the ratio of natural rubber to synthetic used in world tire sector
(DRXSM) and a time trend (T). The model is estimated in log-log functional form.
Estimates results are displayed in Table 5.9.
Equation (5:4) was estimated using the SHAZAM V9.0 via OLS with first order
autocorrelation. Estimated results indicate that the natural rubber supply direct elasticity
c
-
= 0.1551 – 0.0555·(INRO) - 0.0417·ln(ERJA). The average natural rubber supply
price elasticity is c
-
= 0.1494 with a range of 0.1091 to 0.2285. The slope of the natural
rubber supply function with respect to price is 8.83 with a range of 0.9342 to 31.4550.

Chapter 5 Page 115

Table 5.9 Equation (5:4) Direct Natural Rubber Supply Function Estimation
Results
T DRXSM
ERTH WR ERJA WR INRO WR XR
· + ·
+ · + · · + · · + · + =
26 25
24 23 22 21 20
) ln( ) ln( ) ln( ) ln( ) ln( ) ln(
ì ì
ì ì ì ì ì

Coefficient
(t-value)
Constant ì
20
-0.9993
(-20.450)***
Natural rubber price (WR) ì
21
0.1551
(6.223)***
Natural rubber price· INRO (INRO WR) ì
22
-0.0555
(-2.679)**
Natural rubber price·x Japan exchange rate (ERJA ·WR) ì
23
-0.0417
(-2.046)**
Thailand’s exchange rate (ERTH) ì
25
0.2881
(5.804)***
Structural Change in the ratio of natural to synthetic rubber
consumption in tire sector (DRXSM)
ì
24
0.0491
(2.030)**
Time trend (T) ì
26
0.0460
(16.430)***
Durbin-Watson 1.9933
R
2
0.9965
Direct supply elasticity c
*

Mean
Min to Max

0.1494
0.1091 to 0.2285
dXR
dWR

Mean
Min to Max



8.8307
0.9342 to 31.455
*** denotes rejection of null hypothesis at less than 1% level of significance,
** denotes rejection of null hypothesis at 5% level of significance,
* denotes rejection of null hypothesis at 10 % level of significance.
Table 5.10 compares the above estimated results to results from other studies.
Burger & Smit (1997) studied natural rubber supply from different countries during
1973-1993. In contrast this study examines the elasticity at a world level during the
period 1960-2000. Elasticities are estimated from both inverse and direct supply curves.
The estimated elasticity of natural rubber supply will be used to calculate the market
power in next sections.

Chapter 5 Page 116


Table 5.10 Comparative Estimates of Natural Rubber Supply Elasticities
Thailand

Indonesia
Estate
Indonesia
small holding
Malaysia
Estate
Malaysia
small holding
World
1973-1993 1976-1993 1975-1993 1976-1993 1978-93 1960-2000
Burger & Smit (1997) Direct Elasticity
0.22 0.29 -
#1
0.14 0.14 -
#2

This Study: Inverse supply function (1/c)
0.30
This Study: Direct supply function (c
*)

0.15
#1
No significant estimate are available.

#2
No estimation in world level.

5.5 Estimation of the Tire Production Function
A tire production function of the general form ) f(xr q
i i
= is required to obtain a value
for marginal product of natural rubber (
xri
MP ). A Generalized Leontief functional form
(GL) is employed for estimation of the production function. The GL functional form is
one that is frequently employed when estimating production functions, cost functions
and profit functions. Examples for its applications can be found in Schroeter (1990),
Murray (1994), Diewert (1971), Diewert (1978), Diewert (2003), Fox & Diewert (1997)
and Cohen & Paul (2003).
The GL is a flexible functional form. Flexible functional forms can accommodate
second-order derivatives and provide useful applications of the production function
such as permitting partial elasticities of substitution between inputs to vary
36
.
The tire production function (5:5) is transformed from a firm level production function
to a producing country (q
i
) production function. Accordingly, the tire output for country
i (q
i
where i refers to USA, France, Japan and Germany) is set as a function of a natural
rubber input (xr
i
), a synthetic rubber input (xs
i
), the world oil price (WO), the country‟s
vehicle production (VP
i
), the country‟s vehicles in-use (VI
i
) and a time trend (T).

36
Discussion on properties of Generalized Leontief flexible functional form can be found in Diewert
(1971), (1978), (2003).

Chapter 5 Page 117

(5:5)
) (
9
) (
8
2
7 6
5 4
2 1 2 1
3
2
2 1 0
i
VI δ
i
VP δ T δ T δ
T
i
xs δ T
i
xr δ WO
/
i
xs
/
i
xr δ
i
xs δ
i
xr δ δ
i
q
· + · + · + ·
+ · · + · · + · · · · + · + · + =

From (5:5) the marginal product for natural rubber is obtained as:
T δ WO
/
i
xs
/
i
xr δ δ
xr
q
MPxr
i
i
i i
· + · ·
÷
· + =
c
c
= =
4
2 1 2 1
3 1
v
The data applied to the tire production model are selected on the following basis.
Tire Production (q
i
)
In accordance with tire demand estimation, tire production is classified as passenger car
tires plus commercial vehicle tires since most countries have separate data records
except for some countries such as China, Russia and the Republic of Korea, which did
not have separate data until recent years. Given that the input ratio of natural rubber to
synthetic rubber used in passenger car tire and commercial vehicle tires are close
(55%/45% and 50%50%) total tire production is defined as the sum of passenger and
commercial tires.
It is recognized that the ratios of natural rubber to synthetic rubber varies more
significantly in specialist tires. For example racing tires and off-highway tires have
natural rubber /synthetic rubber ratios of 35%/65% and 80%/20% respectively.
However, these categories are small items relative to passenger and commercial vehicle
tires hence their production data is not individually reported in world level data
(International Rubber Study, various copies).

Natural Rubber and Synthetic Rubber Inputs (xr
US
and xs
US
)
Consumption of elastomer is often divided into two sectors, namely tire sector and
general sector consumption. Tire sector consumption comprises natural rubber and
synthetic rubber that are used in all kinds of vehicle tires production. General sector
consumption comprises natural rubber and synthetic rubber that are used to produce
products other than tires. Most general sector products are used in automotive sector i.e.
rubber parts and accessories used in vehicles.
Data for natural rubber and synthetic rubber consumption in the tire sector can be
obtained for USA, France, Japan, Germany, Italy, Spain, U.K. and Brazil and India.

Chapter 5 Page 118

However, they are not available for some countries such as China. Hence the study
does not test for market power from China tire manufacturing on the natural rubber
market despite its significant growth in natural rubber consumption since the 1990s
37
.

World Oil Prices (WO)
As petroleum is a key manufacturing input for synthetic rubber, its price impacts on the
price of synthetic rubber, which is a substitute input for natural rubber in tire
production. Thus, tire production is affected by world oil prices.

Country Vehicle Production and Vehicle In-Use (VP
i
and VI
i
)
As already noted, each new car requires at least five tires and a vehicle in-use also
consumes tires. Therefore, tire production should be determined by vehicle production
and vehicles in-use.

Time Trend (T)
Technology improves manufacturing costs overtime. A time trend is used as a proxy
measure for the impact of technology.
Estimations were undertaken using the non-linear algorithm in SHAZAM V9.0 via OLS
with corrections for autocorrelation using an iterative Cochrane-Orcutt procedure.

5.5.1 US Tire Production Function Estimation
When the tire production function (5:5) is applied to USA (5:5US), US tire output (q
US
)
is modelled as a function of US natural rubber inputs used in its tire sector (xr
US
), the
quantity of synthetic rubber used in its tire sector (xs
US
), world crude oil price (WO), US
vehicles in-use (VI
US
) and a time trend.
Interaction terms such as: US quantity of natural rubber used in the tire sector (xr
US
) and
the time trend T, US quantity of synthetic rubber used in the tire sector (xs
US
) and the

37
However, natural rubber consumption data could be used in place of natural rubber used in tire sector in
such cases.


Chapter 5 Page 119

time trend T, the term T
2
and US vehicle Production (VP
US
) did not provide significant
estimates. The tire production function for USA was hence simplified to:
(5:5US)

T δ
US
VI δ WO
/
US
xs
/
US
xr δ
US
xs δ
US
xr δ δ
US
q · + · + · · · · + · + · + =
5
) (
4
2 1 2 1
3
2
2 1 0

From (5:5US) the US marginal product for natural rubber is:

xr
q
MPxr
US
US
US US
c
c
= = v = WO
/
US
XS
/
US
XR δ δ · ·
÷
· +
2 1 2 1
3 1

The variables employed to estimate the US tire production function are summarized in
Table 5.11. Summary statistics for the US tire production function are displayed in
Table 5.12.

Table 5.11 Variables Description for US Tire Production Function
Variable Description
q
US
Tire production (US passenger car tires and truck tires)
xr
US
Quantity of natural rubber used in tire sector in the US.
xs
US
Quantity of synthetic rubber used in tire sector in the US.
WO World crude oil price, Spot Oil Price (West Texas Intermediate). Deflated by US
consumer price index. 1995=100.
VI
US
Total vehicle in-use in the US.(passenger car and commercial vehicle)
T A time trend

Table 5.12 Data Summary for Variables in the US Tire Production Function
Variable Mean Standard Deviation Minimum Maximum
q
US
(mill) 203.37 39.63 116.78 276.76
xr
US
(1,000) 545.34 170.32 282.60 947.00
xs
US
(1,000) 1130.90 208.37 682.00 1507.10
WO (US$/barrel) 15.18 10.66 2.92 37.38
Deflated 25.49 14.18 12.97 69.14
VI
US
(mill) 149.24 45.04 73.58 221.48


Chapter 5 Page 120

Figures 5.22 to 5.27 display these variables in graphs
38
.

Figure 5.22 Quantity of US Tire
Production (q
US
) (1,000s)

Figure 5.23 Quantity of Natural
Rubber Used in US Tire Sector
(xr
US
) (1,000s)


Figure 5.24 Quantity of Synthetic
Rubber Used in US Tire Production
(xs
US
) (1,000s)

Figure 5.25 World Crude Oil Price
(WO) ($US/barrel)

Figure 5.26 World Crude Oil Price (WO)
(deflated by US consumer price index)

Figure 5.27 US Vehicle In-Use (VI
US
)
(1,000s)


38
Note some figures include a notation change however QUS = q
US
, XRUS = xr
US
, XSUS = xs
US
, VIUS =
VI
US
.


Chapter 5 Page 121

Table 5.13 Equation (5.5US): US Tire Production Estimation Results
T δ
US
VI δ WO
/
US
xs
/
US
xr δ
US
xs δ
US
xr δ δ
US
q · + · + · · · · + · + · + =
5
) (
4
2 1 2 1
3
2
2 1 0

Coefficient
(t-value)
Constant o
0US
0.5344
(3.310)***
Natural rubber inputs - US (xr
US
) o
1 US
0.3717
(6.350) ***
Synthetic rubber inputs - US (xs
US
) o
2 US
0.4240
(7.937) ***
2·(xr
US
)
1/2
(xs
US
)
1/2
·(WO) o
3 US
-0.0157
(-1.985)**
US’s vehicles in-use (VI
US
) o
4 US
-0.6942
( -2.106)**
Time trend (T) o
4 US
0.0192
(2.258)**
Durbin-Watson 1.8821
R
2
0.9796
Natural rubber marginal product
v
US
=

US
US
xr
q
c
c
= WO
/
xs
/
xr δ δ
US US
· ·
÷
· +
2 1 2 1
3 1

Mean
Min to Max




0.3556
0.3254 to 0.3646
*** denotes rejection of null hypothesis at less than 1% level of significance,
** denotes rejection of null hypothesis at 5% level of significance,
* denotes rejection of null hypothesis at 10 % level of significance.
The estimation was undertaken using the non-linear algorithm in SHAZAM V9.0 with
second order autocorrelation correction. Results are summarized in Table 5.13. The
marginal product for natural rubber in the US was estimated as v
US
=
US
US
xr
q
c
c
= 0.3556
with a range from 0.3254 to 0.3646.

5.5.2 France’s Tire Production Function Estimation
When the tire production function (5:5) is applied to France (5:5FR), it estimates
France‟s tire output (q
FR
) as a function of France‟s quantity of natural rubber used in its
tire sector (xr
FR
), the quantity of synthetic rubber used in its tire sector (xs
FR
), world
crude oil price (WO), France‟s vehicle production (VP
US
), and a time trend.

Chapter 5 Page 122

The interaction terms: quantity of natural rubber used (xr
FR
) and the time trend

T,
synthetic rubber used (xs
FR
) and the time trend T, the term T
2
and France‟s vehicles in-
use (VI
FR
) did not provide significant estimates.
The tire production function for France (5:5FR) was:
(5:5FR)
T δ
FR
VP δ WO
/
FR
xs
/
FR
xr δ
FR
xs δ
FR
xr δ δ
FR
q · + · + · · · · + · + · + =
5
4
2 1 2 1
3
2
2 1 0

From (5:5FR) France‟s marginal product for natural rubber is derived as:
WO
/
FR
xs
/
FR
xr δ δ
xr
q
MPxr
FR
FR
FR FR
· ·
÷
· + =
c
c
= =
2 1 2 1
3 1
v
The variables that were employed to estimate the France‟s tire production function are
listed in Table 5.14. The data for these variables are summarized in Table 5.15.

Table 5.14 Variable Description for France’s Tire Production Function
Variable Description
q
FR
Tire production (France’s passenger car tires and truck tires)
xr
FR
Quantity of natural rubber used in Tire sector in France.
xs
FR
Quantity of synthetic rubber used in Tire sector in France.
WO World crude oil price, Spot Oil Price (West Texas Intermediate). Deflated by US
consumer price index. 1995=100.
VP
FR
Total vehicle production in France (passenger car and commercial vehicle)

Table 5.15 Data Summary for France’s Tire Production Function
Variable Mean Standard Deviation Minimum Maximum
q
FR
(mill) 45.620 15.38 14.35 67.71
xr
FR
(1,000) 130.98 35.72 76.60 205.00
xs
FR
(1,000) 147.60 41.59 49.40 197.60
WO US$/barrel) 15.18 10.66 2.92 37.38
Deflated 25.49 14.18 12.97 69.14
VP
FR
(mill) 2.90 0.74 1.25 3.92

Chapter 5 Page 123

These data are represented graphically in Figures 5.28 to 5.31
39
.
Figure 5.28 Tire Production for
France (q
FR
) (1,000s)


Figure 5.29 France’s Quantity of
Natural Rubber Used in Tire Sector
(xr
FR
) (1,000s)


Figure 5.30 France’s Quantity of
Synthetic Rubber Used in Tire Sector
(xs
FR
) (1,000s)


Figure 5.31 France’s Passenger Car
and Commercial Vehicle Production
(VP
FR
) (1,000s)



The estimation was performed using the non-linear algorithm in SHAZAM V9.0 with
fourth order autocorrelation correction. Estimation Results for (5:5FR) are shown in
Table 5.16. The marginal product for natural rubber in France was estimated as
v
FR
=
FR
FR
xr
q
c
c
= 0.6343 with a range from 0.5586 to 0.6583.


39
Note some figures include a notation change however QFR = q
FR
, XRFR = xr
FR
, XSFR = xs
FR
, VPFR =
VP
FR
. The figures for WO and WO (deflated) are found in figures 5.25 and 5.26 above.

Chapter 5 Page 124

Table 5.16 Equation (5:5FR) France’s Tire Production Estimation Results
T δ
FR
VP δ WO
/
FR
xs
/
FR
xr δ
FR
xs δ
FR
xr δ δ
FR
q · + · + · · · · + · + · + =
5
4
2 1 2 1
3
2
2 1 0

Coefficient
(t-value)
Constant o
0FR
-0.1378
(-5.818)***
Natural rubber inputs - France (xr
FR
) o
1 FR
0.6795
(9.563)***
Synthetic rubber inputs – France (xs
FR
) o
2 FR
0.1100
(3.249)***
2·(xr
FR
)
1/2
·(xs
FR
)
½
·WO o
3 FR
-0.0422
(-21.069)***
France’s vehicle production (VP
FR
) o
4 FR
0.2985
(16.971)***
Time trend (T) o
4 FR
0.0071
(5.426)***
Durbin-Watson 1.9816
R
2
0.9932
Natural rubber marginal product
WO
/
FR
xs
/
FR
xr δ δ
xr
q
MPxr
FR
FR
FR FR
· ·
÷
· + =
c
c
= =
2 1 2 1
3 1
v

Mean
Min to Max



0.6343
0.5586 to 0.6583
*** denotes rejection of null hypothesis at less than 1% level of significance,
** denotes rejection of null hypothesis at 5% level of significance,
* denotes rejection of null hypothesis at 10 % level of significance.

5.5.3 Japan’s Tire Production Function Estimation
When the tire production function (5.5) is applied to Japan (5:5JA), it estimates Japan‟s
tire output (q
JA
) as a function of natural rubber input (xr
JA
), synthetic rubber inputs
(xs
JA
), world crude oil price (WO) and a time trend (T).
The interaction terms: synthetic rubber (xs
JA
) and the time trend T, the term T
2
, Japan‟s
vehicle production (VP
JA
) and Japan‟s vehicle in-use (VI
JA
) did not provide significant
estimates.
The tire production function for Japan is:
(5:5JA)
T δ T xr δ WO
/
xs
/
xr δ xs δ xr δ δ q
JA JA JA JA JA JA
· + · · + · · · · + · + · + =
5
4
2 1 2 1
3
2
2 1 0


Chapter 5 Page 125

From (5:5JA) Japan‟s marginal product for natural rubber is derived as:
T δ WO
/
xs
/
xr δ δ
xr
q
MPxr
JA JA
JA
JA
JA JA
· + · ·
÷
· + =
c
c
= =
4
2 1 2 1
3 1
v .
The variables employed to estimate the Japan‟s tire production function are summarized
in Table 5.17. Summarized statistics for the Japan‟s tire production function are
displayed in Table 5.18. Figures 5.32 to 5.34 display Japan‟s Tire Production
Variables
40
.

Table 5.17 Variable Description for Japan’s Tire Production Function
Variable Description
q
JA
Tire production (Japanese passenger car tires and truck tires)
xr
JA
Quantity of natural rubber used in Tire sector in Japan.
xs
JA
Quantity of synthetic rubber used in tire sector in Japan.
WO World crude oil price, Spot Oil Price (West Texas Intermediate). Deflated by US
consumer price index. 1995=100.
T Time trend

Table 5.18 Data Summary for Japan Tire Production Function
Variable Mean Standard Deviation Minimum Maximum
q
JA
mill
95.33 52.49 5.56 164.42
xr
JA
1,000
336.75 197.29 76.90 649.00
xs
JA
1,000
350.47 163.73 22.10 527.00
WO (US$/barrel) 15.18 10.66 2.92 37.38
deflated 25.49 14.18 12.97 69.14


40
Note some fires include a notation change however QJA = q
JA
, XRJA = xr
JA
, XSJ = xs
JA
.
The figures for WO and WO (deflated) are found in figures 5.25 and 5.26 above.

Chapter 5 Page 126

Figure 5.32 Japan’s Quantity of
Tire Production (q
JA
) (1,000s)

Figure 5.33 Japan’s Quantity of
Natural Rubber Used in Tire
Sector (xr
JA
) (1,000s)


Figure 5.34 Japan’s Quantity of
Synthetic Rubber Used in Tire
Sector (xs
JA)
(1,000s)




Estimation Results for the Japan‟s tire production function are depicted in Table 5.19.
Estimation was undertaken using the non-linear estimation algorithim in SHAZAM
V9.0 with first order autocorrelation correction. The marginal product for natural rubber
in Japan‟s tire industry was estimated to be v
JA
=
JA
JA
xr
q
c
c
= 0.5673 with a range from
0.4097 to 0.7341.






Chapter 5 Page 127

Table 5.19 Equation (5:5JA) Japan’s Tire Production Function Estimation Results
T δ T xr δ WO
/
xs
/
xr δ xs δ xr δ δ q
JA JA JA JA JA JA
· + · · + · · · · + · + · + =
5
4
2 1 2 1
3
2
2 1 0

Coefficient
(t-value)
Constant o
0JA
-0.1671
(-5.159)***
Natural rubber inputs – Japan (xr
JA
) o
1JA
0.7948
(8.060)***
Synthetic rubber inputs - Japan (xs
JA
) o
2JA
0.3685
(6.284) ***
2·(XRJA)
1/2
·(XSJ)
1/2
·WO o
3JA
-0.0112
(-1.852) *
Natural rubber inputs· time trend (xr
JA
.
T) o
4JA
-0.0091
(-4.080)***
Time trend (T) o
4JA
0.0134
(3.100) ***
Durbin-Watson 1.8738
R
2
0.9979
Japan’s Natural rubber marginal product
T δ WO
/
xs
/
xr δ δ
xr
q
MPxr
JA JA
JA
JA
JA JA
· + · ·
÷
· + =
c
c
= =
4
2 1 2 1
3 1
v

Mean
Min to Max



0.5673
0.4097 to 0.7341
*** denotes rejection of null hypothesis at less than 1% level of significance,
** denotes rejection of null hypothesis at 5% level of significance,
* denotes rejection of null hypothesis at 10 % level of significance.


5.5.4 Germany’s Tire Production Function Estimation
The tire production function (5:5) applied to Germany (5:5GR) models Germany‟s tire
output (q
GR
) as a function of natural rubber inputs used in its tire sector (xr
GR
), synthetic
rubber inputs used in its tire sector (xs
GR
), world crude oil price (WO), Germany‟s
vehicles in-use (VI
GR
) and a dummy variable to address data deficiency resulting from
the re-unification (1991-2000). The vehicles in-use variable did not yield a significant
result when measured as the sum of passenger cars and commercial vehicles. Removal
of commercial vehicles from the measure provided a significant result.
The interaction terms: natural rubber (xr
GR
) and the time trend T, synthetic rubber (xs
GR
)
and the time trend T, the time trend (T) and Germany‟s vehicle production did not
provide significant estimates.

Chapter 5 Page 128

The tire production function for Germany was estimated as:
(5:5GR)

91 5 91
) (
4
2 1 2 1
3
2
2 1 0
D δ D VI δ WO
/
xs
/
xr δ xs δ xr δ δ q
GR GR GR GR GR GR
· + · · + · · · · + · + · + =

From (5:5GR) Germany‟s tire industry marginal product for natural rubber is derived
as:
WO
/
xs
/
xr δ δ
xr
q
MPxr
GR GR
GR
GR
GR GR
· ·
÷
· + =
c
c
= =
2 1 2 1
3 1
v
.
The variables employed to estimate Germany‟s tire production function are summarized
in Table 5.20.

Table 5.20 Variable Description for Germany’s Tire Production Function
Variable Description
q
GR
Tire production (Germany’s passenger car tires and truck tires).
Xr
GR
Quantity of natural rubber used in tire sector in Germany.
Xs
GR
Quantity of synthetic rubber used in tire sector in Germany.
WO World crude oil price, Spot Oil Price (West Texas Intermediate). Deflated by US
consumer price index. 1995=100.
VI
GR
Vehicle in-use in Germany (only Passenger cars).
T A time trend.
Summarized statistics for the variables are list in Table 5.21.
Table 5.21 Summary Statistics for Germany’s Tire Production Function
Variable Mean Standard Deviation Minimum Maximum
q
GR
(mill) 43.05 11.76 16.35 63.14
Xr
GR
(1,000) 120.58 31.20 70.70 173.00
Xs
GR
(1,000) 143.23 29.01 62.90 182.00
WO ($US/barrel)
deflated
15.18 10.66 2.92 37.38
25.49 14.18 12.97 69.14
VI
GR
(mill) 23.68 11.82 4.86 43.77
T

Chapter 5 Page 129

Figures 5.35 to 5.38: display these variables graphically
41
.
Figure 5.35 Tire Production for
Germany (q
GR
) (1,000s)


Figure 5.36 Germany’s Quantity of
Natural Rubber Used in Tire
Sector (xr
GR
) (1,000s)

Figure 5.37 Germany’s Quantity of
Synthetic Rubber Used in Tire
Sector (xs
GR
) (1,000s)


Figure 5.38 Germany’s Quantity of
Passenger Car In-use (VI
GR
)
(1,000s)



The estimation was undertaken using the non-linear estimation algorithim in SHAZAM
V9.0 with first order autocorrelation correction. Results are provided in Table 5.22. The
marginal product for natural rubber in Germany‟s tire industry was estimated as:
v
GR
=
GR
GR
xr
q
c
c
= 0.3654 with a range from 0.3191 to 0.3793.



41
Note some figures include a notation change however QGR = q
GR
, XRGR = xr
GR
, XSGR = xs
GR
.
The figures for WO and WO (deflated) are found in figures 5.25 and 5.26 above.

Chapter 5 Page 130

Table 5.22 Equation (5:5GR) Germany’s Tire Production Function Estimation
Results

91 5 91
) (
4
2 1 2 1
3
2
2 1 0
D δ D VI δ WO
/
xs
/
xr δ xs δ xr δ δ q
GR GR GR GR GR GR
· + · · + · · · · + · + · + =

Coefficient
(t-value)
Constant o
0GR
0.3658
(1.890)**
Natural rubber input – Germany (xr
GR
) o
1GR
0.3917
(2.805)**
Synthetic rubber input –Germany (xs
GR
) o
2GR
0.4089
(3.452)***
2·(xr
GR
)
1/2
·(xs
GR
)
1/2
·WO o
3GR
-0.0257
(-2.143)**
Germany’s passenger car in-use · dummy variable D91 (VI
GR
·D
91
) o
4GR
0.6992
(1.947)*
dummy variable (D91) o
5GR
-1.2131
(-2.113)**
Durbin-Watson 1.8709
R
2
0.9748
Natural rubber marginal product

WO
/
xs
/
xr δ δ
xr
q
MPxr
GR GR
GR
GR
GR GR
· ·
÷
· + =
c
c
= =
2 1 2 1
3 1
v

Mean
Min to Max




0.3654
0.3191 to 0.3793
*** denotes rejection of null hypothesis at less than 1% level of significance,
** denotes rejection of null hypothesis at 5% level of significance,
* denotes rejection of null hypothesis at 10 % level of significance.

5.6 Estimation of the Optimality Condition Function
As outlined in Chapter 4, derivation of the market power index (MPI) for each
manufacturing country can be derived via 4 different models. Models 1 and 2 use the
optimality condition (4:8a) and (4:8b) developed in Chapter 4 to derive estimates for the
two conjectural elasticities (α
i
and β
i
). Models 3 and 4 apply the direct estimation
approach developed in Chapter 4 to obtain estimates of the two conjectural elasticities.


Chapter 5 Page 131

5.6.1 US MPI Estimation Using Model 1
The MPI Model 1 is derived using inverse tire demand and natural rubber supply
functions with conjectural elasticities estimated via the optimality condition derived in
Chapter 4 as (5:6.1). This condition is estimated using the variables defined in (5:7.1,
5:8.1 and 5:9.1) for US data.
(5:6.1US) US
US US
xr q P WR
. . .
· ÷ · + · =
31 21 11
u u u
From (5:6.1US) estimates of the slope of inverse tire demand (n´=
dQ
dP
), the slope of
inverse natural rubber supply (c´=
dXR
dWR
) and the natural rubber marginal productivity
in the US tire industry (v
US
=
US
US
xr
q
c
c
) are used to obtain the following terms.
(5:7.1US) P P
xr
q
P
US
US
US
US · = ·
c
c
=
.
v
(5:8.1US)
US US US
US
US
US
q q
xr
q
dQ
dP
q · · ' = ·
c
c
· =
.
v n
(5:9.1US)
US US US
xr xr
dXR
dWR
xr · ' = · =
.
c
The three terms are used to estimate the optimality function (5:6.1US) to derive values
for coefficients u
11,
u
21
and u
31
. These three coefficients provide the means for
hypothesis testing for the presence of market power plus estimations of the two
conjectural elasticities required to calculate our market power index (MPI) for each
manufacturing country.
The estimation results for (5:6.1US) are provided in Table 5.23. Two estimation results
are reported (A and B).
As outlined in Chapter 4, the null hypothesis of input market efficiency (no market
power) can be stated in terms of the three coefficients in 5:6.1 as H
0
: u
11
= 1, u
21
= u
31
=
0. If H
0
is not rejected then: P
xr
q
WR
i
i
·
c
c
= and hence the input xr
i
is being paid the
value of its marginal product. Further, if u
21
= u
31
= 0, then o
i1
= |
i1
= 0 and MPI
XRi1
=
0, thus indicating a perfectly competitive input market. Rejection of Ho indicates the
presence of non competitive markets. In particular, significant positive values of u
21


Chapter 5 Page 132

indicate the presence of oligopoly in the output market and significant positive values of
u
31
indicate the presence of oligopsony in the input market.
Results from estimation A in Table 5.23 (u
11US
= 1.1867, u
21US
= 0.0739, and u
31US
= -
0.1881) can be used to test the null hypotheses that: u
11US
= 1, u
21US
= 0.00, and u
31US
=
0.00.

Table 5.23 Equation (5:6.1US) Optimality Function for US Tire Manufacturing
(Model 1) Estimation Results
US
US
US xr q P WR
. . .
· ÷ · + · =
31 21 11
u u u
Estimation A Estimation B
Coefficient
(t-value)
Coefficient
(t-value)
Constant - 0.2344
(4.427)***
US P
.

u
11US
1.1867
(6.047)***
-
US
q
.

u
21US
0.0739
(2.817)***
-
US xr
.

u
31US
-0.1881
(-10.050)***
-0.2119
(-13.450)***
Durbin-Watson 1.9861 1.9331
R
2
0.9123 0.8954
*** denotes rejection of null hypothesis at less than 1% level of significance,
** denotes rejection of null hypothesis at 5% level of significance,
* denotes rejection of null hypothesis at 10 % level of significance.
If the null hypotheses are not rejected then it implies the natural rubber market, as a
specific factor market to tire production in the US, is competitive. If the hypotheses are
rejected it implies that world natural rubber price is less than its value of marginal
product and that there is US oligopoly power in the world tire market and oligopsony
power in the world rubber market. Table 5.24 provides these hypothesis tests.
The hypothesis tests confirm: u
11US
= 1 cannot be rejected; hence H1:u
11US
= 1 is
accepted; u
21US
= 0 is rejected (< 0.02%) hence H1:u
21US
= 0 is accepted; u
31US
= 0 is
rejected (< 0.01%) hence H1: u
31US
= 0; is accepted. The joint test: u
11US
= 1 and u
21US
=
u
31US
= 0 is rejected (< 0.01%) hence either u
11US
= 1, u
21US
= 0 or u
31US
= 0.

Chapter 5 Page 133

In conclusion, although the hypothesis that u
11US
= 1 cannot be rejected, the hypotheses
that u
21US
= 0 and u
31US
= 0 are rejected. Hence there is evidence of oligopoly and
oligopsony market power from the US tire industry on world tire market and world
natural rubber market.

Table 5.24 Hypothesis Tests for u
11US,
u
21US,
u
31US
(Estimation A)
Estimation A H0:u
11US
= 1
H1:u
11US
= 1
H0:u
21US
= 0
H1:u
21US
= 0
H0:u
31US
= 0
H1:u
31US
= 0
H0:u
11US
=1,u
21US
=u
31US
=0
H1:u
11US
=1 or u
21US
=0 or u
31US
=0
Test value
T statistic
Df
P-value
F statistic
Df
P-value
0.1867
0.9512
31
0.3488
0.9048
1,31
0.3488
0.0738
2.8170
31
0.0083
7.9356
1,31
0.0084
-0.1881
-10.0525
31
0.0000
101.0533
1,31
0.0000




369.6176
3,31
0.0000
Conclusion Not reject H0
u
11US
= 1
Reject H0
(< 0.02%)
u
21US
= 0
Reject H0
(< 0.01%)
u31US = 0
Reject H0
(< 0.01%)
u11US =1or u21US = 0or u31US =0
The next step is to derive the conjectural elasticities in order to obtain the MPI measure
of market power. The estimates for u
21US
and u
31US
are used to derive the two
conjectural elasticities according to the approach outlined in (5:10.1) and (5:11.1).
Accordingly the US conjectural elasticity on world tire markets is:
(5:10.1US)
Q
q
Q
q
q
Q
US
US
US
US
US
· = ·
c
c
=
21 1
u o
This generates a mean value of α
US1
= 0.0732 with a range from 0.0587 to 0.1062.

The US conjectural elasticity on world natural rubber market is:
(5:11.1US)
XR
xr
XR
xr
xr
XR
US
US
US
US
US 31 1
u | = ·
c
c
=
This generates a mean value of β
US1
= 0.1884 with a range from 0.1615 to 0.2415.
Having obtained estimates for all key variables it is now possible to estimate the market
power index for natural rubber as an input into US tire manufacturing. We substitute the
values for: n, c, o
US1
and |
US1
in the MPI
XRUS1
expression to obtain:

Chapter 5 Page 134


1
1 1
1
1
US
US US
US XR
ε
η ε
MPI
|
o |
· +
· ÷ ·
= = 0.5243 with a range from 0.3787 to 0.7527.
However, the initial estimation (A) found an estimate foru
11US
> 1 which implies WR >
VMP
xr
(assuming that concurrently: u
21US
= u
31US
= 0). This implies the input XR is
being paid more than the value of its marginal product ( P MP P
xr
q
WR
xr
i
i
· > ·
c
c
> )
whereas theory predicts u
1US
≤ 1 (that is: WR ≤ VMP
xr
). Despite non-rejection of H0:
u
11US
= 1, supplementary estimations were conducted. Inclusion of a constant to test for
other factors yielded insignificant coefficients for u
11US
and u
21US
so estimation version
B is applied withu
11US
and u
21US
forced to zero and a constant to test for the oligopsony
coefficient u
31US
. Results are found in Table 5.23. Hypothesis tests reject the null
hypothesis that u
31US
= 0 (<0.01%) for this estimation as displayed in Table 5.25.

Table 5.25 Hypothesis Tests for u
31US
(Estimation B)
H0: u
31US
= 0
H1: u
31US
= 0
Test value
T statistic
Df
P-value
F statistic
Df
P-value
-0.2119
-13.4125
32
0.0000
179.8962
1,32
0.0000
Conclusion Reject H0 (< 0.01%)
u
31US
= 0

The corresponding conjectural elasticity in (o
US1
) is zero from estimation B due to u
21US

being forced to be zero. The conjectural elasticity in natural rubber market (|
US1
) is
derived from the estimate for u
31US
from B to yield a mean value of:

XR
xr
XR
xr
xr
XR
US
US
US
US
US 31 1
u | = ·
c
c
= = 0.2124 with a range from 0.1820 to 0.2721.
The market power index using the conjectural elasticities from estimation B is:

Chapter 5 Page 135

1
1 1
1
1
US
US US
US XR
ε
η ε
MPI
|
o |
· +
· ÷ ·
= =0.4133 with a range from 0.3523 to 0.5008.
The MPI
XRUS1
results from both estimations (A & B) are very similar. Both find
oligopsony market power in the natural rubber industry.

5.6.2 US MPI Estimation Using Model 2
The MPI Model 2 is derived using direct tire demand and direct natural rubber supply
functions with conjectural elasticities estimated via the optimality condition derived in
Chapter 4 as (5:6.2). This condition is estimated using the variables defined in (5:8.2
and 5:9.2) for US data.
(5:6.2US) US
US
US xr q P WR
. . .
· ÷ · + · =
32 22 12
u u u
From (5:6.2US) estimates of the slope of direct tire demand (
dP
dQ
), the slope of direct
natural rubber supply (
dWR
dXR
) and the natural rubber marginal productivity in the US
tire industry (v
US
=
US
US
xr
q
c
c
) are used to obtain the following terms.
(5:8.2US)
US
US
US
US
q
xr
q
dP
dQ
q ·
c
c
·
|
.
|

\
|
=
.
1
2

(5:9.2US)
US
US xr
dWR
dXR
xr ·
|
.
|

\
|
=
.
1
2


Applying the estimates for natural rubber marginal productivity, to the slope of the
direct tire demand and the slope of the direct natural rubber supply, to estimate the
optimality function (5:6.2US) gives the results displayed in Table 5.26. Hypothesis
tests on Estimation A results are listed in Table 5.27. The null hypothesis that u
12US
= 1
is rejected at less than 0.01%; the null hypothesis that u
22US
= 0 and the null hypothesis
that u
32US
= 0 are rejected at less than 0.01%.

Chapter 5 Page 136

Table 5.26 Equation (5:6.2US) Optimality Function for US Tire Manufacturing
(Model 2) Estimation Results
US
US
US xr q P WR
. . .
· ÷ · + · =
32 22 12
u u u
Estimation A Estimation B
Coefficient
(t-value)
Coefficient
(t-value)
Constant - -
US P
.

u
12US
2.1128
(8.638)***
0.5580
(2.192)**
US
q
.

u
22US
0.5971
(6.772)***
-
US xr
.

u
32US
-0.1224
(-14.020)***
-0.1072
(-10.470)***
Durbin-Watson 1.9934 1.7696
R
2
0.9582 0.9229
*** denotes rejection of null hypothesis at less than 1% level of significance,
** denotes rejection of null hypothesis at 5% level of significance,
* denotes rejection of null hypothesis at 10 % level of significance.

Table 5.27 Hypothesis Tests for u
12US
, u
22US,
u
32US
(Estimation A)
H0:u
12US
= 1
H1:u
12US
=1
H0:u
22US
= 0
H1:u
22US
= 0
H0:u
32US
= 0
H1:u
32US
= 0
H0:u
12US
=1, u
22US
=u
32US
= 0
H1:u
12US
=1oru
22US
=0 oru
32US
=0
Test value 1.1128 0.5971 -0.1224
T statistic
Df
P-value
4.5495
34
0.0001
6.7719
34
0.0000
-14.0197
34
0.0000

F statistic
Df
P-value
20.6983
1,34
0.0001
45.8585
1,34
0.0000
196.5513
1,34
0.0000
385.7968
3
0.0000
Reject H0
(< 0.01%)
Reject H0
(< 0.01%)
Reject H0
(< 0.01%)
Reject H0
(< 0.01%)
Conclusion u
12US
= 1 u
22US
= 0 u
32US
= 0 u
12US
=1 or u
22US
= 0 or u
32US
= 0

The corresponding conjectural elasticities obtained from the coefficient values in
Estimation A are:

Chapter 5 Page 137


Q
q
Q
q
q
Q
US
US
US
US
US
· = ·
c
c
=
22 2
u o = 0.6171 with a range from 0.4744 to 0.9337
and;
= = ·
c
c
=
XR
xr
XR
xr
xr
XR
US
US
US
US
US 32 2
u | 0.1239: with a range from 0.1051 to 0.1572.
The corresponding market power index (MPI
US2
) is:
*
1
* *
2
2 2
2
ε

η


ε

MPI
US
US US
US XR
|
o |
+
+
= =1.3517 at the mean with a range from 1.1163 to
1.7329.
The MPI
XRUS2
formula is that derived in Chapter 4 as (4:8b). It is the formula that
captures the approach adopted by Chang & Tremblay (1991). The MPI
XRUS2
result is not
supported by the underlying theory which requires 0 ≤ MPI ≤ 1. However, as the
estimated value for u
12US
> 1 is also not supported by theory, this may be the factor
generating MPI
US2
> 1. Therefore, a supplementary estimation (B) is undertaken. This
estimation forces the oligopoly power variable coefficient (u
22US
) to zero but retains the
critical oligopsony variable coefficient (u
32US
). Estimation B is undertaken as a contrast
to the initial model. Coefficient values from estimation B are u
12US
= 0.56, u
22US
= 0 and
u
32US
= - 0.11 as listed in Table 5.26 and the hypothesis tests on these coefficients are
listed in Table 5.28.
The hypothesis tests conclude: u
12US
= 1(< 0.10%) and u
32US
= 0(< 0.01%).
The corresponding conjectural elasticity in (o
US2
) is zero from estimation B due to u
22US

being forced to be zero. The conjectural elasticity in natural rubber market (|
US2
) is
derived from the estimate for u
32US
from B to yield a mean value of:

= = ·
c
c
=
XR
xr
XR
xr
xr
XR
US
US
US
US
US 32 2
u | 0.1086. It has a range of 0.0921 to 0.1377.
The market power index using the conjectural elasticities from estimation B is:

*
1
* *
2
2 2
2
ε

η


ε

MPI
US
US US
US XR
|
o |
+
+
= =

0.4180 at the mean with a range from 0.3297 to
0.5198.

Chapter 5 Page 138

Table 5.28 Hypothesis Tests for u
12US
, u
22US
, u
32US
(Estimation B)
H0:u
12US
= 1
H1:u
12US
=1
H0:u
22US
= 0
H1:u
22US
= 0
H0:u
32US
= 0
H1:u
32US
= 0
H0:u
12US
=1, u
32US
=0
H1:u
12US
=1 or u
32US
= 0
Test value -0.4420 -0.1072
T statistic
Df
P-value
-1.7365
35
0.0913
-10.4672
35
0.0000

F statistic
Df
P-value
3.0156
1,35
0.0912
109.5633
1,35
0.0000
111.4320
2,36
0.0000
Conclusion Reject H0
(< 0.10%)
u
12US
= 1
Reject H0
(< 0.01%)
u
32US
= 0
Reject H0
(< 0.01%)
u
12US
=1 or u
32US
=0
The MPI values for Model 2 that is derived from estimation B are consistent with those
provided by Model 1 above. This supports the finding of oligopsony market power from
the US tire manufacturers over their natural rubber input. However, this finding is only
obtained at the expense of imposing an assumed competitive US tire industry (i.e. no
oligopoly power).

5.6.3.France’s MPI Estimation Using Model 1
The approaches adopted for the US are applied to France‟s data. The MPI Model 1 is
derived using inverse tire demand and natural rubber supply functions with conjectural
elasticities estimated via the optimality condition. The equation (5:6.1) representing the
optimality condition is estimated using the variables defined in (5:7.1, 5:8.1 and 5:9.1)
for France‟s data as follows.
(5:6.1FR) FR
FR FR
xr q P WR
. . .
· ÷ · + · =
31 21 11
u u u
From (5:6.1FR) estimates of the slope of inverse tire demand (
Q
P
c
c
= ' n ), the slope of
the inverse natural rubber (c' =
dXR
dWR
) and the natural rubber marginal productivity in
the France‟s tire industry (
FR
FR
FR
xr
q
c
c
= v ) are used to obtain the following terms.

Chapter 5 Page 139

(5:7.1FR) P P
xr
q
P
FR
FR
FR
FR · = ·
c
c
=
.
v
(5:8.1FR)


FR FR FR
FR
FR
FR
q q
xr
q
dQ
dP
q · · ' = ·
c
c
· =
.
v n
(5:9.1FR)
FR FR
xr xr
dXR
dWR
xr
FR
· ' = · =
.
c
The three terms are use to estimate the optimality function (5:6.1FR) to derive values
for coefficients u
11,
u
21
and u
31
. These three coefficients provide the means for
hypothesis testing for the presence of market power plus estimation of the two
conjectural elasticities required to calculate our market power index (MPI) for France.
The estimated results for (5:6:1FR) are provided in Table 5.29.

Table 5.29 Equation (5:6.1FR) Optimality Function for France’s Tire
Manufacturing (Model 1) Estimation Results
FR
FR
FR xr q P WR
. . .
· ÷ · + · =
31 21 11
u u u
Coefficient
(t-value)
Constant -
FR P
.

u
11FR
0.3126
(1.995)**
FR
q
.

u
21 FR
0.0599
(1.724)*
FR xr
.

u
3 1FR
-0.2601
(-15.730)***
Durbin-Watson 1.9950
R
2
0.9620
*** denotes rejection of null hypothesis at less than 1% level of significance,
** denotes rejection of null hypothesis at 5% level of significance,
* denotes rejection of null hypothesis at 10 % level of significance.
Results from Table 5.29 (u
11FR
= 0.3126, u
21FR
= 0.0599, and u
31FR
= - 0.2601) can be
used to test the null hypotheses that: u
11FR
= 1, u
21FR
= 0.00, and u
31FR
= 0.00. If the null
hypotheses are not rejected then it implies the natural rubber market, as a specific factor
market to tire production in France, is competitive. If the null hypotheses are rejected it
implies that world natural rubber price is less than its value of marginal product and that

Chapter 5 Page 140

there is France‟s oligopoly power in the world tire market and oligopsony power in the
world rubber market.
The hypothesis tests are provided in Table 5.30.

Table 5.30 Hypotheses Tests for u
11FR
, u
21FR
, u
31FR
(Estimation A)
H0:u
11FR
= 1
H1:u
11FR
=1

H0:u
21FR
= 0
H1:u
21FR
=0

H0:u
31FR
= 0
H1:u
31FR
= 0

H0:u
11FR
=1,u
21FR
=u
31FR
=0
H1:u
11FR
= 1 or u
21FR
=0 or
u
31FR
=0
Test
Value =
-0.6875 0.0598 -0.2601
T statistic
Df
P-value
-4.3883
31
0.0001
1.7243
31
0.0946
-15.7298
31
0.0000
99.8907
3,31
0.0000
F statistic
Df
P-value
19.2572
1,31
0.0001
2.9732
1,31
0.0946
247.4275
1,31
0.0000

Conclusion Reject H0
(< 0.01%)
u
11FR
=1
Reject H0
(< 0.10%)
u
21FR
=0
Reject H0
(< 0.01%)
u
31FR
=0
Reject H0(< 0.01%)
u
11FR
= 1 or u
21FR
=0 or u
31FR

= 0

The hypothesis tests reject u
11FR
= 1 (less than 0.01%), hence H1:u
11FR
= 1 is accepted,
u
21FR
= 0 is rejected (< 0.10%), hence H1:u
21FR
= 0 is accepted, u
31FR
= 0 is rejected (<
0.01%) hence H1: u
31FR
= 0 is accepted. The joint test u
11FR
= 1 and u
21FR
= u
31FR
= 0 is
rejected (<0.01 %) thus either u
11FR
=1, or u
21FR
=0 or u
31FR
=0.
The next step is to derive the conjectural elasticities in order to obtain the MPI measure
of market power. The estimates for u
21FR
and u
31FR
are used to derive the two
conjectural elasticities according to the approaches outlined in (5:10.1) and (5:11.1).
Accordingly the conjectural elasticity on world tire market for France is:
(5:10.1FR)
Q
q
Q
q
dq
dQ
FR
FR
FR
FR
FR
· = · =
21 1
u o

This generates a mean value of 0.0606 with a range from 0.0522 to 0.0696. The
conjectural elasticity on world natural rubber market for France is:
(5:11.1FR)
XR
xr
XR
xr
dxr
dXR
FR
FR
FR
FR
FR
· = · =
31 1
u |

Chapter 5 Page 141

This generates a mean value of 0.2640 with a range from 0.2180 to 0.3326.
Having obtained estimates for all key variables it is now possible to estimate the market
power index for natural rubber as an input into tire manufacturing. We substitute the
valuesn,c,o
FR1
and |
FR1
for the MPI
1 FR XR
to obtain:

1
1 1
1
1
FR
FR FR
XRFR
ε
η ε
MPI
|
o |
· +
· ÷ ·
= = 0.5608 with a range from 0.4541 to 0.6720.

5.6.4 France’s MPI Estimation Using Model 2
The MPI model 2 is obtained using direct tire demand and direct natural rubber supply
functions with conjectural elasticities estimated via the optimality condition derived in
Chapter 4 as (4.10.2). This condition is estimated using the variables defined in (5:8.2
and 5:9.2) for France‟s data as follows.
(5:6.2FR) FR
FR
FR xr q P WR
. . .
· ÷ · + · =
32 22 12
u u u
From (5:6.2FR) estimates of the slope of the direct tire demand function (
dP
dQ
), the
slope of direct natural rubber supply (
dWR
dXR
) and the natural rubber marginal
productivity in France‟s tire industry (v
FR
=
FR
FR
xr
q
c
c
) are used to obtain the following
terms.
(5:8.2FR)
FR
FR
FR
FR
q
xr
q
dP
dQ
q ·
c
c
·
|
.
|

\
|
=
.
1
2

(5:9.2FR)
FR
FR xr
dWR
dXR
xr ·
|
.
|

\
|
=
.
1
2


Applying the estimates of natural rubber marginal productivity to the slope of the direct
tire demand and the slope of direct natural rubber supply to estimate the optimality
function (5:6.2FR) gives the results displayed in table 5.31.
As revealed in Table 5:31, coefficients for Estimation A are significant for u
32FR
only.
Thus the conjectural variation in the tire market (o
2FR
) and France‟s market power index
(MPI) cannot be derived. Therefore, a supplementary model (Estimation B) is tested by

Chapter 5 Page 142

forcing zero the u
22FR
value given that the initial model yields insignificant estimates
for u
22FR
but retains the coefficient u
32FR
. In contrast to Estimation A, Estimation B
provides results of u
12FR
= 0.50 and u
32FR
= -0.09.

Table 5.31 Equation (5:6.2FR) France’s Optimality Function (Model 2) Estimation
Results
Estimation A Estimation B
Coefficient
(t-value)
Coefficient
(t-value)
Constant - -
FR P
.

u
12FR
0.8005
(1.568)
0.5202
(3.895)***
FR
q
.

u
22FR
0.1129
(0.579)
-
FR xr
.

u
32FR
-0.0930
(-7.730)***
-0.0900
(-8.169)***
Durbin-Watson 1.9001 1.8958
R
2
0.8990 0.8989
*** denotes rejection of null hypothesis at less than 1% level of significance,
** denotes rejection of null hypothesis at 5% level of significance,
* denotes rejection of null hypothesis at 10 % level of significance.

The hypothesis tests on these two coefficients are listed in Table 5.32. If the null
hypotheses cannot be rejected, then it can be concluded that the France‟s tire industry
was operating in a perfectly competitive markets, i.e., it does not have oligopoly neither
on world tire market nor oligpopsony power on world natural rubber market.
The hypothesis tests conclude u
12FR
= 1 (< 0.01%), u
32FR
= 0 (< 0.01%). The joint
hypotheses test indicates that either u
12FR
= 1 or u
32FR
= 0 (< 0.01%).


Chapter 5 Page 143

Table 5.32 Hypotheses Tests for u
12FR
, u
22FR
, u
32FR
(Estimation B)
H0: u
12FR
= 1
H1:u
12FR
= 1
H0:u
22FR
= 0
H1:u
22FR
= 0
H0: u
32FR
= 0
H1:u
32FR
= 0
H0:u
12FR
= 1 or u
32FR
= 0
H1: u
12FR
= 1 or u
32FR
= 0
Test Value -0.4798 - -0.0900
T statistic
Df
P-value
-3.5924
33
0.0011
- -8.1690
33
0.0000

F statistic
Df
P-value
12.9056
1,33
0.0011
- 66.7332
1,33
0.0000
64.9368
2,33
0.0000
Conclusion Reject H0
(< 0.01%)
u
12FR
=1
- Reject H0
(< 0.01%)
u
32FR
= 0
Reject H0
(< 0.01%)
u
12FR
= 1, or u
32FR
= 0

Since the u
22FR
estimate is forced to zero, the corresponding conjectural elasticity on
world tire markets (
2 FR
o ) is zero. The conjectural elasticity in world natural rubber
market is


XR
xr
FR
FR FR
· =
32 2
u |
This generates a mean value of 0.0914 with a range of 0.0754 to 0.1151.
The corresponding market power index is derived as
*
1
* *
2
2 2
2
ε

η


ε

MPI
FR
FR FR
FR XR
|
o |
+
+
=
This generates a mean MPI
XRFR2
value of 0.3740 with a range of 0.2711 to 0.4693. The
outcome is obtained by imposing an assumed competitive state for France‟s tire
industry (no oligopoly market). However, MPI results from Model 1 and 2 are
consistent and support the finding of oligopsony market power from the France‟s tire
manufacturers over the world natural rubber input market.

5.6.5 Japan’s MPI Estimation Using Model 1
The MPI Model 1 for Japan is derived using inverse tire demand and natural rubber
supply functions with conjectural elasticities estimated via the optimality condition
derived in (5:6.1). This condition is estimated using the variables defined in (5:7.1,
5:8.1 and 5:9.1) for Japan‟s data.

Chapter 5 Page 144

(5:6.1JA) JA
JA JA
xr q P WR
. . .
· ÷ · + · =
31 21 11
u u u
From (5:6.1JA) estimates of the slope of inverse tire demand (n´=
dQ
dP
), the slope of
inverse natural rubber supply (c´=
dXR
dWR
) and the natural rubber marginal productivity
in the Japan‟s tire industry (v
JA
=
JA
JA
xr
q
c
c
) are used to obtain the following terms.
(5:7.1JA)
P P
xr
q
P
JA
JA
JA
JA
· = ·
c
c
=
.
v

(5:8.1JA)
JA JA JA
JA
JA
JA
q q
xr
q
dQ
dP
q · · ' = ·
c
c
· =
.
v n

(5:9.1JA)
JA JA JA
xr xr
dXR
dWR
xr · ' = · =
.
c
These three terms are used to estimate the optimality function (5:6.1JA) so as to derive
values for the coefficients u
11,
u
21
and u
31
. These three coefficients provide the means
for hypothesis testing for the presence of market power plus estimations of the two
conjectural elasticities required to calculate our market power index (MPI) for Japan.
The estimation results for (5:6.1JA) are provided in Table 5.33. Two estimation results
are reported (A and B). Results from Estimation A can be used to test the null
hypotheses that: u
11JA
= 1, u
21JA
= 0.00, and u
31JA
= 0.00. If the null hypotheses are not
rejected then it implies the natural rubber market, as a specific factor market to tire
production in Japan, is competitive. If the hypotheses are rejected then it implies that
world natural rubber price is less than its value of marginal product and that there is
Japan‟s oligopoly power in the world tire market and oligopsony power in the world
rubber market.
From Table 5.33 u
11JA
= 0.1710, u
21JA
= -0.0937, and u
31JA
= - 0.2795 but u
11JA
and u
21JA

are not significant and hence cannot provide the above described hypothesis test for
u
11JA
.




Chapter 5 Page 145

Table 5.33 Equation (5:6.1JA) Optimality Function for Japan’s Tire
Manufacturing (Model 1) Estimation Results
JA
JA JA
xr q P WR
. . .
· ÷ · + · =
31 21 11
u u u
Estimation A Estimation B

Coefficient
(t-value)
Coefficient
(t-value)
Constant - -
JA P
.

u
11JA
0.1710
(0.311)
0.5090
(4.921)***
JA
q
.

u
21JA
-0.0937
(-0.590)
-
JA xr
.

u
31JA
-0.2795
(-13.050)***
-0.2784
(-13.200)***
Durbin-Watson 1.9963 2.0055
R
2
0.9488 0.9485
*** denotes rejection of null hypothesis at less than 1% level of significance,
** denotes rejection of null hypothesis at 5% level of significance,
* denotes rejection of null hypothesis at 10 % level of significance.
Therefore, we conduct a supplementary Estimation B that forces u
21JA
to zero. A
significant model estimate is obtained but at the expense of imposing an assumed
competitive tire market for Japan. Hypothesis tests for Estimation B are listed in Table
5.34. Results reject the null hypothesis that u
11JA
= 1 (<0.01%), hence accept that u
11JA

=1, reject that u
31JA
=0 (<0.01%), hence accept thatu
31JA
=0, reject that u
11JA
=0 and u
31JA

=0 (< 0.01%) hence accept that u
11JA
=0 or u
31JA
= 0.
The corresponding conjectural elasticity in (o
JA1
) is zero from estimation B due to
u
21JA
being forced to be zero. The conjectural elasticity in natural rubber market (|
JA1
) is
derived from the estimate for u
31JA
from B to yield a mean value of:

XR
xr
XR
xr
xr
XR
JA
JA 31
JA
JA
1 JA
u | = ·
c
c
= = 0.2816 with a range from 0.1567 to 0.3720.
The market power index using the conjectural elasticities from Estimation B is:
1
1 1
1 JA
1
JA
JA JA
XR
ε
η ε
MPI
|
o |
· +
· ÷ ·
= = 0.4754 with a range from 0.3384 to 0.5584.



Chapter 5 Page 146

Table 5.34 Hypothesis Tests for u
11JA
, u
21JA
, u
31JA
(Estimation B)
Estimation A H0:u
11JA
= 1
H1:u
11JA
= 1
H0:u
21JA
= 0
H1:u
21JA
= 0
H0:u
31JA
= 0
H1:u
31JA
= 0
H0:u
11JA
=1,u
31JA
= 0
H1:u
11JA
= 1 or u
3JA
= 0
Test value -0.4910 - -0.2784
T statistic
Df
P-value
-4.7474
31
0.0000
- -13.1978
31
0.0000

F statistic
Df
P-VALUE
22.5376
1,31
0.0000
- 174.1812
1,31
0.0000
89.0066
2,31
0.0000
Conclusion Reject H0
(< 0.01%)
u
11JA
=1
- Reject H0
(< 0.01%)
u
31JA
= 0
Reject H0
(< 0.01%)
u
11JA
= 1 or u
31JA
= 0

5.6.6. Japan’s MPI Estimation Using Model 2
The MPI Model 2 is derived using direct tire demand and direct natural rubber supply
functions with conjectural elasticities estimated via the optimality condition derived in
(5:6.2). This condition is estimated using the variables defined in (5:8.2 and 5:9.2) for
Japan‟s data.
(5:6.2JA) JA
JA JA
xr q P WR
. . .
· ÷ · + · =
32 22 12
u u u
From (5:6.2JA) estimates of the slope of direct tire demand (
dP
dQ
), the slope of direct
natural rubber supply (
dWR
dXR
) and the natural rubber marginal productivity in the
Japan‟s tire industry (v
JA
=
JA
JA
xr
q
c
c
) are used to obtain the following terms.
(5:8.2JA)
JA
JA
JA
JA
q
xr
q
dP
dQ
q ·
c
c
·
|
.
|

\
|
=
.
1
2

(5:9.2JA)
JA
JA xr
dWR
dXR
xr ·
|
.
|

\
|
=
.
1
2


Chapter 5 Page 147

Applying the estimates for natural rubber marginal productivity, to the slope of the
direct tire demand and the slope of the direct natural rubber supply, to estimate the
optimality function (5:6.2JA) gives the results displayed in Table 5.35.

Table 5.35 Equation (5:6.2JA) Optimality Function for Japan’s Tire
Manufacturing (Model 2) Estimation Results
JA
JA JA
xr q P WR
. . .
· ÷ · + · =
32 22 12
u u u
Estimation A Estimation B

Coefficient
(t-value)
Coefficient
(t-value)
Constant

- -
JA P
.

u
12JA
1.1472
(6.029)***
0.7381
(4.817)***
JA
q
.

u
22JA
0.3111
(3.000)***
-

JA xr
.

u
32JA
-0.1246
(-7.946)***
-0.1060
(-7.092)***
DW 1.9196 1.9229
R
2
0.9065 0.8870
*** denotes rejection of null hypothesis at less than 1% level of significance,
** denotes rejection of null hypothesis at 5% level of significance,
* denotes rejection of null hypothesis at 10 % level of significance.
Hypothesis tests on estimation A results are listed in Table 5.36. The null hypothesis
cannot be reject hence the concluding results are u
12JA
= 1, u
22JA
= 0 (< 0.02%) and u
32JA

= 0 (< 0.01%). The joint test concludes that u
12JA
=1 or u
22JA
=0 or u
32JA
= 0(<0.01%).
The next step is to derive the conjectural elasticities in order to obtain the MPI measure
of market power. The estimates for u
21JA
and u
31JA
are used to derive the two
conjectural elasticities according to the approach outlined in (5:10.1) and (5:11.1).
Accordingly Japan‟s conjectural elasticities on world tire markets are:

Q
q
Q
q
q
Q
JA
JA
JA
JA
JA
· = ·
c
c
=
22 2
u o
This generates a mean value of α
JA2
= 0.3087 with a range of 0.1243 and 0.3966 and

Chapter 5 Page 148

= = ·
c
c
=
XR
xr
XR
xr
xr
XR
JA
JA
JA
JA
JA 32 2
u | 0.1209 with a range of 0.0607 to 0.0.1664.
The corresponding market power index (MPI
JA2
) is 0.8937 at the mean with a range of
0.5593 to 1.0331.

Table 5.36 Hypothesis Tests for u
12JA
, u
22J
A and u
32JA
(Estimation A)
H0:u
12JA
= 1
H1:u
12JA
=1
H0:u
22JA
= 0
H1:u
22JA
= 0
H0:u
32JA
= 0
H1:u
32JA
= 0
H0:u
12JA
= 1, u
22JA
=u
32JA
= 0
H1:u
12JA
=1 oru
22JA
=0 oru
32JA
= 0
Test value 0.1472 0.3111 -0.1246
T statistic
Df
P-value
0.7735
33
0.4447
2.9999
33
0.0051
-7.9457
33
0.00

F statistic
Df
P-value
0.5984
1,33
0.4447
8.9991
1,33
0.0051
63.1346
1,33
0.00
35.2103
3
0.00
Conclusion Cannot reject H0
u
12JA
=1
Reject H0
(< 0.02%)
u
22JA
= 0
Reject H0
(< 0.01%)
u
32JA
= 0
Reject H0
(< 0.01%)
u
12JA
= 1 oru
22JA
= 0 or u
32JA
= 0
From the above result, the hypothesis tests cannot reject that u
12JA
=1 implying that the
Japan‟s tire market is competitive. However, the tests reject the null hypothesis that
u
22JA
and u
32JA
= 0 implying that Japan has market power in the tire market and natural
rubber market. Therefore, the results are conflicting and we present a supplementary
model (Estimation B) to contrast with the initial model (Estimation A). Accordingly,
based on the data available, significant results for Estimation B are derived when
restricting the oligopoly power variable coefficient (u
22JA
) to zero but retains the critical
oligopsony variable coefficient (u
32JA
). Coefficient values from Estimation B are listed
in Table 5.35 (u
12JA
= 0.7381, u
22JA
is forced to zero, u
32JA
= -0.1060)
The hypothesis tests on these coefficients are listed in Table 5.37.
The hypothesis tests conclude: u
12JA
= 1(< 0.10%) and u
32JA
= 0(< 0.01%). The
corresponding conjectural elasticity (o
JA2
) is zero from Estimation B due to u
22JA
being
forced to be zero. The conjectural elasticity in natural rubber market (|
JA2
) is derived
from the estimate for u
32JA
in Estimation B:

Chapter 5 Page 149

XR
xr
JA
JA JA
· =
32 2
u | ,which yields a mean value of 0.1029 with a range of 0.0517 to
0.1416.
The market power values for Model 2 that are derived from Estimation B are:

*
1
* *
2
2 2
2
ε

η


ε

MPI
JA
JA JA
JA XR
|
o |
+
+
= = 0.3950 with a range of 0.3019 to 0.4908
The estimated MPI from Model 2 is consistent with Model 1 (0.4754). Both models
support the presence of market power from Japan‟s tire manufactures over their natural
rubber inputs (oligopsony) in the world market.

Table 5.37 Hypothesis Tests: u
12JA
, u
22JA
, u
32JA
(Estimation B)

H0: u
12JA
= 1
H1:u
12JA
=1
H0:u
32JA
= 0
H1:u
32JA
= 0
H0:u
12JA
= 1,u
32JA
= 0
H1: u
12JA
=1 or u
32JA
= 0
Test value -0.2619 -0.1060
T statistic
Df
P-value
-1.7091
34
0.0965
-7.0918
34
0.0000

F statistic
Df
P-value
2.9212
1,34
0.0965
50.2937
1,34
0.0000
36.0870
2,34
0.0000
Conclusion Reject H0
(<0.10%)
u
12JA
=1.
Reject H0
(<0.01%)
u
32JA
= 0
Reject H0
<0.01%)
u
12JA
= 1 or u
32JA
= 0


5.6.7 Germany’s MPI Estimation Using Model 1
The MPI Model 1 for Germany is derived using inverse tire demand and natural rubber
supply functions with conjectural elasticities estimated via the optimality condition
derived in (5:6.1). This condition is estimated using the variables defined in (5:7.1,
5:8.1 and 5:9.1) for Germany‟s data.
(5:6.1GR) GR
GR GR
xr q P WR
. . .
· ÷ · + · =
31 21 11
u u u

Chapter 5 Page 150

From (5:6.1GR) estimates of the slope of inverse tire demand (n´=
dQ
dP
), the slope of
inverse natural rubber supply (c´=
dXR
dWR
) and the natural rubber marginal productivity
in the German tire industry (v
GR
=
GR
GR
xr
q
c
c
) are used to obtain the following terms.
(5:7.1GR) P P
xr
q
P
GR
GR
GR
· = ·
c
c
=
.
GR
v
(5:8.1GR)
GR GR GR
GR
GR
q q
xr
q
dQ
dP
q · · ' = ·
c
c
· =
.
v n
GR

(5:9.1GR)
GR GR GR
xr xr
dXR
dWR
xr · ' = · =
.
c
The three terms are used to estimate the optimality function (5:6.1GR) to derive values
for coefficients u
11,
u
21
and u
31
. These three coefficients provide the means for
hypothesis testing for the presence of market power plus estimations of the two
conjectural elasticities required to calculate our market power index (MPI) for
Germany. The estimation results for (5:6.1GR) are provided in Table 5.38.
Results from Estimation A in Table 5.38 (u
11GR
= 0.4894, u
21GR
= 0.0709, and u
31GR
= -
0.2608) can be used to test the null hypotheses that: u
11GR
= 1, u
21GR
= 0.00, and u
31GR
=
0.00. If the null hypotheses are not rejected then it implies the natural rubber market, as
a specific factor market to tire production in Germany, is competitive. If the hypotheses
are rejected it implies that world natural rubber price is less than its value of marginal
product and that there is Germany‟s oligopoly power in the world tire market and
oligopsony power in the world rubber market.
The hypothesis tests in Table 5.39 confirm: u
11GR
= 1 is rejected(<0.03%), u
21GR
= 0 is
rejected (< 0.08 %), u
31GR
= 0 is rejected (< 0.01%). The joint test: u
11GR
= 1 and u
21GR
=
u
31GR
= 0 is rejected (< 0.01%) and hence it can be concluded that u
11GR
= 1, u
21GR
= 0 or
u
31GR
= 0. Therefore, the evidence supports the presence of oligopoly and oligopsony
market power in the German tire industry on world tire market and world natural rubber
market.



Chapter 5 Page 151

Table 5.38 Equation (5:6.1GR) Optimality Function for German Tire
Manufacturing (Model 1) Estimation Results
GR
GR GR
xr q P WR
. . .
· ÷ · + · =
31 21 11
u u u
Estimation A
Coefficient
(t-value)
Constant -
GR P
.

u
11GR
0.4894
(2.208)*
GR
q
.

u
21GR
0.0709
(1.817)*
GR xr
.

u
31GR
-0.2608
(-14.830)***
Durbin-Watson 1.9737
R
2
0.9597
*** denotes rejection of null hypothesis at less than 1% level of significance,
** denotes rejection of null hypothesis at 5% level of significance,
* denotes rejection of null hypothesis at 10 % level of significance.

Table 5.39 Hypothesis Tests for u
11GR
, u
21G
R, u
31GR
(Estimation A)
Estimation A H0:u
11GR
=1
H1:u
11GR
=1
H0:u
21GR
= 0
H1:u
21GR
= 0
H0:u
31GR
= 0
H1:u
31GR
= 0
H0:u
11GR
=1,u
21GR
=u
31GR
=0
H1:u
11GR
=1 or u
21GR
=0 or u
31GR
=0
Test value -0.5106 0.0709 -0.2608
T statistic
Df
P-value
-2.3035
31
0.0281
1.8172
31
0.0789
-14.8265
31
0.0000

F statistic
Df
P-value
5.3059
1,31
0.0281
3.3024
1,31
0.0789
219.8253
1,31
0.0000
249.1557
3,31
0.0000
Conclusion Reject H0
(<0.03%)
u
11GR
=1
Reject H0
(<0.08%)
u
21GR
= 0
Reject H0
(<0.01%)
u
31GR
= 0
Reject H0
(<0.01%)
u
11GR
= 1or u
21GR
= 0 or u
31GR
= 0

The next step is to derive the conjectural elasticities in order to obtain the MPI measure
of market power. The estimates for u
21GR
and u
31GR
are used to derive the two
conjectural elasticities according to the approach outlined in (5:10.1) and (5:11.1).

Chapter 5 Page 152

Accordingly the German conjectural elasticity on the world tire markets is:
(5:10.1GR)
Q
q
Q
q
q
Q
GR
GR
GR
GR
GR
· = ·
c
c
=
21 1
u o
This generates a mean value of α
GR1
= 0.0721 with a range from 0.0537 to 0.0916.

The German conjectural elasticity on the world natural rubber market is:
(5:11.1GR)
XR
xr
XR
xr
xr
XR
GR
GR
GR
GR
GR 31 1
u | = ·
c
c
=
This generates a mean value of β
GR1
= 0.2616 with a range from 0.2153 to 0.3010.
Having obtained estimates for all key variables it is now possible to estimate the market
power index for natural rubber as an input into German tire manufacturing. We
substitute the values for n, c, o
GR1
and |
GR1
in the MPI
XRGR1
expression to obtain:

1
1 1
1
1
GR
GR GR
GR XR
ε
η ε
MPI
|
o |
· +
· ÷ ·
= = = 0.5805 with a range from 0.4442 to 0.7220.
The MPI
XRGR1
results from both estimations find that Germany has both oligopoly
market power in the world tire market and oligopsony market power in the natural
rubber industry. However, a weak point in these results is that the estimate for
Germany‟s oligopoly conjectural elasticity in the world tire market (u
21GR
) has only a
0.08% significant level.

5.6.8 Germany’s MPI Estimation Using Model 2
The MPI Model 2 is derived using direct tire demand and direct natural rubber supply
functions with conjectural elasticities estimated via the optimality condition derived in
(5:6.2). This condition is estimated using the variables defined in (5:8.2 and 5:9.2) for
Germany‟s data.
(5:6.2GR) GR
GR GR
xr q P WR
. . .
· ÷ · + · =
32 22 12
u u u
From (5:6.2GR) estimates of the slope of direct tire demand (
dP
dQ
), the slope of direct
natural rubber supply (
dWR
dXR
) and the natural rubber marginal productivity in the
Germany‟s tire industry (v
GR
=
GR
GR
xr
q
c
c
) are used to obtain the following terms.

Chapter 5 Page 153

(5:8.2GR)
GR
GR
GR
GR
q
xr
q
dP
dQ
q ·
c
c
·
|
.
|

\
|
=
.
1
2

(5:9.2GR)
GR
GR xr
dWR
dXR
xr ·
|
.
|

\
|
=
.
1
2


Applying the estimates for natural rubber marginal productivity, to the slope of the
direct tire demand and the slope of the direct natural rubber supply, to estimate the
optimality function (5:6.2GR) gives the results displayed in Table 5.40.
Hypothesis tests on Estimation A results are listed in Table 5.41. The null hypothesis
that u
12GR
= 1 is rejected (< 0.03%); the null hypothesis that u
22GR
= 0 is rejected (<
0.02%); the null hypothesis that u
32GR
= 0 is rejected (<0.01%). Therefore, we conclude
that u
12GR
=1, u
22GR
= 0, u
32GR
= 0. The joint test confirms that u
12GR
= 1, or u
22GR
= 0, or
u
32GR
= 0 (< 0.01%).
The corresponding conjectural elasticities obtained from the coefficient values in
Estimation A are:

Q
q
Q
q
q
Q
GR
GR
GR
GR
GR
· = ·
c
c
=
22 2
u o = 0.7819 with a range of 0.5796 to 0.9883 and
= = ·
c
c
=
XR
xr
XR
xr
xr
XR
GR
GR
GR
GR
GR 32 2
u | 0.1108 with a range of 0.0909 to 0.1271.
The corresponding market power index (MPI
GR2
) is:
*
1
* *
2
2 2
2
ε

η


ε

MPI
GR
GR GR
GR XR
|
o |
+
+
= = 1.6314 with a range of 1.3692 to 1.8596.
The MPI
XRGR2
result is not supported by the underlying theory which requires 0 ≤ MPI ≤
1. In addition Estimation A gives the value for u
12GR
that is greater than 1. This also
conflicts with theory which requires that u
12GR
s 1 (less than one when there is market
power in the output market and equal to one when the output market is competitive).
Thus to confirm the results, a supplementary estimation is tried; one of which produces
significant estimates (Estimation B) combines the coefficient values for u
12GR
and u
22GR

with effects from unidentified factors embodied in a constant term. This approach
sacrifices estimates for u
12GR
and u
22GR
but retains the critical oligopsony variable

Chapter 5 Page 154

coefficient (u
32GR
). Estimation B is used to contrast with the initial model. Coefficient
values from Estimation B are constant = 0.2675 and u
32GR
= - 0.0984 as listed in Table
5.40 and the hypothesis tests on these coefficients are listed in Table 5.42.
Table 5.40 Equation (5:6.2GR) Optimality Function for German Tire
Manufacturing (Model 2) Estimation Results
GR
GR GR
xr q P WR
. . .
· ÷ · + · =
32 22 12
u u u
Estimation A Estimation B
Coefficient
(t-value)
Coefficient
(t-value)
Constant - 0.2675
(3.762)***
GR P
.

u
12GR
2.747
(3.848)***
-

GR
q
.

u
22GR
0.7657
(2.822)**
-
GR xr
.

u
32GR
-0.1101
(-7.764)***
-0.0984
(-10.650) ***
Durbin-Watson 1.8524 1.9326
R2 0.9148 0.9071
*** denotes rejection of null hypothesis at less than 1% level of significance,
** denotes rejection of null hypothesis at 5% level of significance,
* denotes rejection of null hypothesis at 10 % level of significance.
Table 5.41 Hypothesis Tests for u
12GR
, u
22GR,
u
32GR
(Estimation A)
H0: u
12GR
= 1
H1:u
12GR
=1
H0: u
22GR
= 0
H1: u
22GR
= 0
H0: u
32GR
= 0
H1:u
32GR
= 0
H0: u
12GR
= 1,u
22GR
=u
32GR
=0
H1:or u
12GR
=1or u
22GR
=0or u
32GR
=0
Test value 1.7466 0.7657 -0.1101
T statistic
Df
P-value
2.4470
32
0.0201
2.8217
32
0.0081
-7.7636
32
0.0000

F statistic
Df
P-value
5.9878
1,32
0.0201
7.9620
1,32
0.0081
60.2739
1,32
0.0000
114.3238
3
0.0000
Conclusion Reject H0
(< 0.03%)
u
12GR
=1
Reject H0
(< 0.02%)
u
22GR
= 0
Reject H0
(< 0.01%)
u
32GR
= 0
Reject H0
(< 0.01%)
u
12GR
=1oru
22GR
= 0 or u
32GR
= 0

Chapter 5 Page 155

Table 5.42 Hypothesis Tests for u
32GR
(Estimation B)
H0: u
32GR
= 0
H1: u
32GR
= 0
Test value -0.0984
T statistic
Df
P-value
-10.6524
33
0.0000
F statistic
Df
P-value
113.4738
1,33
0.00
Conclusion Reject H0
(< 0.01%)
u
3GR
= 0
The hypothesis test concludes that u
32GR
= 0(< 0.01%). The corresponding conjectural
elasticity in (o
GR2
) is zero due to u
22GR
being forced to be zero. The conjectural
elasticity in the natural rubber market (|
GR2
) is derived from the estimate for u
32GR
and
is used to yield a mean value of:

= = ·
c
c
=
XR
xr
XR
xr
xr
XR
GR
GR
GR
GR
GR 32 2
u | 0.0991 with a range from 0.0812 to 0.1136.
The market power index using the conjectural elasticities from estimation B is:

*
1
* *
2
2 2
2
ε

η


ε

MPI
GR
GR GR
GR XR
|
o |
+
+
= =

0.3934 with a range from 0.2704 to 0.4778.
The range of the MPI values for Model 2 that is derived from Estimation B are
consistent with those provided by Model 1 above. This supports the finding of
oligopsony market power from the German tire manufacturers over their natural rubber
input. However, this finding is only obtained at the expense of imposing an assumed
competitive German tire industry (i.e. no oligopoly power).

5.7 Market Power Index Estimation Using Models 3 and Model 4
The previous section derived MPI estimates for four countries using the optimality
condition approach contained in Models 1 and 2. This section describes MPI
estimations for the same four countries using Models 3 and 4. These models employ an
alternative approach for estimation of the two conjectural elasticities. As explained in

Chapter 5 Page 156

Chapter 4, this approach involves direct estimation of the i‟th country‟s observed
response to industry changes which is then used to derive a proxy measure of the
individual country (firm‟s) conjecture as to the global industry‟s response to its
behaviour. Fundamentally this approach simply measures the average response, over the
studied time period, in each individual firm‟s (or country‟s) market share of the global
industry which is then used to calculate the conjectural elasticities (α
i
and β
i
).
The direct estimation approach to the estimation of the conjectural elasticities (α
i
and β
i
)
first requires estimation of equations (5:12) and (5:13) followed by calculation of the
two conjectural elasticities as per (5:14) and (5:15).
(5:12) ) (q f Q
i 2
=
(5:13)
) (
3 i
xr f XR =

For i = US, France, Japan and Germany. The values:
(5:14)
Q
q
dq
dQ
α
i
i
i
· =
3
and,
(5:15)

β
i
3
XR
xr
dxr
dXR
i
i
· = can then be derived.
On the output side, the individual country‟s conjectural elasticity in the global tire
market is defined as:
Q
q
dq
dQ
α
i
i
i
· =
3
. It can be interpreted as the conjectural variation
i
dq
dQ
weighted by the country‟s own market share
Q
q
i
. If estimated by a linear model
5:12 gives the coefficient estimates
i
dq
dQ
and we obtain the conjectural elasticity by
multiplying each estimate with that country‟s market share. If the estimation is in the
double-log form, then the term
Q
q
dq
dQ
i
i
· can be directly derived mathematically.
If
i
dq
dQ
is found to be 1 then it implies that the market is the specific case of collusive
Cournot market behaviour and the conjectural elasticity then reduces to market share.
More general market structure interpretations were shown in Table 3.4.

Chapter 5 Page 157

However, the estimated
Q
q
dq
dQ
i
i
· here is derived from a post-event measurement of
the quantity of tire produced (q
i
). Hence to interpret the estimated term
Q
q
dq
dQ
i
i
· as a
conjectural elasticity requires the assumption that the prevailing observed response is
the same as the firm conjectured pre-event. This implies that ex ante conjectured
behaviour of the firm is always correct. Although this is not the case for every
behaviour, it helps provide a frame of possible outcomes to be used as robust testing
with outcomes from Model 1 and Model 2.
In comparison to this approach, other studies provide a variety of estimation methods,
based on each specific study context, to obtain the conjectural elasticity. Examples of
other estimations of conjectural elasticity are found in Appelbaum (1982) who
approximated the conjectural elasticity using a linear function of input prices such as
interest rate, wage rate and intermediate input prices; Murray (1994) who estimated a
function of transportation costs and border rival spatial competition ratio; Lopez et.al
(2002) who assigned the conjectural elasticity as a constant but also tested it as a
function of the concentration variable; Wilcox & Abott (2003) who estimated the
conjectural elasticity as a function of product price, demand elasticity, supply elasticity
and number of firms and Zhang & Sexton (2002) who simply adopted conjectural
elasticity values from previous studies. However, there is criticism that conjectural
behaviour should incorporate a sequence of actions in reaction to rivals‟ quantity
changes, not just be estimated from a static model. Thus, the term
i
dq
dQ
in the literature
is sometime reduced to be a market conduct parameter instead of a conjectural elasticity
(Sexton, 2000). In contrast, there are alternative approaches to study market power
based on games theory (Sexton, 2000) and experimental analysis (Engle-Warnick &
Ruffle 2005).
On the input market side, the derivation of each country‟s conjectural elasticity on its
input market, specifically the global natural rubber market,

β
i
3
XR
xr
dxr
dXR
i
i
· = could be
obtained in analogous to the derivation of
Q
q
dq
dQ
α
i
i
i
· =
3
described above.
Results for estimation of (5:12) - world tire production as a function of tire production
outputs in US, France, Japan, Germany and a time trend is reported in Table 5.43.

Chapter 5 Page 158


Table 5.43 Estimation Results for (5:12): Countries’ Conjectural Elasticities in
Global Tire Industry
tT q q q q Q
GR GR JA JA FR FR US US
+ + + + + = o o o o o
0

Coefficient
(t-value)
Constant
o
0
-0.2807
(-21.200)***
U.S. ‘s tire production (q
US
)
o
US
0.3385
(18.200)***
France’s tire production (q
FR
)
o
FR
0.1705
(7.001) ***
Japan’s tire production (q
JA
)
o
JA
0.1168
(8.894) ***
Germany’s tire production (q
GR
)
o
GR
0.1427
(5.134) ***
Time trend (T)
t 0.0124
(23.730) ***
Durbin-Watson 2.00
R
2
0.9996
*** denotes rejection of null hypothesis at less than 1% level of significance,
** denotes rejection of null hypothesis at 5% level of significance,
* denotes rejection of null hypothesis at 10 % level of significance.
The estimation results in Table 5.43 were generated in a log-log form with first order
correction for autocorrelation. The time trend representing technological development is
found to be statistically significant in the global tire market. Given the log-log
specification for (5:12) the conjectural elasticities (5:14) for each country are derived as:
Q
q
q
Q
US
US
US
·
c
c
=
3
o = 0.3385

Q
q
q
Q
FR
FR
FR

3
·
c
c
= o = 0.1705

Q
q
q
Q
JA
JA
JA
·
c
c
=
3
o

= 0.1168

Q
q
q
Q
GR
GR
GR

3
·
c
c
= o = 0.1427 for US, France, Japan and Germany respectively.

Chapter 5 Page 159

Table 5.44 reports estimates for (5:13) - world natural rubber production as a function
of quantities of natural rubber that are used in tire sectors in US, France, Japan and
Germany.

Table 5.44 Estimation Results for (5:13): Countries’ Conjectural Elasticities in
Global Natural Rubber Supply Market.
WO D xr xr xr xr xr XR
WO GR GRD GR GR JA JA FR FR US US
m m m m m m m + · + + + + + + = 91
0


Coefficient
(t-value)
Constant m
0

0.0018
(0.1869)
Natural rubber input – US (xr
US
) m
US

0.1709
(3.641)***
Natural rubber input - France (xr
FR
) m
FR

0.2957
(3.471)***
Natural rubber input – Japan (xr
JA
) m
JA

0.2898
(8.459)***
Natural rubber input - Germany (xr
GR
) m
GR

0.0484
(0.525)
Natural rubber input - Germany (xr
GR
)·D91 m
GRD

0.1891
(2.591)**
World oil price (WO) m
WO

-0.0665
(-4.073)***
Durbin-Watson 1.9563
R
2
0.9951
*** denotes rejection of null hypothesis at less than 1% level of significance,
** denotes rejection of null hypothesis at 5% level of significance,
* denotes rejection of null hypothesis at 10 % level of significance.
The estimation results in Table 5.44 were generated from a log-log form with first order
correction for autocorrelation. The time trend repressing the technological development
is not found statistically significant as in the global tire market in 5:12. However, the
world oil price (WO) is found statistically significant in the world natural rubber market
as synthetic rubber produced from crude oil is, to some extent, a substitutable input to
natural rubber. In addition the data for Germany‟s use of natural rubber input is not
readily available for the period before the country reunification hence a dummy variable
is assigned to incorporate the effect of data structural break caused by the reunification

Chapter 5 Page 160

in 1991. Estimation results for Germany data reflect that its estimates (m
GR
) are not
statistically significant except for the years after 1991 (m
GRD
).
Given the log-log specification for (5:13), the derived average conjectural elasticities for
each country are:

XR
xr
xr
XR
US
US
US

3
·
c
c
= | = 0.1709

XR
xr
xr
XR
FR
FR
FR
·
c
c
=
3
| = 0.2957

XR
xr
xr
XR
JA
JA
JA

3
·
c
c
= | = 0.2898

XR
xr
xr
XR
GR
GR
GR
·
c
c
=
3
|

= 0.1046 (1962-1990 =0.0484, 1991-2000 = 0.2375)
for US, France, Japan and Germany respectively.
The two directly estimated conjectural elasticities (o
I
and |
i
) for each country i can be
used to derive new estimates for MPI for each country. The results for Model 3 (market
power index derived from inverse tire demand elasticity (n), inverse natural rubber
supply elasticity (c), and directly estimated conjectural elasticities for the world tire
industry (o
i3
) and the world natural rubber industry (|
i3
) for each country, is reported in
Table 5.45. MPI results using Model 4 (market power index derived from direct tire
demand elasticity (n
*
), direct natural rubber supply elasticity (c
*
), and directly estimated
conjectural elasticities for the world tire market (o
i3
) and the world natural rubber
market (|
i3
) for each country, is reported in Table 5.46.

Table 5.45 MPI Estimations Using Model 3
3
3 3
3
1
US
US US
US XR
η ε
MPI
| c
o |
· +
· ÷ ·
=

Mean 1.0442
Min to Max 0.6266 - 1.6500
3
3 3
3
1
FR
FR FR
FR XR
η ε
MPI
| c
o |
· +
· ÷ ·
=

Mean 0.7672
Min to Max 0.5830 – 1.0211
3
3 3
3
1
JA
JA JA
JA XR
η ε
MPI
| c
o |
· +
· ÷ ·
=

Mean 0.6787
Min to Max 0.5407– 0.8649
3
3 3
3
1
GR
GR GR
GR XR
η ε
MPI
| c
o |
· +
· ÷ ·
=

Mean 0.5907
Min to Max 0.3916 – 0.8949


Chapter 5 Page 161


Table 5.46 MPI Estimations Using Model 4
*
1
* *
3
3 3
4
ε

η


ε

MPI
US
US US
US XR
|
o |
+
+
=

Mean 0.9598
Min to Max 0.9506 – 0.9658
*
1
* *
3
3 3
4
ε

η


ε

MPI
FR
FR FR
FR XR
|
o |
+
+
=

Mean 0.8190
Min to Max 0.7647 – 0.8518
*
1
* *
3
3 3
4
ε

η


ε

MPI
JA
JA JA
JA XR
|
o |
+
+
=

Mean 0.7673
Min to Max 0.6981 – 0.8092
*
1
* *
3
3 3
4
ε

η


ε

MPI
GR
GR GR
GR XR
|
o |
+
+
=

Mean 0.5935
Min to Max 0.5131 – 0.7509


5.8 Summary
This chapter has derived four different estimations of the market power index for four
individual countries: the US, France, Japan and Germany. The estimates are derived
from the four estimation models developed in Chapter 4. A summary of the estimation
methods involved for each of the 4 models are summarised in Chapter 4 in Figures 4.2a
and 4.2b. Model 1 and Model 2 use indirectly estimated conjectural elasticities for tire
and natural rubber industries market. Model 1 differs from Model 2 in that Model 1
uses an inverse tire demand elasticity and an inverse natural rubber supply elasticity
whereas Model 2 uses a direct tire demand elasticity and a direct natural rubber supply
elasticity.
In contrast, Model 3 and Model 4 use directly estimated conjectural elasticities.
Analogous to Models 1 and 2, Model 3 uses the inverse tire demand elasticity and
inverse natural rubber supply elasticity whereas Model 4 uses the direct tire demand
elasticity and the direct natural rubber supply elasticity.
For Models 1 and 2, a two-step procedure for market power analysis is used. This
allows for the estimation of the optimality equation (equation 5:6
i
), which gives the

Chapter 5 Page 162

estimates of u
1
, u
2
, u
3.
In the first step hypothesis tests are applied to the estimates of
u
1
,

u
2
& u
3
. The null hypotheses for a competitive market are: u
1
= 1 and u
2
= u
3
= 0.
This implies that the natural rubber price is equal to the value of the marginal product of
natural rubber in tire manufacturing.
If u
1
<1 and u
2
=0, u
3
=0, then the implication is that the natural rubber market is not
competitive and oligopoly market power could be present in the tire output industry and
oligopsony market power could be present in the tire input natural rubber industry. Step
2 is then called for and it involves measurement of the degree of market power via the
market power index (MPI). This requires two more components in addition to the tire
demand elasticity and the natural rubber elasticity. They are the conjectural elasticity in
tire market (o
i1
), which is derived from u
2
and the conjectural elasticity in the natural
rubber market (|
i1
), which is derived from u
3.

The MPI will have values of 0 to 1 and is general in its application to a range of market
power cases including both oligopoly in the output market (tires) and oligopsony in its
input market (natural rubber). The range of test values is detailed in Chapter 4 in Table
4.1. The critical test for oligopsony is based on the conjectural elasticity β
i
. A
competitive input market is implied by β
i
= 0. Oligopsony is implied by 0<|
i
<1 and
monopsony is implied by |
i
=1. The degree of oligopsony market power is then given by
MPI.
The tests for market power in this study thus depend on the values of: world tire
demand elasticity, world natural rubber supply elasticity, natural rubber marginal
productivity in each country‟s tire production function and output and input conjectural
elasticities. The elasticity estimates are derived from both inverse and direct demand
and supply functions. The conjectural elasticity estimates are derived from two
approaches.
The demand and supply elasticity estimates are summarised in Table 5.47.
Estimates of natural rubber marginal productivity for tire production for each country
are summarised in Table 5.48.




Chapter 5 Page 163

Table 5.47 Demand and Supply Elasticity Estimates (n, n*,c, c*)
Inverse Function Direct Function
World inverse tire demand elasticity n = -3.3439
(-6.5875 to -1.2152)
1/n
*
= -2.6989

World direct tire demand elasticity 1/n = -0.3804
(-0.1518 to -0.8229)
n
*
= -0.3705
World inverse natural rubber supply elasticity c = 3.3405
(2.9063 to 3.8368)
1/c
*
= 6.8768
(4.3763 – 9.1641)
World direct natural rubber supply elasticity 1/c = 0.3005
0.2606-0.3441
c* = 0.1494
(0.1091 to 0.2285)

Table 5.48 Natural Rubber Marginal Product Estimates(v
i
: v
US,
v
FR
, v
JA
, v
GR
)
U.S. (v
US
) 0.3556
(0.3254 to 0.3646)
France (v
FR
) 0.6343
(0.5586 to 0.6583)
Japan (v
JA
) 0.5673
(0.4097 to 0.7341)
Germany (v
GR
) 0.3654
(0.3192 to 0.3793)
Estimates of these critical variables are applied to generate market power tests for each
country. Results are as follows.
USA
Estimated models and hypothesis tests (for the null of competitive conditions) for the
US for Models 1 and 2 were reported in Tables 5.23 to 5.28. Hypothesis test results for
the US are summarised in Table 5.49 and Table 5.50.
Two estimation results are reported following some difficulties in generating significant
and theoretically consistent estimates for all coefficients in the optimality function. In
the first estimation (A) u
1
>1 but H0:u
1
=1cannot be rejected. However, the null
hypothesis for u
2
and u
3
and the joint hypothesis are all rejected. The alternative
estimation (B) forces u
1
= u
2
= 0 and rejects the null hypothesis for u
3
. These results
provide qualified support for the presence of oligopsony behaviour based primarily on

Chapter 5 Page 164

the results for u
3
. This is supported by the derived market power index results with
average MPI
US
values of 0.5243 from estimation A and 0.4133 from B.
Test results for Model 2 also reflect difficulties in generating a significant and
theoretically consistent value for u
1
.

The first estimation (A)

could not reject the
theoretically inconsistent finding of: u
1
>1. This outcome was corrected by forcing u
2
=
0 in Estimation B. However, as for Model 1, the null for u
2
and u
3
as well as the joint
null is rejected. Hence Model 2 tests also provide qualified support for oligosony
behaviour. The theoretically inconsistent size of u
1
is assumed responsible for a
theoretically incorrect value for the resulting market power index. The mean MPI
US

value of 1.3517 is > 1. However, the mean MPI
US
of value of 0.4180 from Estimation B
is consistent with both Model 1 results and the hypothesis test conclusions.
The MPI values from Models 3 and 4 are consistent but significantly higher than those
derived from Models 1 and 2. The average market power index is 1.0442 for Model 3
and 0.9598 for Model 4. These values imply near maximum levels of oligopsony
behaviour and market power.
Overall it is considered that the results values support the presence of oligopsony
market power for the U.S. tire industry for its world natural rubber market input.

Table 5.49 Hypothesis Test Summary for US (Models 1 and 2)
#1

H0:u
1
= 1 H0:u
2
= 0 H0:u
3
= 0 H0:u
1
=1, u
2
= 0, u
3
= 0
Model 1
Estimate A Not reject
#2
Reject Reject Reject
Estimate B - - Reject
Model 2
Estimate A Reject
#2
Reject Reject Reject
Estimate B Reject - Reject Reject
#1
All ui estimates are significant unless otherwise stated.

#2
u1 > 1 whereas theory predicts u1 s 1.



Chapter 5 Page 165

Table 5.50 Conjectural Elasticities for US and MPI
US
Summary
#1

Variable Model 1 Model 2 Model 3

Model 4

o
I


(Estimate A) 0.0732
#2

(0.0587 to 0.1062)
0.6171
#2

(0.4744 to 0.9337 )


o
I
(Estimate B)

- -
o
I


0.3385
|
i
(Estimate A) 0.1884
#2

(0.1615 to 0.2415)

0.1239
#2
(0.1051 to 0.1572)

|
i
(Estimate B) 0.2124
(0.1820 to 0.2721)
0.1086
(0.0921 to 0.1377)

|
i
0.1709

MPI
XRUS
(Estimate A)
0.5243
#2

(0.3787 to 0.7527)
1.3517
#2,#3

(1.1163 to 1.7329)


MPI
XRUS
(Estimate B)
0.4133
(0.3523 to 0.5008)
0.4180
(0.3297 to 0.5198)

MPI
XRUS
1.0442
#3
0.9598
#1
Values in parentheses are minimum and maximum values.

#2
values involve u1 > 1 whereas theory predicts u1 s 1.

#3
Theory predicts MPI s 1.

France
Results for France are summarised in Table 5.51 and Table 5.52. Estimated models and
hypothesis tests (for the null of competitive conditions) for the France for Models 1 and
2 were reported in Tables 5.29 - 5.32. In the first estimation (A) for Model 1, the null
hypotheses that u
1
=1, u
2
=0 and u
3
= 0 as well as the joint hypothesis test are all
rejected. This is consistent with the derived market power index results with average
MPI
FR
values of 0.5608, thus all tests support the evidence of France‟s tire
manufacture‟s market power both in tire market and the natural rubber market.
The results for Model 2 involve difficulties in generating significant values for u
1
and

u
2
. Hence an alternative estimation (B) which forces u
2
= 0 is provided. Corresponding
results allow for the rejection of the null hypothesis tests for competitive market
condition. Specifically, the null that u
3
= 0 is rejected. The MPI
FR
of 0.3740 supports the
test results and is consistent with Model 1 results.

Chapter 5 Page 166

As in the US case, the average MPI values for France from Models 3 and 4 are
consistent but higher, exceeding the upper bound of those derived from Models 1 and 2.
The average market power index is 0.7672 for Model 3 and 0.8190 for Model 4.

Table 5.51 Hypothesis Test Summary for France (Models 1 and 2)
#1

H0:u
1
= 1 H0:u
2
= 0 H0:u
3
= 0 H0:u
1
=1, u
2
= 0, u
3
= 0
Model 1
Estimate A Reject Reject Reject Reject
Model 2
Estimate A
Not reject
#2
Not reject
#2


Reject Reject
Estimate B Reject - Reject Reject
#1
All ui estimates are significant unless otherwise stated.

#2
u1 and u2 are not significant.

Table 5.52 Conjectural Elasticities for France and MPI
FR
Summary
#1

Variable Model 1 Model 2

Model 3

Model 4

o
i
(Estimate A) 0.0606
(0.0522 to 0.0696)
#2

o
i
(Estimate B) -
o
i
0.1705
|
i
(Estimate A) 0.2640
(0.2180 to 0.3326)
#2




|
i
(Estimate B) 0.0914
(0.0754 to 0.1151)

|
i
0.2957
MPI
XRFR
(Estimation A) 0.5608
(0.4541 to 0.6720)
#2

MPI
XRFR
(Estimation B) 0.3740
(0.2711 to 0.4693)

MPI
XRFR
0.7672 0.8190
#1
Values in parentheses are minimum and maximum values.

#2
u1 and u2 are not significant.

Chapter 5 Page 167

Overall it is considered that the results values support the presence of oligopsony
market power for the France‟s tire industry for its world natural rubber market input.
Japan
Results for Japan are summarised in Table 5.53 and Table 5.54. Estimated models and
hypothesis tests for Models 1 and 2 were reported in Tables 5.33- 5.37. Two estimation
results are reported following some difficulties in generating significant and
theoretically consistent estimates for all coefficients in the optimality function.
In Model 1 initial estimation (A), u
1
and u
2
estimates are statistically insignificant. A
supplementary estimation (B) is thus given. This test tries forcing u
2
= 0; its results find
the null hypotheses that u
1
= 1 and u
3
= 0 are rejected. These results provide qualified
support for the presence of oligopsony behaviour based primarily on the results for u
3
.
This is confirmed by the derived market power index results with average MPI
JA
values
of 0.4754.
Although test results for Model 2 do not reflect difficulties in generating significant
estimates and provide the MPI
JA
= 0.8937, the first estimation (A)

could not reject the
theoretically inconsistent finding of: u
1
>1.

This outcome is corrected by forcing u
2
= 0
in estimation B and the null that u
1
= 1

and u
3
= 0

as well as the joint null are rejected.
The resulting value of MPI
JA
= 0.3950 confirms support of the presence of market
power, specifically the oligopsony power as found by Model 1.
The conjectural elasticity in the input market (natural rubber) is consistent with results
from Model 1 and 2. The MPI values from Models 3 and 4 are 0.6787 and 0.7673,
higher than those derived from Models 1 and 2.
The consistent results from each model qualifies the inference for the presence of
market power of Japan‟s tire manufacturing industry in the world market, specifically
oligopsony power in the world natural rubber input market for tire industry in Japan.







Chapter 5 Page 168

Table 5.53 Hypothesis Test Summary for Japan (Models 1 and 2)
#1

H0:u
1
= 1 H0:u
2
= 0 H0:u
3
= 0 H0:u
1
=1, u
2
= 0, u
3
= 0
Model 1
Estimate A

Not reject
#2
Not reject
#2

Reject Reject
Estimate B Reject - Reject Reject
Model 2
Estimate A Not reject
#3


Reject Reject Reject
Estimate B Reject - Reject Reject
#1
All ui estimates are significant unless otherwise stated.

#2
u1 & u2 are not significant.

#3
Value involves estimated u1 >1 whereas theory predicts u1 s 1.

Table 5.54 Conjectural Elasticities for Japan and MPI
JA
Summary
#1

Variable Model 1 Model 2 Model 3 Model 4
o
i
(Estimation A)
#2


0.3087
#3

(0.1243 to 0.3966)

o
i
(Estimation B ) 0.0000 0.0000
o
i
0.1168
|
i
(Estimation A )

#2


0.1209
#3

(0.0607 to .1664)

|
i
(Estimation B ) 0.2816
(0.1567to 0.3720)
0.1029
(0.0517 to 0.1416)

|
i
0.2898
MPI
XRJA
(Estimation A)
#2
0.8937
#3

(0.5593 to 1.0331)

MPI
XRJA
(Estimation B) 0.4754
(0.3384 to 0.5584)
0.3950
(0.3019 to 0.4908)

MPI
XRJA
0.6787 0.7673
#1
Values in parentheses are minimum and maximum values.

#2
u1 and u2 are not significant

#3
Value involves estimated u1 >1 whereas theory predicts u1 s 1.


Chapter 5 Page 169

Germany
Summary results for Germany are presented in Table 5.55 and 5.56. Estimation and
hypothesis tests were detailed in Tables 5.38 - 5.42.
Overall they do not have statistical significant problems in any model. Model 1 results
reject all hypotheses for the competitive markets (reject the null that u
1
= 1, u
2
= 0 and
u
3
= 0). The MPI
GR
result is 0.5805. However, Model 2 involves difficulty in that
estimated u
1
> 1 which is not consistent with its theoretical prediction. However, the
hypothesis tests reject the null hypotheses that u
2
= 0 and u
3
= 0 implying that output
market (tire) as well as the input market (natural rubber) is not competitive; the MPI
GR

is 1.6314. To correct for the u
1
‟s estimation result, a supplementary estimation (B)
forced all effects other than input market into a constant term. Results found u
3
strongly
significant hence rejected the null hypothesis that u
3
= 0. The average MPI
GR
is 0.3934,
being in the range of Model 1‟s results and thus indicating consistency of results from
both models that qualifies estimation A‟s finding of the evidence for oligopsony market
power. The average MPI values from Models 3 and 4 is 0.5907 for Model 3 and 0 5935
for Model 4. These values are consistent with those derived from Models 1 and 2.
Overall it is considered that the results support the presence of oligopsony market power
for the German tire industry upon its world natural rubber market input.

Table 5.55 Hypothesis Test Summary for Germany (Models 1 and 2)
#1

H0:u
1
= 1 H0:u
2
= 0 H0:u
3
= 0 H0:u
1
=1, u
2
= 0, u
3
= 0
Model 1
Estimate A Reject Reject Reject Reject
Model 2
Estimate A Reject
#

2


Reject Reject Reject
Estimate B - - Reject -
#

1
All ui estimates are significant unless otherwise stated.

#

2
Value involves estimated u1 >1 whereas theory predicts u1 s 1.

Chapter 5 Page 170

Table 5.56 Conjectural Elasticities for Germany and MPI
GR
Summary
#1

Variable Model 1 Model 2

Model 3

Model 4

o
i
(Estimation A ) 0.0721
(0.0537 to 0.0916)
0.7819
#2

(0.5796-0.9883)

o
i
(Estimation B ) -
o
i
0.1427
|
i
(Estimation A ) 0.2616
(0.2153 to 0.3010)
0.1109
#2

(0.0.0909-0.1271))

|
i
(Estimation B ) 0.0991
(0.0812 to 0.1136)

|
i
0.1046
(1962-1990 = 0.0408
1991-2000 = 0.2375)
MPI
XRGR
(Estimation A) 0.5805
(0.4442 to 0.7220)
1.6314
#2,#3

(1.3692-1.8596)

MPI
XRGR
(Estimation B) 0.3934
(0.2704 to 0.4778)

MPI
XRGR
0.5907
1964-1990 =
0.6027
1991-2000 =
0.5582
0.5935

1962-1990 =
0.5432
1991-2000 =
0.7393
#1
Values in parentheses are minimum and maximum values.

#2
Value involves estimated u1 >1 whereas theory predicts u1 s 1.
#3
MPI > 1 whereas theory predicts MPI s 1.

To summarize the evaluation for the empirical estimation can be concluded that:
1) The findings for u
3
in the initial estimations (A) for Model 1 & 2 are all
significant hence reject the null that u
3
=0, thus supporting the presence of
oligopsony power in the natural input markets by the tire manufacturing countries.
2) The findings for u
2
in the initial estimations for Model 1 & 2, excluding France‟s
Model 2 and Japan‟s Model 1, indicate rejection of the null that u
2
= 0 indicating the
presence of oligopoly for tire manufacturers in the tire output markets.
3) However, the estimates for u
1
in some of these estimations provide conflicting
interpretations that call for some further consideration. The two problems are:
a) Although most of the findings for u
1
in the initial estimations for Model 1
& 2 are significant, the estimates for France‟s Model 2 and Japan‟s Model 1 are
insignificant hence the hypothesis test for the null that u
1
= 1 cannot be applied
to these estimations without caution.

Chapter 5 Page 171

b) Secondly, although most of the estimated values for u
1
are less than 1,
estimations from US‟s Model 1& 2, Japan‟s Model 2 and Germany' Model 2 are
greater than 1 whereas theory predicts u
1
s 1; they are hence theoretically
inconsistent and call for further investigations.
Therefore, appropriate supplementary estimations are undertaken to qualify each of
these particular estimations involving interpretation problems.
4) Thus only Model 1 for France and Germany can produce significant and
theoretically consistent evaluation for market power existence. Other estimations
involving problems are resolved by supplementary estimations (B) restricting u
2
=0.
All outcomes in the supplementary estimations confirm the rejection of the null that
u
3
= 0 as found in their corresponding initial estimations (A). Thus even if it is
assumed that output market is competitive, market power evidence still exists, with
some lower resulting MPI
XRi
results
42
. Hence, this helps to confirm the evidence of
oligopsony market power potential in the natural rubber input markets.
5) The outcomes from Model 3 & 4 are consistent with Model 1 & 2 with higher
levels of the MPI index for each country.
Finally Table 5.57 compares the market power index for each country. The MPI values
reported are selected from preferred models. Results that involve statistically
insignificant estimates (Estimation A for France‟ Model 2 and Japan‟s Model 1) as well
as theoretically conflicting estimates (Estimation A for US‟s Model 1 &2, Japan‟s
Model 2 and Germany‟s Model 2) are provided in the corresponding remarks.
From Table 5.57, US has the top market power index, judged by Model 2, 3, and 4.
France has the second highest level of market power, judged by Model 1, 3, and 4.
Japan has the third highest level of market power, judged by Model 1, 3, and 4.
Germany has the least market power, judged by Model 3 and Model 4. Model 3 and
Model 4 give similar ranking results.
In conclusion, estimated results imply that the tire industry in US, France, Japan and
Germany have market power (oligopsony) on the world natural rubber market. Results
are reconciled between inverse and direct function approaches for tire demand and
natural rubber supply. In addition, in each approach outcomes are confirmed between
the derived and directly estimated conjectural elasticities in tire and natural rubber

42
This might imply an industry wide level of inefficiency which could also increase the price-cost margin

Chapter 5 Page 172

markets. Results from empirical estimations are reconciled between initial and
supplementary estimations.

Table 5.57 Market Power Index (Preferred Model Estimates)
Country MPI
XRi

Model 1 Model 2 Model 3 Model 4
Inverse Elasticity
(n, c)
Direct Elasticity
(n
*
, c
*
)
Inverse
Elasticity
(n, c)
Direct
Elasticity
(n
*
, c
*
)

Indirectly estimated
conjectural elasticities
(o
i1
,|
i1
)
Indirectly estimated
conjectural elasticities
(o
i2
,|
i2
)
Directly estimated conjectural
elasticities
(o
i3
,|
i3
)
MPI
XRi1
MPI
XRi2
MPI
XRi3
MPI
XRi4

U.S.
#1
0.4133 0.4180 1.0442 0.9598
France
#2
0.5608 0.3740 0.7672 0.8190
Japan
#3
0.4754 0.3950 0.6787 0.7673
Germany
#4
0.5805 0.3934 0.5907 0.5935
#1
Other estimates for MPI
US
are 0.5243 from Model 1 estimation A and 1.3517

from Model 2
estimation A,

but they are derived from u
1
>1 whereas theory predicts u1 s 1.

#2
Other estimates from Model 2 estimation A for MPI
FR
gave statistically insignificant estimates
for u
1
and u
2
hence are not reported.

#3
Other estimates from Model 1 estimation A gave statistically insignificant estimates for u
1
and
u
2
hence are not reported. The other outcome of 0.8937 from Model 2 estimation A is derived
from u
1
>1 whereas theory predicts u1 s 1.
#4
Other estimates from Models 2 estimation A for MPI
GR
is 1.6314. It is derived from u
1
>1
whereas theory predicts u1 s 1.
Thus, policy responses to be considered will be discussed in Chapter 6.


Chapter 6 Page 173

Chapter 6
Conclusions and Policy Recommendations

6.1 Introduction
This thesis has examined the research question: Does oligopsony market power exist in
the natural rubber input market for the global tire industry?
The research question is of specific importance to countries such as Thailand as the
production of natural rubber, which is an important input to the production of tires, is
restricted to certain countries, predominantly the developing economies of Thailand,
Indonesia and Malaysia of which Thailand is the top producing country.
Much of the natural rubber production is conducted on relatively small and low income
farms. In contrast tire production is dominated by large multinational companies in a
relatively concentrated industry with production and sales concentrated in wealthy
developed countries. Consequently the market for natural rubber, as an input for tire
manufacture has both economic efficiency and welfare issues of interest. The economic
efficiency issue of concern is the possibility that tire manufacturers may be able to exert
market power in the market for natural rubber inputs, such that natural rubber prices
paid to its producers are less than the marginal revenue product earned by the tire
producers from this input. The welfare issue of concern is the possible distortion in
income distribution between natural rubber producers and consumers of natural rubber
products. As natural rubber production is concentrated in a small number of less
wealthy producing countries and the production of tires is concentrated in multinational
companies with developed country ownership and the sale of tires is concentrated in
these same developed countries, a welfare issue of income distribution translates to a
country level.
Therefore, this thesis has focused on the assessment of market power in a global
industry of producers of natural rubber inputs to the global tire industry. If market
power was found to exist then this indicated the potential for its associated welfare
implications of an inefficient and inequitable income distribution between the lesser
developed countries producing the natural rubber input and developed country
producers and consumers of tires.


Chapter 6 Page 174

6.2 Thesis Process and Outcomes
The background of the natural rubber industry was surveyed in Chapter 2 from the
beginning stage of the natural rubber tree plantation through to latex tapping,
intermediate product manufacturing of smoked-sheet and block rubber and the
manufacture of tires. The importance of synthetic rubber as a substitute input for natural
rubber in tire manufacturing was also identified.
The industry structure of the downstream product cycle of natural rubber was found to
be increasingly concentrated through the various stages of tapping, processing,
exporting and tire manufacturing. As such there are several stages in the natural rubber
industry that have potential for market power from the buyer side. The natural rubber
export industry is dominated by particular buyer countries for each seller country
namely: Japan for Thailand, US for Indonesia and EU for Malaysia. As such there is
potential also for market power to be exercised by the supplier countries of natural
rubber (oligopoly).
The natural rubber consumer industry such as vehicle tire manufacture is concentrated
in the hands of a small group of conglomerate enterprises that cross national borders.
This concentration is also reflected in country level data with the major developed
countries dominating the consumption of natural rubber for tire manufacture and the
consumption of the manufactured tires. Hence there is potential for market power to be
exercised in the natural rubber markets from the buyer side (oligopsony) and that
potential can be analysed via company level or country level data. Industries that
possess oligopsony market power in their input markets may or may not also possess
oligopoly market power in their output markets. In this case the tire industry has
structural features consistent with potential oligopsony market power in its natural
rubber input market and oligopoly market power in its tire output market.
The potential for oligopoly market power (by seller countries), based on the fact that
market is dominated by three supplier countries, is more problematic. It could be
analysed using country level data but based on an analysis of the natural rubber industry
supply chain in Thailand, there is not the same strong level of concentration in a
company – country relationship as found for the tire industry. Hence this thesis tests for
the presence of market power by the tire industry in its tire output market
(oligopoly)and market power in its natural rubber input market (oligopsony).

Chapter 6 Page 175

The theoretical background for the analysis of oligopoly and oligopsony power was
examined in Chapter 3 by means of a review of the theory of production and price in
output markets and employment and price in input markets. The analysis was first
framed for a perfectly competitive market that was then used as a benchmark to evaluate
production and employment in imperfectly competitive markets. Deviations from the
competitive standard are considered potential evidence of market power.
A review of the literature on measuring market power identified three approaches: buyer
concentration, effects from structural changes and the conjectural variation approach.
The conjectural variation approach was considered to be of most relevance for the
approach adopted in this thesis. Typically studies using this approach adopt a duality
theory approach namely the application of Shephard's Lemma and Hotelling's Lemma to
derive demand functions for inputs and supply functions for outputs respectively. The
degree of oligopsony/oligopoly power is then defined as the deviation of actual input
prices from the value of their marginal products (shadow price) with the shadow price
being derived from the profit maximization conditions.
Given the potential for mixed oligopsony/oligopoly market power to exist in the
markets considered in this study, the literature supports an analysis of both output and
input market competitor behaviour. Conjectural elasticities in output and input markets
are needed as well as the elasticities of demand for inputs and supply of outputs, to
obtain a valid measurement of market power.
This chapter also provided a review of the literature on tire production, tire demand and
natural rubber supply. It was found that tire demand has two components namely: new
vehicle production demand that is not price sensitive and replacement tire demand that
is price sensitive. Natural rubber studies generally support the claim that the industry is
competitive and that supply is price sensitive as farmers can vary tapping intensity and
tree uprooting rates in responses to price changes. It is also widely concluded that The
International Natural Rubber Organization (INRO) did achieve a degree of price
stabilization in the natural rubber market during its existence. However, it did not
operate as a supplier cartel to impose market power in the manner of The Organization
of the Petroleum Exporting Countries (OPEC) in the oil market. A general model for the
application of an oligopsony/oligopoly model using the conjectural variation approach
was developed in Chapter 4. The outcome was the derivation of a market power index
that could be used to assess oligopsony/oligopoly market power. The approach was
based on the model developed by Chang and Tremblay (1991) that was extended to

Chapter 6 Page 176

incorporate 4 different interpretations which were identified as models 1 to 4. Model 1
and Model 2 used indirectly estimated conjectural elasticities for tire and natural rubber
industries market. Model 1 differs from Model 2 in that Model 1 uses an inverse tire
demand elasticity plus an inverse natural rubber supply elasticity whereas Model 2 uses
a direct tire demand elasticity and a direct natural rubber supply elasticity. In contrast,
Model 3 and Model 4 use directly estimated conjectural elasticities. Analogous to
Models 1 and 2, Model 3 uses the inverse tire demand elasticity and inverse natural
rubber supply elasticity whereas Model 4 uses the direct tire demand elasticity and the
direct natural rubber supply elasticity.
The general model thus provided four contrasting market power indexes to evaluate if
oligopsony/oligopoly market power is present.
An important adaptation of this general model was its transformation from the
conventional industry/firm level to a global/country industry level so that it could be
applied to test for the presence of oligopsony market power deriving from the global tire
industry comprising tire producing countries (as proxies for multinational companies
headquartered in these countries) on the global natural rubber industry comprising
natural rubber input producing countries.
The general model with its four variants was converted into empirical models and
estimated in Chapter 5. The outcome was the derivation of market power indexes (MPI)
for each of the four major tire producing countries. The MPI were then used to test for
the presence of oligopoly market power in the tire output market for each of these
countries and the presence of market power exerted by each tire producing country over
the natural rubber input producing industry that is dominated by the three major natural
rubber producing countries in South East Asia.
The MPI requires values for four key elasticities, tire demand elasticity, input supply
elasticity and conjectural elasticities for the tire output market in each country and
conjectural elasticities for the natural rubber input market. These elasticities in turn
require estimation of a number of market, production and optimality functions. Prior to
estimation all data series were examined for possible non-stationarity using standard
Dickey-Fuller and Phillips-Perron tests. The data were found to be non-stationary.
Further testing for the presence of cointegrating relationships was undertaken and the
results confirmed almost all series to be I(1) and the relationships of interest to be
cointegrated. Error correction model estimations supported this finding. Given the long

Chapter 6 Page 177

term focus of the study model conventional OLS estimations were therefore used to
obtain the long term functional relationships required for MPI derivations.
The elasticity values for tire demand and natural rubber supply were first estimated
from inverse tire demand and natural rubber supply functions. The conjectural
elasticities were derived from estimation of an optimality function and the tire
production function. Market power indexes were obtained for the USA, France, Japan
and Germany (Model 1). The process was repeated using direct tire demand and natural
rubber supply functions (Model 2). Given certain difficulties associated with the
conjectural elasticity estimations, the Models 1 and 2 were duplicated using an
alternative procedure to directly estimate ex-post proxies for the conjectural elasticities
(Model 3 and 4).
Results from the four contrasting approaches supported the hypothesis that oligopsony
market power was present in the tire industry of the USA, France, Japan and Germany
over the global natural rubber market. The USA had the highest market power index,
judged by Models 2, 3, and 4. France had the second highest market power index,
judged by Models 1, 3, and 4. Germany had the third highest market power index,
judged by Models 2, 3, and 4. Japan had the fourth highest market power index, judged
by Model 3 and Model 4.
The results for joint oligopsony/oligopoly in the tire and natural rubber industry
relationship were somewhat compromised by conflicting estimation results for the two
conjectural elasticities from the optimality functions used in Models 1 and 2. Although
there was support for oligopoly market power in the tire industries‟ tire output markets
in each of the four countries, significant estimates for the input market conjectural
elasticities could only be obtained in some cases by forcing an assumed competitive tire
market into the optimality function estimation. This effectively reduced the empirical
model from a joint oligopsony/oligopoly model to an oligopsony model only in those
cases. The general theoretical model has the flexibility to accommodate this separation
and as the key research question for this thesis relates to the oligopsony component, in
such cases the oligopoly testing component of the model was sacrificed.
Important for this thesis however, is the consistent finding of oligopsony market power
in the natural rubber market across four different model variants and for each of the
major tire producing countries.


Chapter 6 Page 178

6.3 Interpretation of Results and Implications for Policy Options
Interpretation of these results and the implications for policy can be approached by
examining the underlying components of the market power measure that have been used
to conclude the presence of oligopsony market power. The MPI used for the
measurement of market power comprises four components: the world tire demand
elasticity (
n
n
1
*
= ), the tire producing country‟s conjectural elasticity on the world tire
industry (o
i
), the world natural rubber supply elasticity (
c
c
1
*
= ) and the tire producing
country conjectural elasticity in the world natural rubber market (|
i
). From Table 4.1 the
smallest market power index (MPI
XRi
) is derived when both the markets for tires and
natural rubber are competitive. This can occur if zero values are found for o
i
and

|
i
as
then a zero value will be generated for the market power index (MPI
XRi
) indicating no
oligopoly or oligopsony market power. Alternatively no market power is indicated
when
*
n and c
*
are perfectly elastic (approaching infinity) as this will also result in a
zero value for the market power index.
However, these conditions are rarely found in reality, as reflected by our findings of an
inelastic tire demand (0.3804 from inverse tire demand function and 0.3705 from direct
tire demand function) and an inelastic natural rubber supply (0.2993 from inverse
supply function and 0.1494 from direct supply function). Non-zero values are also
found for tire output market conjectural elasticity (o
i
)

and the tire input natural rubber
market (|
i
) (Table 5.50 for US, Table 5.52 for France, Table 5.54 for Japan and Table
5.56 for Germany).
However, any policies that could raise the values of
*
n and c
*
and/or reduce the values
of o
i
and |
i
would reduce the level of market power because the higher is the n*, the
lower is the MPI
XRi
; the higher is the c*, the lower is the MPI
XRi
; the lower is the o
i
, the
lower is the MPI
XRi
and the lower is the |
i
, the lower is the MPI
XRi
. Hence it is useful to
explore the industry and or market policy options for each of these elasticities.
The tire demand elasticity (n
*
) has a strong theoretical propensity to be inelastic based
on the review of earlier studies as well as this thesis. Tire demand has a large derived
demand component that is price insensitive. This derives from the fact that new vehicle
production demands at least five tires per unit with the tire cost a minor component of

Chapter 6 Page 179

the other vehicle cost. Demand from the vehicle in-use sector, is potentially competitive
and price sensitive. However, it is only part of the overall tire market, it has a relatively
rigid total market size based on vehicle numbers and average use and there is likely a
degree of brand loyalty. The potential to alter tire demand elasticity via policy is thus
considered very limited.
The tire producing country‟s conjectural elasticity in the global tire market (o
i
) is a
direct function of the industry structure. Within the existing dominant countries,
competition policies could be employed. But such policies are beyond the legislative
powers of the natural rubber producing countries such as Thailand. Other options
include the growth of other tire producers and within the country context of this thesis,
other tire producing countries with producer companies independent of the current
dominant US, Japanese, French and German multinationals would be called for. In this
respect the potential for independent tire production in countries such as China and
Russia is of considerable importance. The data available for this study excluded these
two rapidly industrialising countries. However, it is clear that tire demand has grown
strongly in these two countries and China‟s expansion has been particularly rapid since
2000 to the extent that it was reported to be the largest producer country in 2008 with
approximately 300 tire manufacturing firms (Business Wire, 2008). The industry is not
yet as highly concentrated as in the traditional manufacturing companies of the USA,
France, Japan and Germany however, three large Chinese manufacturers are emerging
and the dominant western country manufacturers are actively engaged in the industry. A
similar experience is evident in Russia with rapid expansion since 2002 and active
involvement by European tire manufacturers in particular
43
.
It would be in Thailand‟s interest to support an expanded independent domestic tire
manufacturing industry in such countries as a force to dilute the existing oligopsony
market power of the dominant western country manufacturers. The risk is that the same
market forces that lead to industry concentration within these countries will also impact
on the China and Russia industries to produce domestic industry concentration which
together with strong state control in these two countries could result in merely an

43
The Russian tire producer group Sibur -Russian Tires started expanding its production from 2002. The
AMTEL Group acquired the Dutch tire producer Vredestein Banden B.V.in 2005. When Sibur –Russian
joined The AMTEL Group they became the largest tire producer in Europe and one of the top ten
producers in the global market. In 2008 the Pirelli Group reached agreement with the Russian Federation
government to manufacture tires in Russia and the Commonwealth of Independent States. In the same
year Continental of Germany acquired a Finnish tire firm which has operations in Russia. Hence Russia
appears a promising market for natural rubber as a tire input.(Sources: Tire Review Online (2009)).

Chapter 6 Page 180

extension of the same form of oligopsony market power identified in this thesis for the
dominant western country tire producers. Whether the previously dominant western
country multinationals could extend their existing levels of control into China and
Russia via a process of multinational merger and acquisition is yet to be revealed. It
may be more difficult due to the political factors involved but the major western
multinationals are actively pursuing involvement in China and Russia.
The natural rubber supply elasticity (
*
c ) and the global tire industry natural rubber
input conjectural elasticity (|
i
) are the two elasticities from the natural rubber market
side that impact on the market power index. The potential for a country such as
Thailand to influence these two factors is much greater. The presence of an inelastic
supply curve coupled with an inelastic tire demand curve means demand shocks feeding
through to the natural rubber supply market are likely to impact mainly on price. This
has social as well as economic impacts on the industry as income fluctuations will likely
be greatest in the less concentrated upstream section of the industry. Policies to increase
supply elasticity are effectively aimed at reducing the price impact of market shocks by
increasing supply flexibility and a number of agricultural policies can be targeted at
achieving this outcome.
In general agricultural policies are aimed at: increasing demand, decreasing supply,
providing direct income supplementation, stabilising price and/or income, and providing
risk management (Jones, 1994). Supporters for agricultural policy support argue that
technology developments over time tend to reduce supply costs but natural rubber
prices fall further thus keeping incomes low. Natural rubber prices were examined in
Chapter 2 (Figure 2.2) and Chapter 5 (Figure 5.7, 5.8 and 5.9) and a decreasing real
price trend was evident. Export prices fluctuated over the studied period and in recent
times experienced a significant slump post 1996 followed by a recovery. However, by
2004 US dollar exports prices had still not recovered to their 1996 levels. Prices in local
currency (Thai baht) for domestic natural rubber increased steadily since 2001.
Although current as well as real prices in Thai baht were raised by the impact of the oil
price surge in commodity market hedging transactions ahead of the financial crisis, it
was only a short term trend as natural rubber prices suddenly dropped in late 2008 as
the US financial crisis extended into the world economic slump. However, the finding
of oligopsony market power predicts the price would be driven to a competitive market
price for the suppliers regardless as to whether that price is rising or falling over time.

Chapter 6 Page 181

An industry dominated by small plantation operators will find it difficult to finance
research and development projects and hence government support for industry level
research and development can be justified for natural rubber. However, the risk remains
that the benefits of cost reduction policies will be expropriated by the oligopsony tire
buyers if they do not target supply elasticity.
Policies that are more likely to impact on supply elasticity would include policies that
would provide for better access to information on future market trends to better plan for
plantation production. Monoculture reinforces supply inelasticity. Policies designed to
expand product diversity in small plantation farms could increase supply elasticity by
enabling farmers to vary production levels without adversely impacting on their
incomes. Risk management supported through initiatives such as farm insurance either
private or government supplied would also help introduce greater supply flexibility
(higher elasticity).
Arguments for industry support can also be based on social and political grounds in that
natural rubber planting provides income, home and lifestyle benefits in country regions
that discourage population drift to overcrowded cities.
Policies directed towards increasing demand for products are not likely to be effective if
the increased demand is from an industry such as the tire industry that exercises
oligopsony market power in the market for natural rubber inputs. Such policies will
only benefit the natural rubber industry if they are directed to increasing demand from
substitute markets with competitive structures.
Direct supplementation grants or payments to farmers based on output quantity or
applied to producers of relevant factors of production such as fertilizers also risk
expropriation by consumers (tire industry) in markets with inelastic demand and supply
functions.
Price and/or income stabilisation policies can have different forms. Equalization funds
require farmers to pay money into the fund in boom periods and receive price
supplementation in recession. They are self funding schemes that transfer income
between periods. Buffer stock schemes typically operate with a market board that
targets a certain price level (maybe government set). The Board buys quantities of the
product when supply is high and price is low and then resell when the price has risen. It
transfers quantities of supply between periods. In both cases the government could leave
the stabilization fund to manage the price and ignore the need to equalise income or

Chapter 6 Page 182

supply over time. However, in practice this can lead to extensive subsidisation costs for
the government and problems with managing excess stocks of the product as typically
the government will be pressured to maintain prices above market levels.
Examples of such agricultural policies can be found in the USA and European Union.
The United States Department of Agriculture (USDA) has policies that include, for a
number of agricultural products, price support, domestic supply control, loan schemes,
direct income support, insurance support for natural disasters and a number of trade
support policies for US producers: import quotas and tariffs, export subsidies and
government funded trade missions (The United States Department of Agriculture,
2008).
Such measures are highly discriminatory against poorer competing economies as they
are not only anti-trade but also can only be afforded by the richer countries of the world.
However, there have been a number of initiatives applied to the natural rubber industry.
At the world market level the most notable example is found in the operation of the
International Rubber Organization (INRO) which provided price stabilisation through
the holding of buffer stocks of natural rubber. However, as discussed in Chapter 2 A2.2,
inherent conflicts between consumer and producer members eventually lead to its
demise in 1999.
In Thailand many policies have been implemented to assist the industry. These include
demand increasing policies via encouragement of the diversification of natural rubber
consumption into sectors other than the tire industry such as the irrigation and
construction sectors. Price support was provided during 1992-2002. A number of central
markets have been opened for auction trading to guide market prices. Diversification of
country natural rubber processing into block rubber in addition to sheet rubber has been
encouraged. Establishment of farmer organizations has been supported and encouraged
to process latex output into sheet and block rubber. Since 2002 supply restriction
schemes have been introduced for natural rubber production and exports as the result of
an agreement among the producing countries via the International Rubber Consortium
Limited (IRCO) comprising Thailand, Indonesia and Malaysia (International Rubber
Consortium Limited, 2008).
However, natural rubber supply is still inelastic. The estimated results for the indirect
natural rubber supply function give an average supply elasticity of 0.299 with the
impact of INRO and rainfall having negative effects on supply elasticity. The direct

Chapter 6 Page 183

natural rubber supply function‟s average elasticity is even lower at 0.149 with INRO
and Japan‟s currency exchange rates having negative effects on supply elasticity.
One important policy area that has not yet been generally considered is that of risk
management. Risk management is another measure to improve supply elasticity.
Natural rubber supply could be more elastic if farmers had risk management support
against crop failure, price falls and seasonal fluctuation as many USA agricultural
producers do. Approaches could focus on more effective forward contract markets with
weather linked forward contract derivative products (Sharma & Vashishtha, 2007) or
through market-based price floor insurance (Gilbert et al., 2001). The United Nations
also has assigned the International Task Force to work on providing knowledge of risk
managements to commodity supplying countries but it still requires funding support
44
.
An equalization fund is another risk management alternative. Estimation results from
cointegration models for the inverse and direct natural rubber supply functions found
that the natural rubber prices and quantities supplied adjusted towards equilibrium by
67% and 87% respectively in the first year. Results confirm the adjustment back to
equilibrium price and quantity is stabilising and relatively rapid. This adds to the
potential for a successful implementation of an equalization fund.
The discussion on these various agricultural policies has focused mainly on their
potential to improve the natural rubber supply elasticity component of the market power
index. However, the world natural rubber industry may require more than agricultural
policies to tackle its concentrated market structure that contributes to its oligopsony
market power potential as reflected in the fourth component of the market power index:
the conjectural elasticity (|
i
) for the global tire industry input of natural rubber.
Past attempts with INRO focused on price stabilisation without regulating the buyer
countries‟ oligopsony power over the producing countries‟ natural rubber markets. The
introduction of supply restriction via IRCO to stabilise natural rubber prices coincides
with other emerging conditions such as the economic growth in emerging economies
such as China and India (International Rubber Consortium Limited, 2008). The surge in
commodity prices in the early part of 2008 assisted in raising natural rubber prices but
this was followed by an even faster collapse in oil prices in the second half of 2008 as
the global financial crisis took hold. However, supply restriction policies alone do not

44
The International Taskforce on Commodity Risk Management Conference, October 2008 was
sponsored by the World Bank and other institutions ( http://www.euacpcommodities.eu/fr/node/289)


Chapter 6 Page 184

seem sufficient as they ignore the structural problems on the demand side. The risk is
that, if successful, the higher prices stimulated by supply restriction policies will
stimulate efforts to break the supply restrictions: either by existing producer regions
contravening restrictions or by encouraging plantations in new regions.
If IRCO were to be successful in controlling natural rubber supply then the natural
rubber market would move closer to an oligopsony/oligopoly (or even monopoly
model). Further insight as to the possible outcomes of such a market structure might
therefore be gained by reference to the theory of bilateral monopoly behaviour. Figure
6.1 is adapted from Scherer & Ross (1991) and Salvatore (1997) to describe such a
market model.

Figure 6.1 Bilateral Monopoly Model











A competitive outcome would see an output of xc at a price of wc. A bilateral monopoly
for this market would see only one natural rubber buyer (say a tire industry cartel) and
one natural rubber supplier (say a supplier country cartel). The tire industry buyer of
natural rubber buyer will provide a demand curve that reflects the marginal revenue
product (MRP) that it earns from purchasing natural rubber inputs. However, for profit
maximisation it needs to match its marginal revenue (MRP) with its marginal cost. It
faces a supply curve (S) from the natural rubber monopolist supplier (the monopsonist‟s
MC curve). But its marginal cost curve will be its marginal resource cost (MRC) curve
(that is the marginal curve for S). The tire industry monopsonist will thus maximise
profit by equating its MR and MC. That is where MRP = MRC at point T where it pays
MRP of Tire Industry (D for
Natural Rubber)
Supply (S) of
Natural Rubber
MRC of Tire Industry
Natural Rubber
Quantity (X)
MMRP
Natural Rubber Price
wn
wt
wt*
wn*
T
xj
N
wj
xt xn
S
VMP
C
xc
wc

Chapter 6 Page 185

a price of wt for its natural rubber input quantity of xt and earns a profit on each unit
purchased of wt*- wt. The monopolist seller of natural rubber however, faces a demand
curve for natural rubber that is MRP and a marginal cost curve that is S. Its marginal
revenue curve is MMRP (the marginal curve for MRP) and it will attempt to maximise
profit by equating marginal revenue with marginal cost which is where MMRP = S at
point N where it sells natural rubber to the tire industry at a price of wn* and makes a
profit per unit of wn* - wn. The outcome is indeterminate. The price paid to natural
rubber producers will vary between wn* demanded by the producers and wt offered by
the tire buyers. The quantity supplied will vary between xt and xn. Both outcomes
produce an inefficient restriction of output below competitive market outcomes.
The eventual outcome will depend on the relative bargaining power of each party.
Given that the empirical estimates support an inelastic natural rubber supply curve the
possible price range could be wide. Relative bargaining interaction would also have
political dimensions as IRCO is an organisation composed of three developing countries
and the oligopsonist market power is based in four major developed countries.
Two other outcomes are possible. A joint profit sharing outcome would occur where
MRP = S at a quantity of xj and a price range from wj to the intersection of xj with VMP
(not shown but between wt* and wn* on this diagram). This would likely approximate a
bargaining outcome where the two parties had equal bargaining power. However, even
this outcome involves a price for natural rubber that will be less than the value of its
marginal product given by the VMP curve. A competitive outcome would require an
output of xc at a price of wc.
Figure 6.1 also provides a diagrammatic illustration of the potential distortion that
market power can impose on a market outcome. Given the evidence provided in this
thesis of oligopsony market power imposed by the tire producing countries over the
natural rubber producing countries the natural rubber input market price would be closer
to that produced by the bilateral monopoly model where bargaining power resides with
the monopsonist buyer; that is wt. This is a lower price and quantity supplied than that
suggested for a joint profit outcome (wj and xj) and a competitive outcome (wc and xc).
In theory a joint buyer and seller country market organisation such as INRO was should
have been expected to achieve something approximating the joint profit outcome
illustrated in Figure 6.1. However, the history of INRO suggests that the relative
bargaining power in that organisation was biased towards the buyer countries. As such

Chapter 6 Page 186

the bilateral monopoly model predicts the outcome would have been closer to the wt
and xt outcome illustrated in Figure 6.1 and supported by the MPI results provided by
this thesis.
INRO was primarily aimed at price stabilisation rather than market cartelisation and
sellers‟ joint profit maximization as its members comprised both the producing and
consuming countries of natural rubber. However, IRCO has a stronger focus on market
power rebalance and as such may achieve a different outcome.
Transposing this model from a bilateral monopoly to our oligopsony/oligopoly market
for natural rubber and tires adds even more indeterminacy. If the tire producer is not a
monopoly seller but an oligopolist seller in its tire output market then it may or may not
operate in a price competitive manner. If pricing behaviour is near competitive its
decisions to increase output may not affect market price and as such its demand curve
would be MRP and not MMRP. Then the outcome would likely be closer to the joint
profit outcome of the bilateral monopoly model but still with an indeterminate price
range. However, based on the model results in Chapter 5 from this thesis the predicted
outcome in this scenario would see prices driven down to the supply curve (marginal
cost) level with the excess value (VMP – S) being expropriated by the tire industry.
As this industry is global the data are impacted upon by multiple currencies. This was
an area of difficulty faced by INRO during its operation and will be a problem for any
other international marketing organisation such as IRCO in the future. However,
individual countries‟ macroeconomics policies can influence currency exchange rates
which in turn can affect commodity prices. Mundell (2002) argued that commodity
prices are mostly quoted in US Dollars but the US dollar has its own cycle based on
home country monetary policy. Hence US dollars are not stable and their instability is
transferred to commodity prices that are quoted in US dollars. This can be seen from a
comparison of the US dollar cycle and the commodity price cycle during 1970 to 2001.
During this period commodity prices in US dollars were high when the US dollar was
depreciating during US recessions and low interest rate US monetary policies.
Commodity prices in US dollars were low when US monetary policy was tight and US
dollar was appreciating.
Mundell argues that commodity prices should be quoted in a medium that is more stable
for example the SDR (Special Drawing Right). Evidence of the impact of currency
fluctuations on natural rubber is found with the estimates of the natural rubber supply

Chapter 6 Page 187

function. This was strongest for Japan‟s currency and for Thailand as Japan is the
biggest purchaser of Thai natural rubber. Japan yen exchange rates impact not only via
spot purchases by the Japanese tire industry but also by trading in TOCOM Futures
market. Perhaps the natural rubber producing countries should consider reducing their
reliance on TOCOM and SICOM market prices and consider setting prices in their
home country‟s currency in order to avoid exchange rate risks. The Agricultural Future
Exchange of Thailand (AFET) has commenced commodity futures trading and this
should assist such a move.
In contrast to Mundell‟s argument, prices set in local currencies can also affect the
natural rubber prices. For instance, reference prices for natural rubber were required in
the various price stabilising programs that have operated in the past. In the INRO case,
changes in exchange rates were factors that obstructed its operation. Since reference
prices were set as a Malaysia/Singapore composite price, it did not accommodate price
falls in the US dollar. In the 1997 the Asian currency crisis saw the currencies of
Thailand, Malaysia and Indonesia depreciate against the US dollar. The US dollar value
of natural rubber prices fell sharply but INRO did not intervene because the prices
measured in Malaysia/Singapore did not fall to their reference levels. Tire industry
buyers with US dollars received a windfall price reduction.
Therefore, any new policy for a natural rubber price stabilization fund should recognise
the role of macro-economic variables such as currency exchange rates. A composite
reference price is critical for determining supply and demand management. Mundell‟s
comment that commodities should be quoted in a stable currency could, in this case,
involve a weighted basket of producing consuming countries‟ currencies. As well a
moving average of currency exchange rates over time should be used instead of the spot
currency values.
The market model illustrated in Figure 6.1 identifies the potential for monopoly market
power to override and change market prices whereas both insurance and income
equalization funds are not aimed at altering market prices; merely dampening income
fluctuations caused by market price volatility. Hence such schemes are potentially not
distorting of resource allocation and income distribution and do not have tax payers or
consumer burden impacts. This is not so for other assistance programs outlined above.
As is more commonly found, agricultural commodity assistance policies usually are
administered using complex regulations with a heavy administrative and market
distortion cost. Programs for price support (minimum prices) and supply restriction

Chapter 6 Page 188

(production quotas, import tariffs, export subsidies), usually alter the market prices and
hence generate economic inefficiencies in resource allocation and income distribution.
However, as such policies also have social and political dimensions they cannot be
evaluated solely on economic grounds.

6.4 Limitations
The extensive model estimations conducted in Chapter 5 are heavily dependent on data
availability and quality. The results are therefore qualified by certain data limitations.
As mentioned previously, a significant gap in the country level data is the absence of
long term data on China and Russia. Both countries, but especially China, have rapidly
expanded their tire industries in recent years and as such must be considered an
influence on future market outcomes. The existing country data could also have been
distorted by the re-exporting of natural rubber from Singapore that might have been
consumed in tire producing countries but is not included in the data for natural rubber
consumed in these countries. It would have impacted on world tire market prices.
If more detailed tire price data were available, the models could have been extended to
accommodate different tire types. Similarly if natural rubber products used in the tire
industry were able to be classified into specific rubber types, such as rubber sheet and
block rubber, then the model could have been modified to test for market power at
different stages of the natural rubber supply chain index which was identified in Chapter
2 as composed of increasingly concentrated stages from the upstream raw material
plantation stage to the downstream export stage.
Incomplete data on the distribution of tire producers across companies and countries
means the adoption of a country level model is not underpinned by fully reconcilable
data.
With respect to estimation techniques adopted, a justification for adoption of
conventional OLS estimation techniques for long term functional relationships is based
on testing that supported the presence of cointegrated relationships in nonstationary data
series. Adoption of a full error correction modelling for all functional forms required to
generate the required market power indexes was ruled out on the grounds of excessive
complexity. It was also considered to be unnecessary for the objectives of this thesis.

Chapter 6 Page 189

Finally, the estimations of the optimality equation were based on estimated coefficients
from tire demand, natural rubber supply and each specific country‟s tire production
function. Hence, such estimations were made on predicted variables. As such, the
coefficients obtained certainly contain errors from the first round estimation. The
standard errors subsequently found for the optimality equation estimates are thus
compromised. Methods exist to obtain asymptotically correct standard errors. Chang &
Tremblay (1991) referred to methods advanced by Murphy & Topel (1985) and
examples for deriving asymptotically correct standard errors in two-step econometric
models can be found in Greene (1998), Kartz (2000) and Hole (2006). However, such
methods were not adopted in this case. Instead an alternate approach to obtain proxy
values for the conjectural variables was adopted as a means of cross checking for
estimation consistency.

6.5 Summary of Conclusions
This thesis has examined the research question: Does oligopsony market power exist in
the natural rubber input market for the global tire industry?
It concludes that the world natural rubber market does display oligopsony market
power.
To obtain this conclusion, this thesis: reviewed the theoretical literature on the
assessment of the market power; developed a general model capable of measuring
oligopsony/oligopoly in linked output and input markets and generated empirical
estimations of the model for the global tire industry and its natural rubber inputs.
Estimation results suggest the presence of oligopoly market power in the global tire
industry on the output side and the presence of oligopsony in the global natural rubber
industry on the input side.
Whereas the oligopoly and oligopsony conditions both require appropriate policy
responses, this thesis has focused on the natural rubber industry and as such has
restricted discussion on possible policy responses to addressing the oligopsony market
power in that industry. The focus has further been directed to the implications of this
oligopsony market power for Thailand which is the major world producer of natural
rubber. Consideration of tire industry policies are reserved for further studies.
Policy options to address the oligopsony market power have been discussed in the
context of the critical factors in the general model that indicate the presence of

Chapter 6 Page 190

oligopsony market power. These are the elasticity of the natural rubber supply function
in the market and the conjectural elasticity for the natural rubber input market for tires.
The finding of an inelastic supply function for this market suggests policies that might
increase the elasticity of this function would reduce the degree of oligopsony in this
market. In this regard, agricultural policies that focus on altering supply characteristics
are called for. Addressing the impact of the conjectural elasticity factor requires a focus
on competition policies. Here the options are limited if, as is indicated by the estimation
results, the prime source of oligopsony power comes from competition deficiencies in
major tire producer countries. Consideration of intervention policies to promote
countervailing power in the natural rubber market then becomes an alternative option to
pursue.
Income equalization schemes (in which farmers make payments into the fund in boom
times and receive the income back in depressed times) are an attractive option as are
risk management insurance policies Both income equalization and insurance policies
are potentially non market distorting and hence not distorting economic efficiency.
The global nature of the natural rubber industry requires policies of a macroeconomic
focus to manage exchange rate risk including that induced by currency cycle and
arbitrage effects on natural rubber prices.
The oligopoly market power that was identified in the global level tire market calls for
further study of this market and appropriate regulation policies. The global nature of the
industry poses challenging regulation issues. However, for this study the primary focus
is on the implications for the natural rubber industry and Thailand as the major producer
of this product. In this regard further study into the market conditions at each stage of
the natural rubber supply chain could be pursued. As previously mentioned the natural
rubber supply chain displays increasing levels of concentration from upstream
plantation farming to downstream export and end product manufacturing.

6.6 Claims for the Thesis
This thesis has tested for the existence of market power in the global market for natural
rubber as an input for the tire industry. This issue is of significant importance for natural
rubber producing countries as it has the potential to lower the value of vital export
income for natural rubber producing countries such as Thailand, Indonesia and Malaysia
as well as some newly emerging producer countries of less developed status than these

Chapter 6 Page 191

three major supplier countries. Issues of potential market distortion and market
regulation policies have long been a matter of interest to the three countries who
dominate the natural rubber production industry.
The research methodology adopted an innovative approach in its application of
economic theory from an industry – supplier firm framework to a global industry –
supplier country framework. The basic assumption applied in this translation being that
country level tire production data can be used as proxies for company level production
data for the assessment of market power exerted by tire producing countries against
natural rubber supplier countries. A theoretical model was developed based on using
models of market power from the literature. Several models exist but the particular
model chosen was one that provided for a general model of oligopsony/oligopoly
market power but which, at the time of writing was not known to have been empirically
applied. Fundamental to the application of the selected model was the estimation of
output demand (tire) and input supply (natural rubber) elasticities as well as output and
input conjectural elasticities. These estimates were obtained by econometrical modelling
and the estimates were used to generate a market power index.
Deficiencies inherent in the model (and elsewhere in the literature) associated with
assumed equivalence between direct and inverse demand and supply functions and
estimation problems considered to be due to data deficiencies are addressed by a
number of alternative estimation approaches to that recommended in the literature.
The results reveal a consistent set of market power index estimates, from different
estimation approaches, that support the hypothesis of oligopsony market power being
exerted by tire producing countries over natural rubber supplier countries. Given the
close correlation between firm concentration and country location data examined in
Chapter 2, it is considered valid to conclude that the evidence of oligopsony market
power generated from this country level producer – supplier model is applicable to a
producer industry –supplier firm model.
The industry to firm level implications for a market policy response, are given added
welfare and international political significance by the country producer – country
supplier results from this research.

Reference Page 192

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Appendix Page 202

Appendix

Appendix 2.1: Ownership Structures in Tire Manufacturing

Table A2.1 Ownership in Tire Manufacturers
Type 1
Company Owning in Other Company
Bridgestone Bridgestone (Tianjin) Tire Co Ltd (95%)
Bridgestone (Shenyang) Tire Co Ltd (74%)
Thai Bridgestone (67%)
Bridgestone Australia Ltd (60%)
PT Bridgestone Tire Indonesia (51%)
Continental Barum Continental (85%)
Continental-Matador SRO (76%)
Moscow Tire (76%)
Continental Tyre S. Africa (60%)
Continental Sime Tyre (51%)
Co Ecuatoriana del Caucho (40%)
GT E Africa (26%)
Mabor Moçambique (11%)
GT Pakistan (10%)
Cooper-Avon Tyre --
Goodyear Goodyear Dalian Tire Co Ltd (75/25% JV w/ Dalian) (75/25 JV w/
Sumitomo Rubber Industries)
Goodyear Dunlop Tires North America LLC
Goodyear Dunlop Tires Europe BV(75/25 JV w/ Sumitomo Rubber
Industries)
Sava Tires (80%)
T C De,bica (60%)
South Pacific Tyres (50/50 JV w/ Pacific Dunlop)
Hankook Jiangsu Hankook Tire Co Ltd (91%)
Michelin

Icollantas (99%)
Stomil Olsztyn (99%)
Taurus Rubber Co Ltd (99%)
Michelin-Shen Yang (90%)

Appendix Page 203

Shanghai Michelin Warrior Tire Co Ltd (70/30 JV w/ Shanghai Tyre)
Michelin Siam Group (60%)
Michelin Russian Tyres (51%)
Tigar MH (25%)
Apollo Tyres Ltd. (14.9%)
Gajah Tunggal (10%)
(Option to buy up to 10%)
Pirelli

Alexandria Tire (83%)
Turk Pirelli Lastikleri (61%)
Sumitomo PT Sumi Rubber(80%)
Yokohama Yokohama Tire Philippines (80%)
Yokohama Tyre Vietnam (56%)
Hangzhou Yokohama Tire Co Ltd (80%)
Toyo Cheng Shin Toyo (22%)

Type 2
MC Projects BV Joint
venture
Nippon Giant GTY Tire
Continental 50% 51%
Goodyear 65%
Michelin 50%
Yokohama 33.4%
Toyo 30%
Source: European Rubber Journal


Appendix Page 204


Appendix 2.2: International Natural Rubber Organization (INRO)

The INRO Establishment
Major attempts to address issues of price fluctuation date back to 1976, when the United
Nations Conference on Trade and Development (UNCTAD) agreed to set up some
organizations to resolve for the problem of commodity price fluctuation. Consequently,
the International Natural Rubber Organization (INRO) was set up. INRO is the
operating body for the International Natural Rubber Agreement (INRA), which was
arranged by UNCTAD since 1979. The agreement was continued in 1987 as INRA II
and 1995 as INRA III. The aim is to maintain balancing between rubber demand and
supply; the only tool is a buffer stock of 550,000 tons of rubber. There are 22 member
countries, each member sends payment to support the maintenance of the buffer stock.

The Operation Feature of INRO
INRO operated through:
- Buffer stock.
o Its quantity was 400,000 tons plus a contingency quantity of
150,000 tons.
- Reference price.
o The buying and selling of the stock was operated with a set of
benchmarked prices. It comprises reference price, upper intervention
price, lower intervention price, upper trigger action price, lower trigger
action price, upper indicative price and lower indicative price. The prices
are based on a price basket (Kuala Lumpur RSS1, Bangkok RSS3 and
New York TSR20 are items in the DMIP
45
price basket.) in
Malaysia/Singapore cents per kilogram.



45
Malaysian/Singapore cent is defined as the average of the Malaysian sen and the Singapore cent at the
prevailing rates of exchange (South Centre, 2004).

Appendix Page 205

Figure A2.1 INRO Prices Setting
Upper Indicative Price = 270 Malaysia/Singapore cents per kilogram.
|
Upper Trigger Action Price = Reference Price + 20%
(must sell)
|
Upper Intervention Price = Reference Price +15%
(may sell)
|
Reference Price
|
Lower Intervention Price = Reference Price -15%
(may buy)
|
Lower Trigger Action Price = Reference Price - 20%
(must buy)
|
Lower Indicative Price
When adjusting reference price, the corresponding trigger price cannot exceed
the limit =157 Malaysia/Singapore cents per kilogram.

Daily Market Indicative Prices (DMIP)
This is a composite price based on 5 days average of prices of RSS1, RSS3 and TSR20
by the ratio 2:3:5. The three prices are coded from four markets namely USA, UK,
Malaysia and Singapore markets.

Operation Criteria
If DMIP is higher (or lower) than upper intervention price, the buffer stock manager
may sell (buy) the stocks.
If DMIP is higher (or lower) than upper triggering price, the buffer stock manager must
sell (buy) the stocks.

Appendix Page 206


Adjustment of the Reference Price
- Every 12 months
- When the DMIP was different from intervention prices for over 6
months.
- When buffer stocks were less than 100,000 tons or over 300,000
tons.
- Upper and lower indicative prices will be revised every 24
months (INRA III).

INRA I had more than 65% from each side of countries. INRA II had more than 89%
producers and 75% consumer country. INRA III had more than 94% producer but only
48% consumer countries.

INRO Operation Results
Operation outcomes: INRA I and INRA II gained 144.77 and 136.16 $US/tons
respectively. INRA III lost 103.27 $US/ton due to inability to operate effectively.
Although INRO managed to achieve a degree of price stabilization, helped generate
capital from member country to hold the buffer stock, and generated some rubber R&D,
the results were far from adequate. It was argued that:
- Natural rubber supply outgrew demand so much that the buffer stock was
not effective.
- Member countries were slow in submitting the payments;
- INRO did not buy equally from each country
- The types of rubber that were bought by INRO did not match the types
that were produced
- Most of the stocks were kept in some specific countries and did not
provide storage income to other countries

Appendix Page 207

- The exchange rate crisis significantly increased foreign exchange rates
thus increasing the weight of fees for Asian currency suppliers to keep the buffer
stock.
From 1998, member counties refused to pay their fees. This made it difficult for INRO
to manage the buffer stock and as a result rubber prices decreased tremendously. When
Malaysia quit INRO the remaining five members from the supplying countries were left
to bear the expenses. The fees that producer member countries had to submit were about
31.5 % greater than the fees paid by consuming countries. The bargaining power of the
remaining supplying members also decreased. Consequently, all the producing countries
quit the INRO which was then abolished in October 1999 leaving 138,296 tons of
rubber stocks to be sold before 30 June 2001.
Table A2.2 depicts INRO‟s DMIP and world stocks level during its operation. Figure
A2.1 compares the changes in natural rubber prices, stocks and INRO‟s daily market
indicative prices (DMIP)
46
. Graphics are revealed in standardized values.
The changes in world stocks and INRO DMIP display some association. However,
appropriate empirical evaluation is required to identify this relation.
Table A2.2 World Natural Stocks and INRO Daily Market Indicator Prices
(DMIP)
Year

Stocks
(1,000 tons)
DMIP

Year

Stocks
(1,000 tons)
DMIP

1981 1755.0 224.1 1991 1600.0 176.2
1982 1825.0 176.5 1992 1680.0 174.0
1983 1855.0 225.2 1993 1640.0 168.2
1984 1875.0 205.6 1994 1700.0 229.1
1985 1860.0 170.6 1995 1790.0 307.9
1986 1790.0 184.1 1996 2080.0 267.0
1987 1840.0 217.4 1997 2010.0 209.3
1988 1800.0 254.8 1998 2140.0 191.0
1989 1730.0 207.1 1999 2550.0 160.6
1990 1530.0 181.6 2000 2040.0 113.0
Source: International Rubber Study Group

46
WRS1 is natural rubber price (RSS1), stocks is natural rubber stock.

Appendix Page 208

The relationship among the three variables can be seen in figure A2.2 where DMPI was
above WRS1 from 1981 to 1989; from 1989 to mid 1997 it was close to WRS1; and it is
below WRS1 from mid 1997 to 2000, demonstrating a sharp fall coincident with the
rising stock level.

Figure A2.2 RSS1 Natural Rubber Price, Changes in Stocks and INRO’s Daily Market Indicative
Prices



Appendix Page 209

Appendix 5.1: Variable Tests for Stationary

Variables are tested using the Phillips-Perron unit root tests (PP). The PP test uses a
non-parametric correction for serial correlation. It uses the same critical value as the
Dickey-Fuller tests (SHAZAM, 1997 pp. 166-167). If tests on the first differences of
variables reject the null hypothesis of unit root then the series are stationary at I(1).

Table A5.1 Variable Tests for Stationarity
PP I(1)
With constant A(0),
lagged term coefficient A(1),
no trend
With constant A(0),
lagged term coefficient A(1),
trend coefficient A(2)
Test
Variable
Critical
Values
Test
A(1)=0
10% -2.57
5% -2.86
1% -3.43
Test
A(0)=A(1)=0
10%3.78
5% 4.59
1% 6.43
Test
A(1)=0
10% -3.13
5% -3.41
1% -3.96
Test
A(0)=A(1)=A(2)=0
10%4.03
5% 4.68
1% 6.09
Test
A(1)=A(2)=0
10% 5.34
5% 6.25
1% 8.27
Variables in Equations (5:1), (5:2): Tire Demand Function
P -4.84 11.74 -5.57 10.49 15.72
Q -4.49 10.12 -4.70 7.56 11.29
VP -5.47 15.02 -5.88 11.71 17.45
VI -1.98 2.05 -4.06 5.59 8.26
GDPPUS -4.32 9.39 -4.23 6.17 9.25
All variables reject the null hypothesis of unit root at 1% significant level except for vehicle in-use
(VI) which rejects only the model with a trend (5%).


Variables in Equations (5:3), (5:4) Natural Rubber Supply Function
Test
Variable
Critical
Values
Test
A(1)=0
10% -2.57
5% -2.86
1% -3.43
Test
A(0)=A(1)=0
10%3.78
5% 4.59
1% 6.43
Test
A(1)=0
10% -2.57
5% -2.86
1% -3.43
Test
A(0)=A(1)=A(2)=0
10%4.03
5% 4.68
1% 6.09
Test
A(1)=A(2)=0
10% 5.34
5% 6.25
1% 8.27
WR -5.39 14.57 -5.33 9.50 14.25
XR -6.06 18.36 -6.02 12.08 18.12
RAIN -9.43 44.31 -9.32 28.82 43.23

Appendix Page 210

WS
t-3
-5.87 17.22 -7.65 20.09 30.10
ERJA -4.41 9.74 -4.50 6.77 10.15
ERTH -4.10 8.09 -4.13 5.74 8.59
ERSP -3.88 7.63 -3.83 4.97 7.41
RQM -5.56 15.52 -5.55 10.34 15.49
All variables reject the null hypothesis of unit root at 1% significant level except for Thai
exchange rate (ERTH) and Singapore currency exchange rate (ERSP) (with trend, rejected at
5% significant level).

Variables in Equation (5:5US) US Tire Production Function
Test
Variable
Critical
Values
Test
A(1)=0
10% -2.57
5% -2.86
1% -3.43
Test
A(0)=A(1)=0
10%3.78
5% 4.59
1% 6.43
Test
A(1)=0
10% -3.13
5% -3.41
1% -3.96
Test
A(0)=A(1)=A(2)=0
10%4.03
5% 4.68
1% 6.09
Test
A(1)=A(2)=0
10% 5.34
5% 6.25
1% 8.27
q
US
-6.59 21.72 -6.50 14.08 21.12
xr
US
-6.90 23.94 -6.88 15.89 23.67
xs
US
-5.99 18.01 -6.04 12.20 18.25
WO -5.22 13.66 -5.16 8.92 13.35
VI
US
-4.44 9.87 -4.50 6.78 10.14
All variables reject the null hypothesis of unit root at 1% significant level

Variables in Equation (5:5FR) France Tire Production Function
Test
Variable
Critical
Values
Test
A(1)=0
10% -2.57
5% -2.86
1% -3.43
Test
A(0)=A(1)=0
10%3.78
5% 4.59
1% 6.43
Test
A(1)=0
10% -3.13
5% -3.41
1% -3.96
Test
A(0)=A(1)=A(2)=0
10%4.03
5% 4.68
1% 6.09
Test
A(1)=A(2)=0
10% 5.34
5% 6.25
1% 8.27
q
FR
-5.75 16.58 -5.74 11.02 16.52
xr
FR
-5.12 13.14 -5.09 8.66 13.00
xs
FR
-5.31 14.09 -5.50 10.11 15.17
VPFR -6.17 19.00 -6.26 13.08 19.61
All variables reject the null hypothesis of unit root at 1% significant level



Appendix Page 211

Variables in Equation (5:5JA) Japan’s Tire Production Function
Test
Variable
Critical
Values
Test
A(1)=0
10% -2.57
5% -2.86
1% -3.43
Test
A(0)=A(1)=0
10%3.78
5% 4.59
1% 6.43
Test
A(1)=0
10% -3.13
5% -3.41
1% -3.96
Test
A(0)=A(1)=A(2)=0
10%4.03
5% 4.68
1% 6.09
Test
A(1)=A(2)=0
10% 5.34
5% 6.25
1% 8.27
q
JA
-5.63 15.86 -5.81 11.26 16.88
xr
JA
-4.87 11.91 -4.84 7.85 11.77
xs
JA
-4.81 11.60 -5.03 8.48 12.72
All variables reject the null hypothesis of unit root at 1% significant level

Variables in Equation 5:5 GR Germany’s Tire Production Function
Test
Variable
Critical
Values
Test
A(1)=0
10% -2.57
5% -2.86
1% -3.43
Test
A(0)=A(1)=0
10%3.78
5% 4.59
1% 6.43
Test
A(1)=0
10% -3.13
5% -3.41
1% -3.96
Test
A(0)=A(1)=A(2)=0
10%4.03
5% 4.68
1% 6.09
Test
A(1)=A(2)=0
10% 5.34
5% 6.25
1% 8.27
q
GR
-4.35 9.49 -4.31 6.24 9.36
Xr
GR
-6.51 21.19 -6.42 13.73 20.59
Xs
GR
-4.69 11.01 -4.69 7.36 11.04
VI
GR
-6.98 24.34 -6.90 15.91 23.86
All variables reject the null hypothesis of unit root at 1% significant level

Variables in Equation (5:12) Conjectural Elasticity in Output (Tire) Market
Test
Variable
Critical
Values
Test
A(1)=0
10% -2.57
5% -2.86
1% -3.43
Test
A(0)=A(1)=0
10%3.78
5% 4.59
1% 6.43
Test
A(1)=0
10% -3.13
5% -3.41
1% -3.96
Test
A(0)=A(1)=A(2)=0
10%4.03
5% 4.68
1% 6.09
Test
A(1)=A(2)=0
10% 5.34
5% 6.25
1% 8.27
Q -4.48 10.08 -5.09 8.68 13.02
q
US
-6.59 21.72 -6.50 14.08 21.12
q
FR
-5.75 16.58 -5.74 11.02 16.52
q
JA
-5.63 15.86 -5.81 11.26 16.88
q
GR
-4.35 9.49 -4.31 6.24 9.36
All variables reject the null hypothesis of unit root at 1% significant level


Appendix Page 212

Variables in Equation (5:13) Conjectural Elasticity in Input (Natural Rubber) Market
Test
Variable
Critical
Values
Test
A(1)=0
10% -2.57
5% -2.86
1% -3.43
Test
A(0)=A(1)=0
10%3.78
5% 4.59
1% 6.43
Test
A(1)=0
10% -3.13
5% -3.41
1% -3.96
Test
A(0)=A(1)=A(2)=0
10%4.03
5% 4.68
1% 6.09
Test
A(1)=A(2)=0
10% 5.34
5% 6.25
1% 8.27
XR -6.06 18.36 -6.02 12.08 18.12
xr
US
-6.90 23.94 -6.88 15.89 23.67
xr
FR
-5.12 13.14 -5.09 8.66 13.00
xr
JA
-4.87 11.91 -4.84 7.85 11.77
Xr
GR
-6.51 21.19 -6.42 13.73 20.59
All variables reject the null hypothesis of unit root at 1% significant level


Appendix Page 213


Appendix 5.2: Tests for Cointegrating Relationships

The residuals from each cointegrating regression are tested for stationarity. If tests reject
the null hypothesis of unit root then the residuals are stationary, implying the linear
combination of time series in each regression equation is stationary.

Table A5.2 Cointegration Tests (Phillips-Perron Method on Residuals)
#

Equation t-value (critical value)

CRDW (critical value)
(5:1) Inverse Tire Demand Function
t = -4.1739 (-4.13)
CRDW = 0.8833 (0.511)
(5:2) Direct Tire Demand Function
t = -3.9049 ( -3.81)
CR DW = 0.7994 (0.511)
(5:3) Inverse Natural Rubber Supply
t = -5.8472 (-4.70)
CRDW= 1.978 (0.511)
(5:4) Direct Natural Rubber Supply
t = -4.4551 ( -4.15)
CRDW = 1.141 (0.511)
(5:5US) US Tire Production Function
t = -4.5345 ( -4.42)
CRDW = 1.399 (0.511)
(5:5 FR) France Tire Production Function
t = -3.8424 (-3.84)
CRDW = 1.105(0.511)
(5:5JA) Japan Tire Production Function
t = -4.4143 (-4.13)
CRDW= 1.404(0.511)
(5:5GR) Germany Tire Production Function
t = -4.3506 ( -4.15)
CRDW = 0.8450 (0.511)
(5:12) Conjectural Elasticity In Output (Tire) Market

t = -4.3287( -4.13)
CRDW = 1.808 (0.511)
(5:13) Conjectural Elasticity In Input (Natural
Rubber) Market
t = -5.3800 (-4.70)
CRDW = 1.733 (0.511)
# Tests are undertaken using SHAZAM Version 9. The critical values applied by SHAZAM are
taken from Davidson and MacKinnon (1993). The DW statistic for the tests on residuals is the
Cointegrating Regression Durbin-Watson statistic (CRDW). The critical CRDW value is for a
1% confidence level

Appendix Page 214


Appendix 5.3: Error Correction Models for Natural Rubber Price and
Quantity
Figure A.1 Changes in World
Natural Rubber Price RSS1
(WR)
Figure A.2 Changes in World
Natural Rubber Quantity
Production


Figure A.3 Changes in Residual
Terms (Inverse Natural Rubber
Supply)
Figure A.4 Changes in Residual
Terms (Direct Natural Rubber
Supply)

Table A5.3.1 Variable Description for Error Correction Models
WR A

Changes in Natural rubber price
1 ÷
A
t
WR

One year lag of Changes in Natural rubber price
XR A

Changes in world natural rubber production
1 ÷
A
t
XR

One year lag of Changes in world natural rubber production
2 ÷
A
t
XR

two years lag of Changes in world natural rubber production
) ( XR INRO· A
Changes in
) ( XR INRO·

ERJA A

Changes in Japan’s currency exchange rates
ERSP A

Changes in Singapore’s currency exchange rates
2
) (
÷
· A
t
XR RAIN

Two years lag of changes in
) ( XR RAIN ·


Appendix Page 215

Table A5.3.1 (cont.)
1 ÷
A
t
ERTH

One year lag of changes in Thailand’s currency exchange rates
1
ˆ
÷ t
WR
c

Estimated natural rubber price residuals
1
ˆ
÷ t
XR
c

Estimated natural rubber production residual

Table A5.3.2 Error Correction Model for the Inverse Natural Rubber Supply
1
ˆ ) (
) (
10 1 9 2 8 2 7 1 6
5 4 3 2 1 1
÷
+ A + · A + A + A
+ A + A + · A + A + A = A
÷ ÷ ÷ ÷
÷
t
WR t t t t
t
a ERTH a XR RAIN a XR a XR a
ERSP a ERJA a XR INRO a XR a WR a WR
c

Coefficient
(t-value)
1
) (
÷
A
t
WR

1
a

0.43462***
(4.011)
XR A

2
a

3.4076
(7.624)***
) ( XR INRO· A

3
a

-0.7107
(-3.846)***
ERJA A

4
a

-0.3971**
(-2.413)
ERSP A

5
a

-0.7793
(-4.286)***
1
) (
÷
A
t
XR

6
a

-2.6397
(-5.169)***
2
) (
÷
A
t
XR

7
a

-1.4151
(-3.241)***
2
)) ( (
÷
· A
t
XR RAIN

8
a

0.4505
(3.057)***
1
) (
÷
A
t
ERTH

9
a

0.7030
(3.006)***
1
ˆ
÷ t
WR
c

10
a

-0.6693
(-1.839)*
DURBIN-WATSON 2.1576
R
2
0.8966
Price adjusted 67% in the consecutive year.


Appendix Page 216

Table A5.3.3 Error Correction Model for the Direct Natural Rubber Supply
Function
1
ˆ
4 1 3 2 1 1
÷
+ A + A + A = A
÷ ÷
t
XR t t
b WR b WR b XR b XR c

Coefficient
(t-value)
1
) (
÷
A
t
XR

1
b

0.8099
(6.523)***
WR A

2
b

0.1082
(4.671)***
1
) (
÷
A
t
WR

3
b

-0.1053
(-4.321)***
1
ˆ
÷ t
XR
c

4
b

-0.8713
(-3.302)***
DURBIN-WATSON 2.0691
R
2
0.4538
Quantity adjusted by 87 % in the consecutive
year.





Appendix Page 217


Appendix 5.4 Variables and Data
Table A5.4 1 Variables and Data
Variable Description Source
CPIJA
Japan’s consumer price index
United Nations Economic and
Social Commission for Asia and the
Pacific (ESCAP)
CPISP

Singapore’s consumer price index
United Nations Economic and
Social Commission for Asia and the
Pacific (ESCAP)
CPITH

Thailand’s consumer price index
United Nations Economic and
Social Commission for Asia and the
Pacific (ESCAP)
CPIUS1

US consumer price index
Us Bureau of Labor Statistics
DRXSM
Structural change dummy variable for a
change in the mix of natural rubber and
synthetic rubber following introduction of the
radial tire .(1970 -2000 = 1)
(Dummy variable)
ERJA
Japan’s currency exchange rates
(100Yen/$US)
The Bank of Thailand

ERML
Malaysia’s currency exchange rates
(ringgit/$US)

ERSP
Singapore’s currency exchange rates(S$/
$US)
The Bank of Thailand
ERTH
Thailand’s currency exchange rates
(Baht/$US)
The Bank of Thailand
INRO
The International Natural Rubber
Organization
(Dummy variable)
GDPPUS US per capita income The World Bank

P Tire prices: US tire price index US Bureau of Labor Statistics
Q World tire production International Rubber Study Group
q
FR
Tire production (France’s passenger car
tires and truck tires)
International Rubber Study Group
q
GR
Tire production (Germany’s passenger car
tires and truck tires).
International Rubber Study Group
q
JA
Tire production (Japanese passenger car
tires and truck tires)
International Rubber Study Group




Appendix Page 218

Table A5.4.1 Variables (cont.)
Variable Description Source
q
US
Tire production (US passenger car tires
and truck tires)
International Rubber Study Group
RAIN Rainfall quantity
The Royal Irrigation Department,
Thailand
RQM
Top seven countries’ quantity / total quantity
ratio. Top seven tire producing countries are
US, France, Japan, Germany, Italy, UK and
India.
Compiled from International Rubber
Study Group
T A time trend. -
VI World passenger car and commercial
vehicles in-use.
International Rubber Study Group
VI
GR
Vehicle in-use in Germany (only Passenger
cars).
International Rubber Study Group
VI
US
Total vehicle in-use in the US.(passenger
car and commercial vehicle)
International Rubber Study Group
VP World passenger car and commercial
vehicle production
International Rubber Study Group
VP
FR
Total vehicle production in France
(passenger car and commercial vehicle)
International Rubber Study Group
WO World crude oil price, Spot Oil Price (West
Texas Intermediate)
Federal Reserve Bank of St. Louis,
Economic Research.
WR
Natural Rubber Price: RSS1 natural rubber
prices, fob Malaysia ringgit/ton
International Rubber Study Group
WS
t-3
Synthetic rubber price lagged by 3 years International Rubber Study Group
XR World Natural Rubber Production International Rubber Study Group
xr
FR
Quantity of natural rubber used in Tire
sector in France.
International Rubber Study Group
xr
GR
Quantity of natural rubber used in tire sector
in Germany.
International Rubber Study Group
xr
JA
Quantity of natural rubber used in Tire
sector in Japan.
International Rubber Study Group


Appendix Page 219

Table A5.4.2 Variables (cont.)
Variable Description Source
xr
US
Quantity of natural rubber used in tire sector
in the US.
International Rubber Study Group
xs
FR
Quantity of synthetic rubber used in Tire
sector in France.
International Rubber Study Group
xs
GR
Quantity of synthetic rubber used in tire
sector in Germany.
International Rubber Study Group
xs
JA
Quantity of synthetic rubber used in tire
sector in Japan.
International Rubber Study Group
xs
US
Quantity of synthetic rubber used in tire
sector in the US.
International Rubber Study Group



Appendix Page 220

Table A5.4.2 Data
year

CPIJA

CPISP

CPITH

CPIUS1

ERJA (100
Yen/$US)
ERML
(Ringgit/$US)
ERSP
(S$/$US)
ERTH
(Baht/$US)
1960 21.80 76.82 20.49 88.70 360.00 3.10 3.06 21.18
1961 23.00 76.16 22.00 89.60 360.00 3.10 3.06 21.06
1962 24.60 88.46 22.82 90.60 360.00 3.10 3.06 20.88
1963 26.40 92.30 22.82 91.70 360.00 3.10 3.06 20.83
1964 27.40 97.75 22.64 92.90 360.00 3.10 3.06 20.80
1965 29.50 88.12 22.67 94.50 360.00 3.10 3.06 20.80
1966 31.00 84.65 23.59 97.20 360.00 3.10 3.06 20.80
1967 32.30 81.82 24.61 100.00 360.00 3.10 3.06 20.80
1968 34.00 78.51 25.05 104.20 360.00 3.10 3.06 20.80
1969 35.80 77.47 25.66 109.80 360.00 3.10 3.06 20.80
1970 38.50 76.81 25.64 116.30 360.00 3.10 3.06 20.80
1971 40.90 76.51 25.76 121.30 349.33 3.10 3.05 20.80
1972 42.90 80.36 27.01 125.30 303.17 2.80 2.81 20.80
1973 47.90 99.44 31.20 133.10 271.70 2.40 2.46 20.62
1974 59.10 107.63 38.78 147.70 292.08 2.40 2.44 20.38
1975 66.00 100.12 40.85 161.20 296.79 2.40 2.37 20.38
1976 72.20 90.12 42.54 170.50 296.55 2.50 2.47 20.38
1977 78.10 86.31 45.78 181.50 268.51 2.50 2.44 20.38
1978 81.40 90.02 49.40 195.40 210.44 2.30 2.27 20.34
1979 84.40 92.98 54.29 217.40 219.14 2.20 2.17 20.42
1980 90.90 97.76 64.99 246.80 226.74 2.20 2.14 20.48
1981 95.40 91.12 73.22 272.40 220.54 2.30 2.11 21.82
1982 98.00 82.69 77.07 289.10 249.08 2.30 2.14 23.00
1983 99.80 83.79 79.94 298.40 237.51 2.30 2.11 23.00
1984 102.10 83.27 80.64 311.10 237.52 2.30 2.13 23.64
1985 104.20 78.26 82.60 322.20 238.54 2.50 2.20 27.16
1986 104.80 76.58 84.12 328.40 168.52 2.60 2.18 26.30
1987 104.90 79.04 86.22 340.40 144.64 2.50 2.11 25.72
1988 105.70 80.29 89.50 354.30 128.15 2.60 2.01 25.29
1989 108.10 81.71 94.40 371.30 137.96 2.70 1.95 25.70
1990 111.40 90.18 99.97 391.40 144.79 2.70 1.81 25.59
1991 115.10 93.08 105.70 408.00 134.71 2.80 1.73 25.52
1992 117.00 97.31 110.00 420.30 126.65 2.50 1.63 25.40
1993 118.50 101.00 113.70 432.70 111.20 2.60 1.62 25.32
1994 119.30 106.87 119.50 444.00 102.21 2.60 1.53 25.15
1995 119.20 115.27 126.40 456.50 94.06 2.50 1.42 24.92
1996 119.30 114.64 133.80 469.90 108.78 2.50 1.41 25.34
1997 121.50 110.49 141.20 480.80 120.99 2.80 1.48 31.36
1998 122.20 95.40 152.70 488.30 130.91 3.90 1.67 41.36
1999 121.80 93.25 153.20 499.00 113.91 3.90 1.69 37.84
2000 121.00 92.08 155.65 515.80 107.77 3.84 1.72 40.14



Appendix Page 221

Table A5.4.2 Data (cont.)
year

GDPPUS
($)
INRO

P

XR
(1,000 tons)
q
FR

(mill)
q
GR

(mill)
q
JA

(mill)
1960 2,832.24 0 38.30 2,040.00 16.52 16.35 5.56
1961 2,882.03 0 37.90 2,120.00 14.35 17.50 8.16
1962 3,052.96 0 35.70 2,175.00 18.78 18.91 9.93
1963 3,174.80 0 36.90 2,175.00 20.30 21.45 13.68
1964 3,364.95 0 36.40 2,350.00 20.94 24.63 18.21
1965 3,607.31 0 37.00 2,370.00 23.37 29.31 20.53
1966 3,909.75 0 38.40 2,415.00 26.01 29.63 24.11
1967 4,086.86 0 39.50 2,550.00 28.88 28.22 31.79
1968 4,420.81 0 40.60 2,710.00 29.30 33.78 42.25
1969 4,727.16 0 40.60 3,020.00 33.84 38.64 49.32
1970 4,920.26 0 43.20 3,140.00 39.42 42.24 54.60
1971 5,278.34 0 43.30 3,135.00 44.14 42.34 57.54
1972 5,744.64 0 43.20 3,160.00 45.06 46.43 65.54
1973 6,362.61 0 44.00 3,545.00 45.74 46.82 74.73
1974 6,815.99 0 52.60 3,470.00 45.40 40.39 67.05
1975 7,341.30 0 58.40 3,360.00 39.37 38.12 71.67
1976 8,124.20 0 63.50 3,625.00 44.00 44.13 76.90
1977 8,962.04 0 66.70 3,655.00 46.59 44.59 82.85
1978 10,014.38 0 70.40 3,770.00 46.42 44.25 90.47
1979 11,054.83 0 80.90 3,870.00 50.47 45.48 100.67
1980 11,922.37 1 93.10 3,850.00 50.41 45.09 111.42
1981 13,244.87 1 98.30 3,705.00 43.46 42.93 107.80
1982 13,635.93 1 100.00 3,750.00 40.72 43.45 106.64
1983 14,598.14 1 96.10 4,025.00 45.56 45.19 119.39
1984 16,056.31 1 94.90 4,260.00 47.82 47.00 121.26
1985 17,014.96 1 92.80 4,340.00 46.50 48.84 132.15
1986 17,774.12 1 91.40 4,490.00 51.13 51.42 132.08
1987 18,688.76 1 90.50 4,850.00 55.57 55.84 135.89
1988 19,954.19 1 93.60 5,130.00 59.85 57.49 147.13
1989 21,314.72 1 96.80 5,240.00 60.92 58.35 151.81
1990 22,266.28 1 96.20 5,120.00 57.61 53.66 150.08
1991 22,651.52 1 97.40 5,170.00 60.54 49.61 150.70
1992 23,638.04 1 98.40 5,460.00 62.50 50.14 152.19
1993 24,603.69 1 98.30 5,340.00 55.91 45.63 140.12
1994 25,828.50 1 97.80 5,670.00 59.27 45.64 136.58
1995 26,786.42 1 99.00 6,070.00 63.77 47.93 149.46
1996 27,975.04 1 95.40 6,440.00 62.72 48.58 155.21
1997 29,297.08 1 93.60 6,460.00 65.24 53.54 160.35
1998 30,517.20 1 92.20 6,840.00 67.46 57.87 156.77
1999 31,914.76 1 90.90 6,810.00 66.87 59.45 161.42
2000 34,940.17 0 90.90 6,810.00 67.71 63.14 164.42




Appendix Page 222

Table A5.4.2 Data (cont.)

year

Q
(mill)
QM7
(mill)
q
US

(mill)
RAIN
(millimetres)
VI
(mill)
VI
US

(mill)
1960 231.11 183.12 119.82 1,807.80 116.18 73.58
1961 234.24 184.84 116.78 2,143.30 123.11 75.60
1962 268.87 209.71 133.87 1,947.10 131.64 78.65
1963 296.22 231.26 139.07 2,198.50 141.72 82.12
1964 335.56 257.71 158.11 1,321.00 152.75 86.10
1965 363.95 283.14 167.83 2,927.80 163.69 90.36
1966 392.79 300.19 177.46 3,268.60 174.70 93.96
1967 399.08 298.96 163.19 1,671.00 186.07 96.93
1968 468.35 357.02 202.94 1,769.50 198.25 100.89
1969 501.80 383.58 207.83 2,821.90 211.34 105.10
1970 513.34 386.49 190.40 2,561.90 223.78 108.41
1971 560.90 421.80 216.36 2,269.10 237.64 112.99
1972 599.24 435.03 229.61 1,883.40 254.15 118.80
1973 617.55 439.27 223.87 2,500.50 270.59 125.65
1974 591.15 416.77 211.35 2,113.00 291.44 129.93
1975 561.10 392.61 186.71 2,028.00 326.60 132.96
1976 598.50 412.63 185.95 2,519.00 344.70 138.54
1977 669.40 447.99 231.64 1,578.70 360.80 142.09
1978 673.00 446.12 223.41 1,288.10 380.00 148.05
1979 685.70 444.74 206.69 1,706.40 396.80 151.87
1980 654.80 419.12 159.26 1,784.20 414.70 155.80
1981 646.80 426.13 181.76 2,232.50 429.40 158.29
1982 640.80 419.62 178.50 1,963.60 442.40 159.64
1983 683.20 442.52 186.92 2,137.50 458.10 163.75
1984 729.70 471.04 209.38 2,217.60 468.70 166.25
1985 733.90 474.89 196.92 1,983.80 485.90 171.69
1986 755.20 481.56 190.29 1,789.10 502.90 175.70
1987 802.10 504.48 202.98 1,628.10 516.40 178.91
1988 851.90 530.54 211.35 1,684.80 535.70 184.39
1989 860.70 545.04 212.87 1,586.80 555.20 187.36
1990 847.50 537.46 210.66 1,454.80 573.60 188.80
1991 845.30 540.77 202.39 1,784.80 593.10 188.14
1992 899.30 573.59 230.25 1,467.70 608.90 190.36
1993 890.90 551.51 237.45 2,414.10 631.80 194.06
1994 917.80 561.56 243.70 1,838.20 645.40 198.05
1995 972.90 598.84 255.52 2,274.70 660.10 201.50
1996 1006.80 604.94 255.72 2,363.00 677.50 206.37
1997 1052.50 624.71 263.86 2,192.00 692.90 207.75
1998 1074.20 628.07 270.91 1,698.60 709.30 211.62
1999 1095.60 625.19 267.65 2,969.50 723.80 216.31
2000 1147.80 638.36 276.76 2,417.90 748.00 221.48




Appendix Page 223

Table A5.4.2 Data (cont.)

year

VP
FR

(mill)
VP
(mill)
VI
GR

(mill)
WO
($US/barrel)
WR
(Ringitt/ton)
WS
($US/ton)
1960 1.37 14.47 4.86 2.97 2,383.00 683.00
1961 1.25 13.35 5.77 2.97 1,842.00 655.00
1962 1.54 16.04 6.77 2.97 1,724.00 573.00
1963 1.74 18.41 7.75 2.97 1,597.00 582.00
1964 1.62 19.64 8.69 2.95 1,502.00 540.00
1965 1.64 22.02 9.72 2.92 1,544.00 553.00
1966 2.03 22.53 10.65 2.94 1,441.00 540.00
1967 2.01 22.22 11.29 3.03 1,192.00 509.00
1968 2.08 26.23 12.05 3.07 1,171.00 534.00
1969 2.46 27.33 13.17 3.30 1,539.00 467.00
1970 2.75 26.75 14.38 3.35 1,244.00 434.00
1971 3.01 31.12 15.48 3.56 1,016.00 432.00
1972 3.02 33.16 16.32 3.56 935.00 395.00
1973 3.22 36.39 17.04 3.87 1,655.00 408.00
1974 3.08 33.09 17.36 10.37 1,794.00 628.00
1975 2.86 32.90 18.16 11.16 1,357.00 657.00
1976 3.40 38.20 19.18 12.65 1,991.00 677.00
1977 3.51 40.90 20.38 14.30 2,028.00 803.00
1978 3.51 42.20 21.62 14.85 2,300.00 832.00
1979 3.61 41.50 22.61 22.40 2,794.00 931.00
1980 3.38 38.30 23.24 37.38 3,123.00 885.00
1981 3.02 37.00 23.68 36.67 2,578.00 1,042.00
1982 3.15 36.00 24.04 33.64 2,000.00 1,008.00
1983 3.34 39.90 24.69 30.40 2,469.00 974.00
1984 3.06 42.10 25.38 29.28 2,243.00 975.00
1985 3.02 44.70 26.10 27.97 1,886.00 975.00
1986 3.20 45.40 27.22 15.04 2,083.00 813.00
1987 3.49 46.00 28.30 19.16 2,481.00 836.00
1988 3.70 48.10 29.19 15.96 3,098.00 897.00
1989 3.92 49.30 30.15 19.59 2,625.00 1,139.00
1990 3.77 48.30 30.70 24.49 2,334.00 1,104.00
1991 3.61 46.20 37.46 21.48 2,267.00 995.00
1992 3.77 47.20 37.58 20.56 2,189.00 949.00
1993 3.16 46.00 39.20 18.46 2,135.00 1,007.00
1994 3.56 49.00 39.92 17.19 2,933.00 1,002.00
1995 3.48 49.60 40.50 18.43 3,956.00 1,331.00
1996 2.39 50.20 41.05 22.15 3,518.00 1,286.00
1997 2.57 53.40 41.33 20.60 2,787.00 1,245.00
1998 2.95 51.70 41.72 14.39 2,813.00 1,193.00
1999 3.18 54.20 42.42 19.25 2,404.00 1,017.00
2000 3.35 54.90 43.77 30.30 2,624.00 1,163.00




Appendix Page 224

Table A5.4.2 Data (cont.)

year

xr
FR

(1,000)
xr
GR

(1,000)
xr
JA

(1,000)
xr
US

(1,000)
xs
FR

(1,000)
xs
GR

(1,000)
xs
JA

(1,000)
xs
US

(1,000)
1960 76.60 76.60 76.90 328.80 49.40 62.90 22.10 682.00
1961 78.90 70.70 86.40 282.60 51.70 70.80 34.50 690.30
1962 78.40 74.30 90.10 309.50 56.90 78.30 46.80 774.00
1963 76.60 77.80 93.80 299.80 67.20 87.50 65.00 798.20
1964 77.10 78.10 98.30 318.50 77.20 101.80 80.50 898.90
1965 76.60 83.00 94.70 361.00 83.80 124.40 88.10 966.30
1966 78.60 80.10 101.30 393.20 95.10 122.60 102.70 1,041.30
1967 82.20 71.60 117.10 340.70 104.80 118.90 133.90 1,006.20
1968 86.40 80.00 125.00 402.60 109.60 139.80 175.20 1,229.50
1969 100.70 99.00 139.50 435.70 129.40 175.80 212.00 1,313.50
1970 114.20 102.70 154.00 393.00 148.20 181.30 245.00 1,209.90
1971 116.60 106.20 165.80 425.40 158.70 171.40 258.30 1,374.30
1972 119.00 105.00 188.30 469.40 173.70 173.70 293.00 1,479.70
1973 119.60 106.80 217.10 515.20 178.10 167.20 345.30 1,507.10
1974 123.80 113.30 218.20 561.10 183.60 165.40 326.90 1,404.60
1975 118.50 106.30 197.10 497.40 165.20 156.10 343.00 1,196.20
1976 127.90 114.90 207.50 491.00 175.90 165.50 367.30 1,221.80
1977 130.10 120.90 223.00 622.80 184.30 171.50 393.30 1,463.90
1978 132.60 117.30 250.40 590.60 178.10 161.40 413.80 1,377.60
1979 145.90 121.60 290.20 577.90 192.30 165.00 455.80 1,324.30
1980 156.90 120.30 324.80 438.80 197.60 154.80 503.70 1,082.20
1981 138.50 109.80 336.20 469.70 170.10 141.40 466.10 1,111.20
1982 126.90 110.20 334.90 433.20 155.60 138.50 410.90 960.60
1983 132.00 119.50 396.10 480.60 163.00 137.40 445.10 1,026.00
1984 135.00 129.80 414.50 575.10 159.00 137.70 476.80 1,093.90
1985 129.00 137.30 430.30 554.00 159.00 134.20 475.50 958.80
1986 134.40 137.70 433.90 520.60 157.20 140.20 426.60 919.30
1987 146.00 139.50 472.10 563.50 144.00 146.40 432.30 992.70
1988 157.00 146.70 518.60 657.30 153.00 144.40 502.70 1,011.00
1989 163.00 158.00 538.10 663.20 163.00 155.40 510.80 997.20
1990 155.30 151.50 555.10 621.90 150.20 152.10 500.20 1,101.70
1991 159.70 151.00 566.00 590.80 150.70 152.80 478.20 1,001.90
1992 156.80 159.00 569.30 680.40 162.70 155.30 467.60 1,129.30
1993 150.80 133.20 527.80 739.00 152.00 134.70 421.60 1,205.30
1994 161.80 139.20 536.50 758.50 161.20 140.30 421.60 1,196.80
1995 165.40 152.20 598.00 792.30 171.10 145.70 466.00 1,237.70
1996 174.10 156.00 615.00 775.70 170.10 135.00 487.00 1,232.20
1997 176.70 172.80 613.00 820.70 179.90 142.00 516.00 1,269.00
1998 182.70 169.00 616.00 862.40 186.70 166.00 506.00 1,340.90
1999 202.70 173.00 627.00 798.00 186.20 175.00 527.00 1,338.00
2000 205.00 172.00 649.00 947.00 196.00 182.00 525.00 1,203.00




Appendix Page 225

Table A5.4.2 Data (cont.)

year

RQM
(CR7 Ratio)
DRXSM

1960 0.79 0
1961 0.79 0
1962 0.78 0
1963 0.78 0
1964 0.77 0
1965 0.78 0
1966 0.76 0
1967 0.75 0
1968 0.76 0
1969 0.76 0
1970 0.75 1
1971 0.75 1
1972 0.73 1
1973 0.71 1
1974 0.71 1
1975 0.70 1
1976 0.69 1
1977 0.67 1
1978 0.66 1
1979 0.65 1
1980 0.64 1
1981 0.66 1
1982 0.65 1
1983 0.65 1
1984 0.65 1
1985 0.65 1
1986 0.64 1
1987 0.63 1
1988 0.62 1
1989 0.63 1
1990 0.63 1
1991 0.64 1
1992 0.64 1
1993 0.62 1
1994 0.61 1
1995 0.62 1
1996 0.60 1
1997 0.59 1
1998 0.58 1
1999 0.57 1
2000 0.56 1

Table of Contents
Abbreviations .......................................................................................................................... vii Certificate of Authorship.......................................................................................................... ix Acknowledgement......................................................................................................................x Abstract .................................................................................................................................... xi Chapter 1 ....................................................................................................................................1 Introduction ................................................................................................................................1 1.1 Introduction ......................................................................................................................1 1.2 Justification for the Research ...........................................................................................2 1.3 Methodology ....................................................................................................................4 1.4 Empirical Application ......................................................................................................5 1.5 Outline of the Thesis ........................................................................................................6 Chapter 2 ....................................................................................................................................7 Rubber as a Product: Nature, Production, Uses and Market ......................................................7 2.1 Introduction ......................................................................................................................7 2.1.1 Biology of Rubber Trees ...........................................................................................7 2.1.2 Rubber as a Commercial Product ..............................................................................7 2.1.3 Synthetic Rubber .......................................................................................................8 2.2 Natural Rubber Location and Production ........................................................................9 2.2.1 Location ....................................................................................................................9 2.2.2. Production Methods ...............................................................................................11 2.3 Uses of Natural Rubber ..................................................................................................14 2.3.1 Uses of Natural and Synthetic Rubber in Tire Sector .............................................18 2.3.2 Natural Rubber and the Tire Industry .....................................................................20 2.4 Natural Rubber Market and Prices .................................................................................20 2.4.1 Thai Domestic Natural Rubber Prices ....................................................................21 2.4.2 Thai Natural Rubber Export Prices .........................................................................24 2.4.3 Other Export Market Prices ....................................................................................25 2.5 Thai Natural Rubber Market Structure ..........................................................................25 2.5.1 Primary Producers Market ......................................................................................27 2.5.2 Export Market .........................................................................................................28 2.5.3 Tire Manufacturing Market .....................................................................................30 2.6 Global Level Natural Rubber Market Structure .............................................................31 2.6.1 World Primary Production ......................................................................................31 2.6.2 World Export Market ..............................................................................................32 2.6.3 Natural Rubber Export Country and Buying Country Concentration .....................33 2.6.4 World Tire Market ..................................................................................................37 2.7 Conclusion......................................................................................................................41 Chapter 3 ..................................................................................................................................45 Market Power and the Natural Rubber Industry ......................................................................45 3.1 Introduction ....................................................................................................................45 3.2 Competitive and Non Competitive Markets ..................................................................45 3.3 Equilibrium Conditions in Input Markets ......................................................................46 3.4 Oligopsony Analysis ......................................................................................................50 3.4.1 Buyer Concentration Approach ..............................................................................51 3.4.2 Structural Changes and Market Power Analysis.....................................................52 3.4.3 Cournot Model with Conjectural Variation Approach ...........................................53

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3.5 Studies of Oligopsony Market Power Analysis with Conjectural Variation Approach ................................................................................................................58 3.6 Empirical Studies of the Tire Industry ...........................................................................70 3.6.1 Tire Production .......................................................................................................70 3.6.2 Tire Demand ...........................................................................................................72 3.7 Empirical Studies of the Natural Rubber Industry. ........................................................73 3.7.1 Natural Rubber Supply Elasticity ...........................................................................73 3.8 Natural Rubber and Price Stabilization ..........................................................................74 3.8.1 Natural Rubber Prices and Currency Exchange Rates ............................................75 3.9 Conclusion......................................................................................................................75 Chapter 4 ..................................................................................................................................77 A General Model of Oligopsony Market Power ......................................................................77 4.1 Introduction ....................................................................................................................77 4.2 The General Model ........................................................................................................77 4.2.1 Optimality Condition and the Derivation of Market Power Index for Model 1 .....79 4.2.2 Reconciliation of the Derived Market Power Index and the Chang & Tremblay Index........................................................................................................83 4.2.3 Optimality Conditions and Derivation of Market Power Index for Model 2 ..........84 4.2.4 The Derivation of Market Power Index for Model 3 ..............................................85 4.2.5 The Derivation of Market Power Index for Model 4 ..............................................86 4.3 Interpretation of the Market Power Index ......................................................................86 4.4 Application of the Model to Global Natural Rubber and Tire Industries ......................88 4.5 Conclusion and Summary ..............................................................................................91 Chapter 5 ..................................................................................................................................95 Data Analysis and Empirical Estimation .................................................................................95 5.1 Introduction ....................................................................................................................95 5.2 Data Tests for Nonstationarity .......................................................................................95 5.3 Estimation of the Tire Demand Function .......................................................................96 5.3.1 Estimation Results for Tire Demand .......................................................................99 5.4 Estimation of the Natural Rubber Supply Function .....................................................103 5.4.1 Estimation Results of the Natural Rubber Supply ................................................111 5.5 Estimation of the Tire Production Function .................................................................116 5.5.1 US Tire Production Function Estimation ..............................................................118 5.5.2 France‟s Tire Production Function Estimation .....................................................121 5.5.3 Japan‟s Tire Production Function Estimation .......................................................124 5.5.4 Germany‟s Tire Production Function Estimation .................................................127 5.6 Estimation of the Optimality Condition Function ........................................................130 5.6.1 US MPI Estimation Using Model 1 ......................................................................131 5.6.2 US MPI Estimation Using Model 2 ......................................................................135 5.6.3.France‟s MPI Estimation Using Model 1 .............................................................138 5.6.4 France‟s MPI Estimation Using Model 2 .............................................................141 5.6.5 Japan‟s MPI Estimation Using Model 1 ...............................................................143 5.6.6. Japan‟s MPI Estimation Using Model 2 ..............................................................146 5.6.7 Germany‟s MPI Estimation Using Model 1 .........................................................149 5.6.8 Germany‟s MPI Estimation Using Model 2 .........................................................152 5.7 Market Power Index Estimation Using Models 3 and Model 4 ...................................155 5.8 Summary ......................................................................................................................161 Chapter 6 ................................................................................................................................173 Conclusions and Policy Recommendations ...........................................................................173 6.1 Introduction ..................................................................................................................173 6.2 Thesis Process and Outcomes ......................................................................................174 Page ii

6.3 Interpretation of Results and Implications for Policy Options .....................................178 6.4 Limitations ...................................................................................................................188 6.5 Summary of Conclusions .............................................................................................189 6.6 Claims for the Thesis ...................................................................................................190 References ..............................................................................................................................192 Appendix ................................................................................................................................202 Appendix 2.1: Ownership Structures in Tire Manufacturing.............................................202 Appendix 2.2: International Natural Rubber Organization (INRO) ..................................204 Appendix 5.1: Variable Tests for Stationary......................................................................209 Appendix 5.2: Tests for Cointegrating Relationships ........................................................213 Appendix 5.3: Error Correction Models for Natural Rubber Price and Quantity ..............214 Appendix 5.4 Variables and Data ......................................................................................217 List of Tables Table 2.1 Elastomer Consumption ................................................................................... 9 Table 2.2 Areas under Natural Rubber Plantation (2004) ............................................. 10 Table 2.3 Natural Rubber Production in Thailand, Indonesia and Malaysia (19602004) ............................................................................................................. 14 Table 2.4 Thai Natural Rubber Products Exports (fob Value, $US Million, 2004) ..... 17 Table 2.5 Tire Manufacture Ingredients......................................................................... 19 Table 2.6 Natural and Synthetic Rubber Used in US, France, Japan & Germany Tire Sectors (1960-2004) ...................................................................................... 20 Table 2.7 Natural Rubber Price ...................................................................................... 21 Table 2.8 Natural Rubber Local Market Prices and Central Market Prices (1998-2007) ....................................................................................................................... 22 Table 2.9 Thai Domestic Natural Rubber Prices (1998-2007) ...................................... 23 Table 2.10 Thai Natural Rubber Export Market Prices (1996-2004) ($US/ton) ............ 24 Table 2.11 Concentration in Rubber Exporters by Number of Firms (1955-2000) ........ 28 Table 2.12 Natural Rubber Exporter Concentration by Company Sale Quantity (2000)29 Table 2.13 Thailand Tire Manufactures Capital Concentration (2003) .......................... 30 Table 2.14 Small Holdings and Estate Areas under Rubber Plantation .......................... 32 Table 2.15 World Net Exports Market Structure (2004) ................................................ 32 Table 2.16 Gross Exports from Thailand to Natural Rubber Consuming Countries (1975 – 2000) ................................................................................................ 34 Table 2.17 Gross Exports from Indonesia Natural Rubber to Consuming Countries (1975-2000) ................................................................................................... 35 Table 2.18 Gross Exports from Malaysia to Natural Rubber to Consuming Countries (1975-2000) ................................................................................................... 35 Table 2.19 Export Shares of Natural Rubber Producing Countries and Natural Rubber Imports of Consuming Countries .................................................................. 37 Table 2.20 Global Tire Sector Consumption of Natural and Synthetic Rubber (19462004) ............................................................................................................. 38 Table 2.21 Concentration in Natural Rubber Consumption by Tire Producing Countries ....................................................................................................................... 39 Table 2.22 Concentration in Tire Sale Volume by Producing Countries ....................... 39 Table 2.23 Concentrations in Tire Sale Volume by Producing Companies (2000) ........ 40

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14 Variable Description for France‟s Tire Production Function ..........31 Equation (5:6.......... 132 Table 5... 122 Table 5.................. 134 Table 5..29 Equation (5:6.............................2US) Optimality Function for US Tire Manufacturing (Model 2) Estimation Results............4 Table 5..............27 Hypothesis Tests for 12US................................Table 3..................................................................................24 Hypothesis Tests for 11US.......... 119 Table 5.................21 Summary Statistics for Germany‟s Tire Production Function ....... 54 Table 3................................................... 127 Table 5... 139 Table 5.........5 Table 5...30 Hypotheses Tests for 11FR......... 138 Table 5.. 116 Table 5......20 Variable Description for Germany‟s Tire Production Function ................. 31FR (Estimation A) .........................88 Table 5........... 63 Table 3............3 Conjectural Variation and Market Performance ...... 128 Table 5....................... 103 Variable Descriptions for the Natural Rubber Supply Function ..............16 Equation (5:5FR) France‟s Tire Production Estimation Results .. 130 Table 5.................. 142 Table 5.............................................13 Equation (5........................................ 100 Equation (5:2): Direct Tire Demand Estimation Results ... 121 Table 5. 102 Comparative Estimates of Tire Demand Elasticities .....22 Equation (5:5GR) Germany‟s Tire Production Function Estimation Results ..........1 Table 5..........25 Hypothesis Tests for 31US (Estimation B) ...........11 Variables Description for US Tire Production Function ......................... 122 Table 5......................17 Variable Description for Japan‟s Tire Production Function .............2 Table 5.1US) Optimality Function for US Tire Manufacturing (Model 1) Estimation Results................. 55 Table 3................7 Table 5........12 Data Summary for Variables in the US Tire Production Function ...................................... 115 Table 5..........18 Data Summary for Japan Tire Production Function ....................................7 Tire Demand Elasticity .... 136 Table 5............ 124 Table 5..8 Natural Rubber Supply Price Elasticity ................................1 Optimality Conditions for Input Employment and Input Price in Various Types of Market Structure .....................1FR) Optimality Function for France‟s Tire Manufacturing (Model 1) Estimation Results......15 Data Summary for France‟s Tire Production Function .................. 22US... 32US (Estimation A) ....2 Cournot Model with Conjectural Variation ................ 32FR (Estimation B) ............... 98 Equation (5:1) Inverse Tire Demand Function Estimation Results .......23 Equation (5:6........................................ 21FR..................................................................................................... 21US......... 71 Table 3.......................9 Equation (5:4) Direct Natural Rubber Supply Function Estimation Results .................28 Hypothesis Tests for 12US........................................ 112 Table 5.........................................1 Market Power Index and Market Structures................ 125 Table 5........................10 Comparative Estimates of Natural Rubber Supply Elasticities . 140 Table 5.......................... 136 Table 5........................................................................2FR) France‟s Optimality Function (Model 2) Estimation Results .............8 Variable Description for the Estimation of the Tire Demand Function ........................ 74 Table 4.......................................... 22US... 125 Table 5.................................5 Relevant Conditions in Oligopsony Studies ............................ 72 Table 3.........5US): US Tire Production Estimation Results ........ 143 Page iv ..........6 Tire Production ... 108 Equation (5:3) Inverse Natural Rubber Supply Function Estimation Results .. 133 Table 5............... 32US (Estimation B) .....................32 Hypotheses Tests for 12FR.... 104 Summary Statistics for Natural Rubber Supply Function .............19 Equation (5:5JA) Japan‟s Tire Production Function Estimation Results .................. 119 Table 5... 49 Table 3........................................................ 97 Summary Statistics for Tire Demand . 31US (Estimation A) .................................................................................4 Comparing Conjecture Variation Definitions and Resulting Implications ....... 22FR.........................3 Table 5.6 Table 5............................................. 128 Table 5.. 56 Table 3..................................26 Equation (5:6.....................................................

.48 Natural Rubber Marginal Product Estimates( i:  US.....56 Conjectural Elasticities for Germany and MPIGR Summary ..... 165 Table 5.......................... 146 Table 5..  JA.... 172 Table A2......... 154 Table 5............................................ 149 Table 5............................................. ........... 145 Table 5........................................................................ 169 Table 5.3..................Table 5.........................................1JA) Optimality Function for Japan‟s Tire Manufacturing (Model 1) Estimation Results......... 23 Figure 2.. 159 Table 5..................2GR) Optimality Function for German Tire Manufacturing (Model 2) Estimation Results............1 Variable Tests for Stationarity ....................2 Error Correction Model for the Inverse Natural Rubber Supply ........34 Hypothesis Tests for 11JA...44 Estimation Results for (5:13): Countries‟ Conjectural Elasticities in Global Natural Rubber Supply Market........................1GR) Optimality Function for German Tire Manufacturing (Model 1) Estimation Results.........2 Cointegration Tests (Phillips-Perron Method on Residuals) ....... 207 Table A5...3 Error Correction Model for the Direct Natural Rubber Supply Function .......................... 21 Figure 2.........2JA) Optimality Function for Japan‟s Tire Manufacturing (Model 2) Estimation Results.. 168 Table 5.....................47 Demand and Supply Function Elasticity Estimates (......49 Hypothesis Test Summary for US (Models 1 and 2) ....... 214 Table A5........ 31JA (Estimation B) ..........3................39 Hypothesis Tests for 11GR..............1 Uses of Natural Rubber ........................37 Hypothesis Tests: 12JA. 160 Table 5.......... 163 Table 5................ 31 Page v .............................................................. 170 Table 5........... 151 Table 5...............................................  GR) .......................................................................................................................... 22GR..57 Market Power Index (Preferred Model Estimates) .................46 MPI Estimations Using Model 4 ........... 154 Table 5..2 World Natural Stocks and INRO Daily Market Indicator Prices (DMIP) .............1 Ownership in Tire Manufacturers .......2 Natural Rubber Price ...........40 Equation (5:6..................... 21JA......................42 Hypothesis Tests for 32GR (Estimation B)............55 Hypothesis Test Summary for Germany (Models 1 and 2) ..50 Conjectural Elasticities for US and MPIUS Summary ...............1 Variable Description for Error Correction Models ........ 16 Figure 2...........3......................................... 22JA............. 21GR........ 158 Table 5.. 164 Table 5............................... *...............................................................................................................................36 Hypothesis Tests for 12JA.... 147 Table 5....... 151 Table 5.............38 Equation (5:6.......................................52 Conjectural Elasticities for France and MPIFR Summary . 166 Table 5....33 Equation (5:6... 217 List of Figures Figure 2....................... 32JA (Estimation B) .......41 Hypothesis Tests for 12GR... *) .............................. 166 Table 5........... 32GR (Estimation A) ..........  FR...... 31GR (Estimation A) ......43 Estimation Results for (5:12): Countries‟ Conjectural Elasticities in Global Tire Industry ...... 148 Table 5.. 209 Table A5.3 Thai Natural Rubber Prices .....35 Equation (5:6....................54 Conjectural Elasticities for Japan and MPIJA Summary .... 161 Table 5...................... 168 Table 5.............................45 MPI Estimations Using Model 3 ....................... 163 Table 5............4 1 Variables and Data ............. 202 Table A2..... 213 Table A5................. 22JA and 32JA (Estimation A) ...51 Hypothesis Test Summary for France (Models 1 and 2) ............ 216 Table A5....... 215 Table A5..............4 World Natural Rubber Production (1900-2004) ............................................................................................................................................. 155 Table 5.53 Hypothesis Test Summary for Japan (Models 1 and 2) ......................................................................................................

.................. 123 Figure 5.....................15 Japan‟s Currency Exchange Rate (deflated by Japan‟s CPI) (ERJA) (100 Yen / $US).........3b Summary Derivation of the Market Power Index for Model 3 and Model 4 ................................ 123 Figure 5.....................................................................................000s)126 Page vi .2a Input Employment in a Non-Competitive Input Market.............3 World Tire Production (Q) (mill) ..............1 Input Employment in a Competitive Input Market ............................................7 Natural Rubber Price (WR) (fob Malaysia Ringgit/ton) ...6 US Per Capita Income (GDPPUS) ($US deflated).....000s)..........000s) ..........................26 World Crude Oil Price (WO) (deflated by US consumer price index) .......... 48 Figure 3..........................3b Comparing Input Employment in Competitive and Non-Competitive Input Markets ................17 Thai Currency Exchange Rate (deflated by Thai consumer price index) (ERTH) (Baht / $US) ...............31 France‟s Passenger Car and Commercial Vehicle Production (VPFR) (1................................................... 120 Figure 5.. 98 Figure 5... 120 Figure 5................000s) 123 Figure 5..........................4 World Passenger Car & Commercial Vehicle Production (VP) (mill. 120 Figure 5......27 US Vehicle In-Use (VIUS) (1......Figure 3.....20 CR7 Concentration Ratio in World Tire Production (RQM) ... 109 Figure 5........1 Tire Price Index (P) ...... 110 Figure 5...............................19 Singapore‟s Currency Exchange Rate (deflated by Singapore consumer price index) (ERSP) ($S/$US) .............25 World Crude Oil Price (WO) ($US/barrel) ........14 Japan‟s Currency Exchange Rate (ERJA) (100 Yen / $US) ...................... 110 Figure 5.. 110 Figure 5...............................................000s) ...................................................................................5 World Passenger Car and Vehicle In-use (VI) (mill...22 Quantity of US Tire Production (qUS) (1.........................................................................32 Japan‟s Quantity of Tire Production (qJA) (1.......................13 Synthetic Rubber Price(WS) (deflated by US CPI) ($US/ton) .1 The Flows of Natural Rubber from Producing Countries .....34 Japan‟s Quantity of Synthetic Rubber Used in Tire Sector (xsJA) (1............................................ 93 Figure 4.............................................. 126 Figure 5.23 Quantity of Natural Rubber Used in US Tire Sector (xrUS) (1................................................................. 126 Figure 5...........000s) ...........8 Natural Rubber Price (WR) ($US/ton) ................ 110 Figure 5.................. 110 Figure 5....................................................................................16 Thai Currency Exchange Rate (ERTH) (Baht/$US) .................. 111 Figure 5..000s) .............................................................................................................................................................................. 94 Figure 5.2 Tire Price Index (P) (deflated by US consumer price index) ................ 109 Figure 5........................... 110 Figure 5.. 47 Figure 3.........................000s) ....................10 World Natural Rubber Production (XR) (1....................................... 123 Figure 5................................................................ 110 Figure 5............21 The Ratio of Natural Rubber and Synthetic Rubber Consumption in World Tire Sectors (RXSM)(Ratio) ......000 tons) ....)..................................... 109 Figure 5....29 France‟s Quantity of Natural Rubber Used in Tire Sector (xrFR) (1............................91 Figure 4.............. 109 Figure 5............000s) .... 99 Figure 5.................................. 109 Figure 5.........) ............................................... 120 Figure 5.................................................... 99 Figure 5........................................... 99 Figure 5.9 Natural Rubber Price (WR) (deflated by US consumer price index) ($US/ton) ................ 110 Figure 5...........11 Rainfall (RAIN) (millimetres) ....................24 Quantity of Synthetic Rubber Used in US Tire Production (xsUS) (1. 48 Figure 4.....................28 Tire Production for France (qFR) (1...................... 98 Figure 5.......... 109 Figure 5..................000s) .. 120 Figure 5..................................12 Synthetic Rubber Price (WS) ($US/ton) ..................................................33 Japan‟s Quantity of Natural Rubber Used in Tire Sector (xrJA) (1.......000s) ...30 France‟s Quantity of Synthetic Rubber Used in Tire Sector (xsFR) (1......................18 Singapore‟s Currency Exchange Rate (ERSP) (S$ / $US) ........................................................... 120 Figure 5....2a Summary Derivation of the Market Power Index for Model 1 and Model 2 ..... 99 Figure 5......................................

.....38 Germany‟s Quantity of Passenger Car In-use (VIGR) (1.................................................... 205 Figure A2.............. 129 Figure 6........................................... 208 Abbreviations Organizations AFET INRO IRCO IRSG OPEC SICOM TOCOM UNTAD USDA CR4 HHI MRC MRP VMP ISR MSR RSS SBR TSR Cif Fob Agricultural Future Exchange of Thailand International Natural Rubber Organization International Rubber Consortium Limited International Rubber Study Group Organization of the Petroleum Exporting Countries Singapore Commodity Exchange Tokyo Commodity Exchange United Nations Conference on Trade and Development United States Department of Agriculture Four-firm Market Concentration Ratio Herfindahl-Hirschman Index Marginal Resource Cost Marginal Revenue Product Value of Marginal Product Indonesia Standard Rubber Malaysia Standard Rubber Ribbed Smoked Sheet Rubber Copolymer of Styrene and Butadiene Thai Standard Rubber Cost............................. 129 Figure 5.......1 INRO Prices Setting..000s) ................................35 Tire Production for Germany (qGR) (1.........37 Germany‟s Quantity of Synthetic Rubber Used in Tire Sector (xsGR) (1.......................................... Insurance and Freight Freight on Board Page vii Economic Terms Natural Rubber Industry Terms General Terms ..................36 Germany‟s Quantity of Natural Rubber Used in Tire Sector (xrGR) (1..184 Figure A2................ 129 Figure 5......................................000s) ...... Changes in Stocks and INRO‟s Daily Market Indicative Prices ......................000s) ......................................................2 RSS1 Natural Rubber Price...............................1 Bilateral Monopoly Model ......Figure 5...................................................... 129 Figure 5.....000s)...........................................

2009) : Page viii .nso.22 Exchange Rate Terms Malaysia Ringgit Japan (100 Yen) $ Singapore Thai Baht Source: Compiled from The Bank of Thailand Measurement Terms Metric System: 1 hectare = 10.10 1.SDR Terms ERML ERJA ERSP ERTH Special Drawing Right Currency Currency value / $US (2005) 3.050 square meters 1 Thai System : 1 rai 1 ngan = = 1.79 1.600 square meters 400 square meters 4 square meters 1 tarangwa = 1 Source service.doc (21Aug.67 40.000 square meters 1 acres = 4.th/nso/data/data07/07files/unit.go.

Certificate of Authorship Page ix .

Any remaining errors and omissions are my own responsibility. The two institutes also provided accommodation throughout my candidature and the librarians in both institutes provided a lot of assistance with my research and literature review. Professor Greg Walker. Valerie Webb Suwanseree helped edit my writing in the initial chapters. Further essential data were also provided by The Office of Rubber Replanting Aid Fund. I extend my gratitude to all of the help provided to me at each stage of my candidature. His comments and advice have always been constructive in generating a relevant issues and applications for my research. Dr Sanit Samosorn and Dr Viroj Na Ranong. Mrs. provided me with advice during a seminar in Bangkok and sent me some of his papers that proved useful for this thesis. My relatives and friends have always supported me. leading to this achievement. for his guidance. assistance and support provided throughout my candidature as I have completed this thesis.Acknowledgement I would like to extend my appreciation and gratitude to my supervisor. Dr Hidde Smit. The library of The Rubber Research Institute of Thailand provided a lot of useful data without which I would not have been able to complete my research. Residential schools given by Professors from Charles Sturt University and supplementary courses in statistics organized by Sukhothai Thammathirat Open University were helpful in developing my thesis. Page x . via interviews. provided me with useful background knowledge on the natural rubber industry.

However. Concentrated multinational companies in tire producing industrialised countries who import natural rubber inputs are potentially capable of exercising oligopsony market power on the small farms of developing countries producing the natural rubber. and Thai spelling is adopted for this thesis. An optimality condition is applied to derive an oligopsony/oligopoly market power index based on the Lerner index which defines the degree of market power as the deviation of the input price from its shadow price as measured by the input‟s value of marginal product. a theoretical model that accommodates the measurement of both oligopoly and oligopsony is adopted from the literature.S. version: „tire‟ as opposed to the English and Australian spelling „tyre‟. This model is based on the basic theory of output production and input employment linked to the Cournot conjectural variation approach. 2 Page xi . Hence results can be cross checked 2 The common usage English spelling in Thailand is the U.Abstract Purpose: Natural rubber is significant for producer countries such as Thailand. The derived index can be expressed in a series of elasticities that are estimable. Specific to the natural rubber industry is the potential for its market structure characteristics to be considered at a country level. The model is estimated using four different interpretations of the model‟s components. This provides the stimulus for the study conducted in this thesis in order to answer the research question: Does oligopsony market power exist in the natural rubber input market for the global tire industry? Design/Methodology/Approach: Given the possibility that market power could be exercised by tire manufactures to either the consumer side of the tire output market or the supplier side of the natural rubber input market. This identifies a potential for oligopsony market power to exist in upstream markets. The U. its market structure indicates an increasing degree of concentration from the plantation to the transformation and end product production level that includes tire manufacture. Indonesia and Malaysia.S. Thus there is the potential for oligopsony market power and its social welfare distortions to translate into a global level posing the possibility that welfare might be shifted from less developed countries producing the natural rubber input to more developed countries producing tires.

this approach is capable of identifying welfare shifting from less developed countries producing commodity inputs to industrialised countries using the inputs. could be adopted to counter oligopsony market power possessed by its downstream industries. the approach is innovative as it estimates a market power index derived from a Cournot Page xii . estimated coefficients are used for hypothesis tests for the existence of oligopsony market power as well as oligopoly market power. the global tire demand. Policy implementations to address oligopoly power in tire market support attempts to increase competition in the global tire market from newly developing economies but further studies are called for in this regard. Furthermore. France.across four different approaches and transformed from a conventional industry/firm level to a global industry/country level to answer the research question. the presence of oligopsony and/or oligopoly market power is indicated. Findings: Results imply that the tire industries in USA. income equalization funds and risk management are also supported. Data for variables in each equation are analysed and tested for nonstationarity prior to functional specification. This supports the claim that typical agricultural policies designed to raise natural rubber supply elasticity. Originality/Value: Oligopsony market power theory based on an industry/firm level is applied to a global industry/country level. They call for policies aimed at raising the elasticity of demand for tire and supply of natural rubber and generating more competition in the global tire market and natural rubber input market. Japan and Germany are estimated. Derived elasticities enable the derivation of corresponding market power indexes specific to each country. Policies to raise supply elasticity such as access to information. such as price stabilization and subsidies. To implement the market power index. Japan and Germany do display oligopsony power on the world natural rubber market. From each individual country data. the global natural rubber supply and the tire production functions for the USA. Hence. France. If the hypothesis tests reject the null hypothesis of competitive markets. in addition to identifying economic inefficiency. Policy implications are drawn using the elasticity values of the market power indexes.

Page xiii . The multiple variation approach provides stronger support for the tested outcomes.conjectural variation approach with four different variations.

as an input for tire production. These conditions have the potential to generate a lack of bargaining power for natural rubber farmers in the market for natural rubber. As natural rubber production is concentrated in a small number of less wealthy producing countries and production of tires is concentrated in multinational Chapter 1 Page 1 .Chapter 1 Introduction 1. Consequently the market for natural rubber. As an agricultural commodity requiring specific plantation and climate conditions.1 Introduction This thesis explores the extent of input price distortion on the world natural rubber industry. The importance of the natural rubber industry for Thailand is of particular significance for this thesis. block rubber and the major end product of automotive and other vehicle tires. has both economic efficiency and welfare issues of interest. The welfare issue of concern is the possible distortion in income distribution between natural rubber producers and consumers of natural rubber products. The economic efficiency issue of concern is the possibility that tire manufacturers may be able to exert market power in the market for natural rubber inputs such that natural rubber prices paid to its producers are less than the marginal revenue product earned by the tire producers from this input. the production of natural rubber is restricted to certain countries. The markets for natural rubber progressively increase in concentration for each down-stream industry stage. Indonesia and Malaysia of which Thailand is the top producing country. The producing trees are perennial crops and require as much as six to seven years before they can produce the raw product latex. In contrast the major end product of tire production is dominated by large multinational companies in a relatively concentrated industry with production and sales concentrated in wealthy developed countries. The natural rubber industry has a product chain that commences in plantation activity. from field latex to unsmoked sheets.sheets. smoked. Latex requires several production processes before it becomes the rubber sheets and blocks that are important inputs for downstream industries such as automotive tires. Production areas are spread across locations that involve significant transport costs. Much of the natural rubber production is conducted on relatively small and low income farms. Latex outputs are not easily stored overtime like manufacturing products. predominantly the developing economies of Thailand.

4 3 Natural rubber production in Thailand has been growing and currently Thailand is the top producing country. an assessment of oligopsony power of tire producing countries on world natural rubber market is called for.24 % and 0. The industry generates jobs and decreases labour migration from the provinces to Bangkok.91. 4 Chapter 1 Page 2 . welfare issue of income distribution translates to a country level. Natural rubber is one of Thailand‟s major export earning crops.000 farms producing natural rubber.companies with developed country ownership and the sale of tires is concentrated in these same developed countries. The number of natural rubber farmers is approximately six million. using only 10% of total natural rubber output. Accordingly. The key research question is: Does oligopsony market power exist in the natural rubber input market for the global tire industry? 1. Therefore. this thesis examines the potential for market power in a global natural rubber industry supplying inputs to the global automotive tire industry and the associated welfare implications of an inefficient and inequitable income distribution that could exist between the lesser developed countries producing the natural rubber inputs and developed country producers and consumers of automotive tires. 3 International Rubber Study Group (2005) This figure excludes some countries whose data for natural rubber consumed in the tire sector are not available such as China and Russia. which helps to improve provincial population welfare. Indonesia and Malaysia respectively.85 % of Thai GDP respectively. About one-third of world total supply comes from Thailand. It provides jobs for rubber farmers and supplies raw material for rubber manufacturing industries. There are about 1.13 million metric tons for Thailand. The number of employees in government institutions which are related to natural rubber administration is about five thousand. 2. Natural rubber value added industries are still small. However. A quantity of 2. despite this significance.27 and 1.088. the income from natural rubber and natural rubber products comprise only 1. In the year 2005 natural rubber production reached 2.46 million tons or 40% of the three countries‟ natural rubber outputs were used by major vehicle tire producing countries.2 Justification for the Research Natural rubber is an important industry for the producing countries.

Table 2. which illustrates the significance of value added products compared to intermediate rubber products which generated approximately 60% of export income despite comprising 90% of the natural rubber stocks that were not used for local consumption. Thus.16 Chapter 2. The average world tire sale volume concentration ratio for the period 19602000 for the top four producing countries was 77 %. Economic welfare depends on market performance. France (19%) and Germany (7%). The largest producers in 2000 were: Japan (30%) followed by USA (22%). which in turn is seen by mainstream industrial economic theory to be a consequence of market structure. 6 5 5 6 Chapter 2. This outcome is unambiguously predicted in the extreme case of a monopoly producer who is also a monopsony purchaser of inputs. Four economic regions consumed up to 72% of Thai natural rubber exports (see Chapter 2): namely Japan (38%). France (12%) and other EU countries (10%) during the studied period. Assessment of the price – marginal cost differential and the value of marginal product – input price differential is the fundamental approach to economic evaluation of output and input market power respectively.However. they generate approximately40% of total natural rubber export income. Here the monopolist is in receipt of economic rents that are generated in the output market by a price that is higher than the marginal cost of the output sold and in the input market by paying an input price that is less than the value of the marginal product derived from that output. This concern is related to the concept of market power and its consequences. USA (12%).22 Chapter 1 Page 3 . The conceptual basis is found in industrial economics. A concentrated market structure could enable a few large firms to exploit consumers and input suppliers by producing at a lower than optimal output level at higher than optimal output prices with lower than optimal employment of inputs at lower than optimal input prices. enhanced by the collapse of the International Natural Rubber Organization in 1999. The global tire industry is dominated by a few well-known producer countries. the potential for market power to be applied by a small number of multinational tire manufacturers in the market for natural rubber is of considerable concern for natural rubber producer countries such as Thailand. The consequences are that market power can adversely affect economic welfare. Table 2.

A consequence of possible market power that applies to this particular application is that tire producers are located primarily in developed industrialized countries whereas natural rubber is produced by small-scale farmers in developing agricultural countries. It thus becomes an empirical question that requires case by case assessment of the price – marginal cost differential and the value of marginal product – input price differential to identify oligopoly or oligopsonistic market power respectively. leading to economic welfare distortion. The outcome is dependent on the conduct of the firms in reaction to each other. The resulting market performance may or may not approach the optimal theoretical performance outcome. Hence. The index is capable of identifying the market Chapter 1 Page 4 . 1. These papers develop theoretical models that simultaneously assess the market power on both the output and input market sides. The measurement is simplified to a single market power index comprising four estimable elasticities. where there are a few firms. This allows for tracing of potential oligopsony power for an input market such as natural rubber and its interrelationship with a potential oligopolistic downstream output market such as tire manufacture. The model generates an index measure of market power for both market types that is composed of empirical variables such as price and conjectural elasticities. Very few studies have been applied to oligopoly and oligopsony power simultaneously and no study has been found that analyses the markets researched in this thesis. if there are market power rents being earned from market power. resulting in a variety of outcomes.However. Papers of special interest to the methodology adopted in this thesis are Chang & Tremblay (1991) and Chang & Tremblay (1994). in the case of oligopoly and oligopsony. This enhances the concern over market power for the industries in question and calls for analysis at a country level as the consequences of exploitation. The methodology is based on comparing the value of marginal product (VMP) between the profit maximizing optimal VMP and the observed marginal resource costs (MRC) (see Chapter 3). economic theory does not provide an unambiguous predicted outcome. could occur at a national level. then economic welfare gains are being transmitted from less developed countries to more developed countries. They may employ a variety of strategies.3 Methodology The literature on market power assessment is heavily focused on oligopoly applications as opposed to assessment of oligopsony applications.

Particular focus is placed on the implications of the market power interrelationships in these markets for Thailand which is the top natural rubber supplying country. A further extension of the model is its application at a global market level with country level output and input markets as opposed to the traditional firm – industry within a country level application that is commonly found in industrial economics. The model is empirically estimated and applied to the four major tire producing countries. in order to accommodate a number of theoretical and empirical challenges encountered. namely the USA.structure of the input and output markets ranging from competitive/competitive to oligopsony/oligopoly and monopsony/monopoly performance (see Chapter 4). When each firm has equal market shares. The index can also accommodate the monopsony/monopoly Robinson case and the Lerner index case of market power in the output market without market power in input markets. given market shares as a weight. The analysis involves estimation of a number of demand and supply functions including: a world tire demand function. marginal products and conjectural elasticities for the tire market (output) and natural rubber market (input) for each country. Japan. The development of this general model is described in Chapter 4. In addition. to create a general model with four variations depending on the interpretation and estimation approach adopted for the elasticity terms involved. France and Germany as purchasers of natural rubber inputs from the world natural rubber market which is dominated by three major supplier countries. tire production functions for each country. These estimations are used to derive values for key variables that are required for market power index construction including: demand and supply elasticities. The index is capable of covering the range of potential market conditions. the case approaches a Cournot case. For example. Indonesia and Malaysia. This thesis extends the Chang & Tremblay (1991) model. the four Chapter 1 Page 5 . namely Thailand. 1. the Chang & Tremblay index approaches the Herfindahl-Hirshman index. These variables are then used to construct market power indexes for each country for both their tire output and natural rubber input markets. a world natural rubber supply function and optimality condition functions for each country. on the industry level.4 Empirical Application The empirical analysis and results are provided in Chapter 5.

1.alternative approaches to index derivation are applied (see Chapters 4 and 5 for Models 1 to 4). in the form of a general empirical model. Results are presented and discussed in Chapter 5. and the basic conclusion. Chapter 5 describes the empirical application of the model developed in Chapter 4 to the tire and natural rubber industries. Chapter 2 presents an overview of the natural rubber industry in Thailand and at the world level and its relationship to the global tire industry. Results support the presence of the oligopsony market power in the natural rubber input market for tire manufacture on a country level basis. the relevance of the study and its justification. is developed in Chapter 4. Chapter 6 provides a conclusion to the thesis and includes a discussion of the implications of the findings for the natural rubber industry with particular emphasis on Thailand. The methodology to be applied. Chapter 3 surveys the theoretical base for economic analysis of market power and the relevant literature. the research problem. Chapter 1 Page 6 .5 Outline of the Thesis Chapter 1 provides an introduction to the thesis. a brief outline of the methodology used. Policy options are also discussed.

Its original source was latex. 2. It is Hevea Brasiliensis that produces 99% of natural rubber consumed today. Indonesia. He therefore named the material rubber. in modern times. it was not until 1736 that the first sample material from latex was sent to Europe by the French scientist Charles Marie de La Condamine. More than thirty years later. Its origin is in Brazil. 2. there have been attempts to boost natural rubber supply by cultivating Hevea trees in areas far from equator zones. rubber was first applied to modern uses such as raincoats. there are only two species that have become commercially significant.2 Rubber as a Commercial Product Since the 11th century the use of Hevea latex has been known in Central and South America. in 1770. synthetic rubber derived from petroleum was invented to provide additional sources of rubber. Research on substitute trees such as the Guayule bush found in Mexico and south western parts of USA is in progress as are attempts to produce natural rubber by gene technology. It has been introduced to other tropical areas such as Malaysia. discovered a process to transform Chapter 2 Page 7 .1. They are Hevea Brasiliensis and Guayule bush. Rubber was first applied to industrial uses after Charles Goodyear. Rubber has since then been applied to produce many useful objects that help develop a modern society. due to growing demand. and Sri Lanka. However. the material was first named rubber by Joseph Priestley. It has also been planted in some African countries.1.Chapter 2 Rubber as a Product: Nature.1 Biology of Rubber Trees There are more than 200 species of plants that produce rubber latex. Due to high demand in recent years and increasing costs of synthetic rubber production. Uses and Market 2. He noticed that the interesting object could eliminate lines that are written by pencils. However. a natural product from tree sap. Thailand. in 1839. Production. However.1 Introduction In 1770 an English chemist. India. Joseph Priestley. In 1818. received a bouncing ball from a colleague.

rubber into more flexible forms. In 1910 sodium was found to be a catalyst for the polymerization process and this meant it was possible to synthesize rubber by polymerization from a variety of molecular links. Since then synthetic and natural rubber production and consumption have grown in rough balance. synthetic rubber output is more stable but lacks the full qualities of natural rubber and as it is derived from petroleum. they are produced differently. it is environmentally friendly. Natural rubber is a natural plantation crop. during WWII Japan gained control of major natural rubber sources in Asia. However. Synthetic rubber thus became more common and its output reached 4 million tons after the Korean War. Chapter 2 Page 8 . In WWI Germany was cut off from natural rubber supplies.500 tons of synthetic rubber from dimethyl butadiene. He is said to have accidentally dropped a piece of rubber and some sulphur into fire. This led the US to develop more than one million metric tons of synthetic rubber during 1941-1944. Later. it is exposed to 7 Polymers are huge chainlike molecules composed of many smaller molecular links. If the polymer strands anywhere in the mass of rubber are pulled. so they invented 2. On the other hand. Each isoprene molecule of natural rubber has 13 atoms of carbon and hydrogen. Hence British rubber traders commenced cultivation of huge rubber plantations in India. they can straighten and uncoil then re-coil when the pulling is stopped. The process of mixing rubber with sulphur under heating is called vulcanization. 7 Although natural rubber and synthetic rubber are similar in chemical and physical properties. It was during this period that Hevea trees were first introduced to Thailand by Phraya Ratsadanupradit Mahison Pakdi (Kor Sim Bee) in 1899. Subsequently the supply of rubber was depleted by strong demand. In order to avoid having to rely on overseas rubber supplies. 2. Malaysia and Ceylon. Each polymeric molecule consists of tens of thousands of linked isoprene molecules. Rubber materials comprise millions of long and tangled polymeric molecules. As such it is less stable both in quantity and quality.3 Synthetic Rubber Since the 1900‟s there have been many experiments to improve rubber quality. Thus it is known chemically as polyisoprene. other countries also produced their own synthetic rubber supplies. After retrieving the material it was found to be stronger and more elastic.1. In 1887 John Boyd Dunlop patented his pneumatic tire.

when natural rubber was commercialized. the tapping cost structure was high. production was limited. Bolivia. attempts were made to plant more rubber trees in Southern parts of Asia. Southeast Asia became the Chapter 2 Page 9 . However.000 metric tons) Year 2004 2005 Natural Rubber 8.080 20.2 Natural Rubber Location and Production Natural rubber production is linked to the location of tree cultivation. Table 2. Table 2. Consequently. First natural rubber was produced from wild natural rubber trees in rainforests hence. 2002).fluctuations in the world oil price. Venezuela and Peru. The high costs were caused by tough working conditions including health problems such as yellow fever and malaria in the forests. Secondly. 2. Historically more than 90% of natural rubber was exported from Brazil.1 it can be seen that world elastomer consumption in recent years has been more than 20 million metric tons annually and is split roughly 40% to 60% between natural and synthetic rubber. Consequently the demand for natural rubber soon outstripped the production capacity of Brazil (Zephyr & Musacchio.1 Location Natural rubber trees were first discovered in the Amazon basin of South America including Brazil.918 Source: compiled from International Rubber Study Group (various copies).800 (59%) 11. There was a scarcity of rubber tappers and production facilities on top of high transportation costs from Brazil. 2.1 displays the relative consumption rates in recent years.280 (41%) 9. From Table 2.1 Elastomer Consumption (1.917 (57%) Total 20. natural rubber production could not meet demand because of natural restrictions on production. Due to appropriate management and a suitable climate. In addition tapping was restricted to the months of August to January to avoid the rainy season.001 (43%) Synthetic Rubber 11. the production of rubber sheets and block rubber.2. latex tapping.

7 13.0 108.essential geographic area for natural rubber supply.37 3262.4 1282.56 0.17 1.99 0.19 4. By 2004 there was a total of 9.2 Areas under Natural Rubber Plantation (2004) Country Asia Indonesia Thailand Malaysia China India Vietnam Sri Lanka Myanmar Philippines Cambodia Bangladesh Papua New Guinea Total area Africa Nigeria Liberia Cote d’ Ivoire Cameroon D R of the Congo 150.73 6. Lao.9 95.0 52.0 578. Indonesia and Malaysia. Other producing countries are in South Asia such as India.7 34.335. In addition there is some supply from China and Africa. Cambodia and Myanmar.15 93.12 0.7 8694.0 450.3 46.8 92.52 0.3 35.32 13.6 million hectares of rubber planted globally.0 1.000 hectares) % of Total Chapter 2 Page 10 .8 48.0 2083.9 128.83 1.13 Area (1.2 displays areas under natural rubber plantation for the year 2004.61 1. Currently there are three countries that are the key supply sources of natural rubber: Thailand.38 1. Table 2.0 600.50 0.94 22. Table 2.43 6. Sri Lanka and newcomers such as Vietnam.03 0.9 104.

22% and 14% respectively for a total of 71% of total world production.2. Average yield is around 250 kilogram per rai (1. 6%.12 1.2. Production Methods 2. They can then be tapped for latex until they reach 30 years of age. China.2 (continued) Ghana Gabon Total area South America Brazil Guatemala Mexico Total area Total World Area 117. To collect latex.0 467. and soil and terrain requirements.700 hectares (93%) of world natural rubber planting area followed by Africa (5%) and South America (2%).3 44.2.2 173 9335. Indonesia. Latex yield depends on the type of tree clone and environmental conditions. workers tap the Hevea tree by shaving off a slanted strip of bark halfway Chapter 2 Page 11 .18 0.2. productive years. sharing 35%.85 100% 16.5 11. Clone properties determine average yields. 2.48 0.Table 2.01 Source: Compiled from International Rubber Study Bulletins. Thailand and Malaysia are the three largest producing countries. In 2004 Asia had 8.9 0. resistance to diseases and pests. and 5% respectively for a total of 17%.2.14 5.2.26 0. India and Vietnam form the second largest group of countries producing 6%. 2. wind susceptibility. Natural Rubber Plantation In plantations a Hevea tree requires five to seven years to mature.9 13.600 kilogram per hectare).Tapping Natural Rubber Latex Latex from Hevea trees accumulates in small vessels that spiral around trunks. The clone that is mostly planted in Thailand is RRIM600.6 1.694.2. pre-mature periods before tapping. The Rubber Research Institute of Thailand (RRIT) is actively involved in research to develop more productive clones.1.

It takes a few hours for the flowing latex to dry up from each cut. which uses needles to tap instead of cutting the trees and technologies to nourish the tree in order to produce more latex per tapping. It is then blended with water to maintain a uniform standard of rubber element which is 30%-40%. All are produced from fresh latex which is tapped daily.around the tree. Production quantity depends on the area cultivated. Some latex is processed into a variety of products. The smoked rubber sheets are collected a week later and packed into bales of different grades from grade 1 (RSS1) to grade 5 (RSS5). Concentrated latex accounts for about 10% of rubber production. At the factories latex is sieved to remove dirt. 2. Rubber particles bunch together and the coagulated rubber is then rolled within 18 hours. When the cut is about 30 centimetres above the ground. block rubber and concentrated liquid rubber.4 kilograms of latex produces 0. they tap the other side of the tree leaving the first side to renew. except in rainy days.3 Producing Rubber Stocks There are a variety of natural rubber products at this stage. In troubled economic times. puncture tapping. Preservative chemicals such as ammonia and formaldehyde are added to the tapped latex in order to keep it from crumbing before being gathered and transported to manufacturing factories. depending on drying condition and pigments added.2. It is used in producing dipped rubber products including elastic fabric. The rubber is then left to dry and is smoked in smoking houses. to squeeze out water. The rest of the latex is transformed into other kinds of intermediate rubber stocks such as rubber sheets and block rubber. Major variations are ribbed-smoked sheets.2. There are attempts to develop tapping technology in order to save labour cost including. foams. Rubber sheets are used mostly in the tire Chapter 2 Page 12 . Concentrated liquid latex has about 60% of natural rubber substances. and growing nurseries. Every 1. rubber thread. To produce rubber sheets. latex is diluted and then acid is added.5 kilogram of rubber. Some latex is transformed to concentrated latex at this stage. Output per hectare depends on premature periods. Workers repeat tapping every other day.80 centimetres deep. adhesives and coating. about 0. clone qualities. which is used in footwear industry. such as pale crepe rubber. farmers tap more intensely and hence cause damage to longterm productivity. shaving the bark below the previous cut.

Output dropped during the world wars but has continued growing to date. Block rubber is made from mixing rubber sheets and coagulated rubber and is also mostly used in the tire industry. Indonesia produced 620. Indonesia. These are called un-smoked sheets. World production was 45.industry.742. Natural rubber has been produced for over a hundred years.000 tons (8%) in 1960 but it gradually expanded to 3 million tons by 2004 and its market share increased from 8% to 34%. Chapter 2 Page 13 . The process is to mix fresh latex with certain chemicals. The three country market share for these major producers has varied from 76% in 1960 to 79% in 1980 and 71% in 2004. Thailand has both rubber sheets and block rubber. Block rubber is used in tire production. Malaysia produced 764. as discussed in the next section. Its market share was 40% in 1970 but it dropped to 14% in 2004. The production and market share for Thailand. Most of this production is consumed in the tire sector. Some natural rubber farmers transform fresh latex into un-smoked sheets before selling to factories.000 metric tons in 2004. Block rubbers are produced from mixing certain rubber outputs such as cup lump (rubbers that are left in utensils that contain fresh latex) and ribbed-smoked rubber.000 tons in 1960 and its current output fluctuates around one million tons. Block rubber comprises different grades.000 tons in 1960 it grew to 2 million tons in 2004 with a corresponding market share decrease from 30% to 23%. Indonesia and Malaysia produce block rubber from most of the latex harvested. Thailand‟s production was only 171. Block rubbers are called Thai Standard Rubber (TSR) in Thailand. Sheet rubber and block rubber are the most consumed types. Hence world tire manufacturers have a significant impact on the natural rubber industry in these countries.3 summarizes world natural rubber production from 1960 to 2004. which help the latex to dry and form into sheets. Malaysia Standard Rubber (MSR) in Malaysia and Indonesia Standard Rubber (ISR) in Indonesia.000 metric tons in 1900 and increased to 8. and Malaysia are also illustrated. Table 2. Un-smoked sheets are delivered to rubber smoking factories which turn them into smoked sheets. mostly in the USA.

rubber inputs are treated through the processes of mastication.0 (25. At the stage of vulcanization.0 (37. The top Chapter 2 Page 14 .0 (26.3 (13.5) 1.2.9) 2.120 6.1.0 (8.1 (22.1 it can be seen that latex when transformed to sheet rubber and block rubber.Table 2.730 8. As displayed in Figure 2. Indonesia and Malaysia (1960-2004) (1. does not dissolve in water and recoils when stretched.530.0 (24.8) 1.6) 1.4) 1. When vulcanized. vulcanization and moulding.4) 287.1) 501.77) (70.620 Thailand 171.0 (39.7) 1.3 Natural Rubber Production in Thailand.3) Indonesia 620.4 (34.0 (13. They help the product last longer when exposed to sun light and high or low temperature. Adding hydrogen peroxide helps extract water and oxygen causes air bubbles.0) 1.040 3. Vulcanization is a process to put sulphur into natural rubber and heat for a specific time. A dipping method is used to produce a thin sheet for covering glass.0 (30. 2.25) (74. rubber can be used to produce a variety of products.2.0 (9.275.23) (75.2 (23.5) 1.346. Specific machines are used for each type of rubber formation.95) (71.168.959.140 3. an extruder is used to produce tube and rubber foams are made by adding air to latex before vulcanization.3) 2.501.262.0 (40.6) 3 Countries (76.269. rubber can be put into moulds for specific end products. Some chemicals act as age-resistors and anti-degradants.3) Malaysia 764.9) 2. mosaic or metal utensils. It helps polymers of rubber molecules transform into a substance that is stronger. From Figure 2.006.4 (34. The mastication process cuts natural rubber into pieces and adds particular chemicals such as aniline and zinc oxide.4 Producing Rubber Products To produce rubber products.0 (26. For example a calender is used to form rubber into sheets.0) 1. more elastic.000 tons (% share)) Year 1960 1970 1980 1990 2000 2004 World 2.7 (13.291. can be used for intermediate products such as reclaimed rubber and compound rubber.2) 927.3 Uses of Natural Rubber Natural rubber is used to produce a variety of products.3 (24. which help to accelerate vulcanization.020.4) 815.850 5.51) (79.16) Source: Compiled from IRSG (various copies) 2.

tire flaps.volume item is vehicle tires. cord and inner tubes. retreads.4. Another group of uses is products produced from concentrated rubber. and other miscellaneous products. Thailand produces and exports these products. Other items are automotive accessories. Chapter 2 Page 15 . The relative values of the different rubber products are illustrated in Table 2. which includes pneumatic tires. construction products. solid tires. They are articles of apparel and clothing accessories including gloves. tire treads. mittens and mitts and hygienic or pharmaceutical articles.

Hygienic or pharmaceut ical articles. Un-vulcanized Rubber Goods 1. Vulcanized Rubber Goods New pneumatic tires. 2. 2. Miscellaneous items Chapter 2 Page 16 . (14%) Concentrated Latex (86%) Processed Rubber Smoked Sheet Rubber Block Rubber Crepe Rubber Air-Dried Rubber Cup Lump Miscellaneous Types of Rubber Dipped Rubber Goods 1. mittens and mitts. Other articles of consumer products Rubber wood 1. solid or cushion tires.Figure 2. compound rubber and other unvulcanized rubber. Wood toys 3. cord. waste or parings and scrap. 3. Reclaimed rubber. retreaded or used pneumatic tires. pipes and hoses Construction Industry: conveyor or transmission belts Miscellaneous Industries: belting. ebonite. Para wood furniture 2.1 Uses of Natural Rubber Natural Rubber Trees Fresh Latex . hard rubber for example. Articles of apparel and clothing accessories including gloves. inner tubes Automotive Industry : tubes. tire treads and tire flaps.

27 40. joints. for all purposes.10 40.16 40. 2004) HSCODE 40.07 40.12 40. of vulcanised rubber other than hard rubber Tubes. Finally a by-product use of natural rubber is the rubber wood. with or without their fittings (for example. ebonite) in all forms. According to Table 2. sheets.32 2. pipes and hoses.17 Total 271 6 1. solid or cushion tires.08 Description Vulcanised rubber thread and cord Plates. of vulcanised rubber other than hard rubber Other articles of vulcanised rubber other than hard rubber Hard rubber (for example. rods and profile shapes. strip.Table 2. elbows. articles of hard rubber $USmill 101 16 % 5.88 40. Values are transformed from baht at 40.11 40.13 23 615 24 38 1. of rubber Inner tubes.41 40.813 million for Thailand.09 72 3.14 150 8.4.92 1.95 0. the rubber trees have to be re-planted. of vulcanised rubber New pneumatic tires Retreaded or used pneumatic tires of rubber. of rubber Hygienic or pharmaceutical articles (including teats) of vulcanised rubber other than hard rubber. mittens and mitts).813 14.27 33. After some 30 years of latex yielding periods. with or without fittings of hard rubber Articles of apparel and clothing accessories (including gloves.10 40.4 Thai Natural Rubber Products Exports (fob Value. The replaced trees can be processed into rubber wood which is highly demanded by the furniture industry as well as the toy industry.22 baht/$US.11) are the top user of rubber consumer products. flanges) Conveyor or transmission belts or belting.15 497 27. natural rubber products yield export income of $US 1. Pneumatic tires (item 40. tire treads and tire flaps. of vulcanised rubber other than hard rubber. including waste and scrap. $US Million. Chapter 2 Page 17 .33 100% Source: The Customs Department (2006).97 40.57 0.

weighs about 21 pounds. 8 Synthetic rubber can be used as substitute for natural rubber if pricing is advantageous.2. However. Natural rubber consumption had fallen from 70% of total rubber consumption in 1950 to only 30 % in 1980.g. A typical all season passenger tire (e. Hence it meets special purpose needs in general consumption of rubber. Chapter 2 Page 18 . However. rely heavily on natural rubber. which have to carry a lot of weight. Aircraft tires also need high quality natural rubber. Truck tires. 8 IRSG 142/AE. they still need an adequate quantity of natural rubber as a basic ingredient. The competing synthetic rubber has specific qualities such as resistance to heat.3. Synthetic rubber has endured a competing role with natural rubber since its invention. It has the following approximate ingredients as displayed in Table 2. Although technology advancement and the attempts to invent substitute materials for natural rubber have introduced various classes of automobile and motor cycle tires. Thus natural rubber is important for tire making and the tire sector is important for natural rubber since it is a major rubber consuming industry.P195/75R14) which is the most popular size.5. Natural rubber has done well in the tire sector due of its technical qualities such as abrasiveness and elasticity. ozone and oil.1 Uses of Natural and Synthetic Rubber in Tire Sector One of the most discussed issues in the natural rubber industry is the substitution between natural rubber and synthetic rubber. it stopped decreasing following the introduction of radial tires in 1970s which helped to boost natural rubber consumption. technology is still a limiting factor for substitution. In the tire industry the two inputs are closely related.

62% 23. e. resins 5 lbs of 8 types of carbon black 3 lbs of 40 different kinds of chemicals.Table 2. The name is a shortened form of "aromatic polyamide". 6 lbs of 5 types of SR 19.31% Processing aids The natural rubber/synthetic rubber share depends on tire types as follows. peptizers . waxes. softeners 10 Adhesion promoters Curatives 14. Natural Rubber /Synthetic Rubber Shares and Tire Types Tire Types Race tire Passenger tire Light truck tire Off-highway tires (giant/earthmover) NR / SR shares 35% / 65% 45% / 55% 50% / 50% 80% / 20% Source: compiled from http://www. They are used in aerospace and military applications.ca/tire_school/ingredients. etc. resins on fabrics Cure accelerators.goodyear. rayon.81% Reinforcing chemicals Anti-degradants Carbon black. for ballistic rated body armor fabric and as an asbestos substitute. pigments.g.. fibre glass or polyester (usually a combination.26% Rubber 4 lbs of 8 types of NR +. oils.html June 17. sulphur Oils. polyester fabric in the body piles and steel fabric in the belts of most radial passenger tires. brass on wire. 1 lb of polyester and nylon. Natural rubber (NR) and Synthetic rubber (SR) 9 Weight 1 lb of steel cord for belt. Chapter 2 Page 19 . They are fibers in which the chain molecules are highly oriented along the fiber axis so the strength of the chemical bond can be exploited. Antioxidants / ozonants paraffin waxes Cobalt salts. 2006 9 Aramid fibers are a class of heat-resistant and strong synthetic fibers.5 Tire Manufacture Ingredients Ingredient Fabric Steel. 1 lb of steel bead wire % 14. tackifiers. aramid fibre.05% + 28. silica. 10 These products are used as processing aids/viscosity reducers for natural and synthetic rubbers.57% 47. nylon. activators.

Table 2. The average price is 2136.350 5.800 11.3.753 NR / SR 69% 43% 54% 78% 94% 100% % % 26% 25% 28% 29% 27% 21% 35% 32% 22% 20% 19% 15% Source: Compiled from International Rubber Study Group 2. Japan and Germany.5 ringgit ($US 771. dropped to 43% in 1970 and then rose to 100% in 2004. By the year 2004 the consumption had developed to 1.484 1. as well as being used for some tire manufacturing within the exporting countries. France Japan and Germany.4 Natural Rubber Market and Prices Natural rubber data used in the studied period (1960 -2000) are mostly rubber sheets whose price per Malaysian ringgit of grade 1 product (RSS1) was the major guiding price. The top four tire producing countries in the years 1960 .2.751 and 1.041 1.2 Natural Rubber and the Tire Industry Natural rubber products are exported from producing countries to tire producing countries. The percentage of natural rubber to synthetic rubber use was 69% in 1960. France.2000 are US. Japan & Germany Tire Sectors (1960-2004) (1.760 5. The quantity of natural and synthetic rubber used in these four countries was 559 thousand tons and 816 thousand tons respectively in 1960.784 1.30) / ton with a range 935.904 2.6 summarizes the rubber used in tire sectors of US.000 tons) Natural Rubber (NR) NR World 1960 1970 1980 1990 2000 2004 2.00 to Chapter 2 Page 20 .035 3.710 10.800 SR in US FR JA GR 816 1.320 8.753 thousand tons of natural rubber and synthetic rubber respectively.200 7.280 NR in US FR JA GR 559 764 1. Table 2.625 8.938 1.120 3. France.6 Natural and Synthetic Rubber Used in US.785 9.751 Synthetic Rubber (SR) SR World 2.106 1.973 1.

Chapter 2 Page 21 . The markets also provide trading facilities such as warehouses and information. Prices in central markets are more advantageous to natural rubber sellers 11 Average exchange rate for 1960-2000 was 2.334.0 Year 1960 1970 1980 1990 2000 2004 Source: International Rubber Study Group 2. The products are then traded to processing manufacturers and are transformed to concentrated latex. block rubber and concentrated latex prices.77 ringgit per $US with a range of 2.624.90.123. There were 321 exporters in the year 2003. Table 2.977. unsmoked sheet.1 Thai Domestic Natural Rubber Prices Recent prices for natural rubber in Thailand are classified into prices for fresh latex.956. ribbed smoked sheets. Major types are the smoked sheets (RSS3) and grade 20 technically specified rubber (TSR20).7 and Figure 2.0 .244.4.0 3.383.2 display the natural rubber prices during the studied period.3. from small regional level to districts to provinces including farmer cooperatives. Central markets are set up by the government to support natural rubber prices via market location.20 to 3. 11 Table 2.7 Natural Rubber Price Figure 2.0 1.0 2. Domestic consumption is approaching 15%. Some of the processing firms are exporters.0 4.2 Natural Rubber Price (RSS1) (RSS1) (1960-2004) (Malaysian ringgit/metric tons) Natural Rubber Prices (RSS1) 2.0 2. Dealers in these markets buy latex and unsmoked sheets from small holding farmers. There are over two thousand local markets. smoked sheets and technically specified rubber (block rubber).

and concentrated latex prices coded in fob Bangkok.05 1.770 72. 2007). Both smoked sheet and block rubber are traded in AFET (The Rubber Research Institute of Thailand.420 22.100 18.230 71. The generally recognized and available prices are sheet rubber RSS3 prices.250 39. block rubber TSR20 prices.03 1. The export prices of ribbed smoked sheet on average is 20% (15%-31%) higher than Chapter 2 Page 22 .870 38.02 1.350 72.11 Source: Compiled from The Rubber Research Institute of Thailand and The Office of Rubber Replanting Aid Fund The futures market in Thailand is The Agricultural Future Exchange of Thailand (AFET). A sample of average yearly prices for the years 1998 – 2007 show how central market auction trading has helped boost local market prices by an average of 5% (See Table 2.04 1.07 1.250 1.150 40.8).680 19.550 22.140 (1) / (2) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Average Min Max 23.11 1.860 44. It started trading in 2004.540 69.900 53.660 55. At the export level rubber prices are delivered in accordance with their exporting country ports.610 19.360 21.03 1.02 1.530 29.960 70.770 23.05 1.550 70.than local markets but there are only a small number of them currently although more central markets are to be established.140 40.450 27.05 1.084 18.03 1.05 1. Table 2.170 46.8 Natural Rubber Local Market Prices and Central Market Prices (1998-2007) (Baht/ ton) Year (1) USS3 Local Market (2) USS3 Central Market (Had Yai) 25.

18 1.880 68.110 41.18 1.25 1.500 26.09 1.14 1.12 1.05 1.010 23.330 32.05 1.800 18.12 1.660 25.220 18.22 1.650 51.010 38.700 60.310 20.10 1.000 68. as displayed in Table 2.15 1.3.08 1.510 67.06 1.12 1.960 70.210 74.158 23.000 22. Table 2.9 and Figure 2.500 79.930 43.070 74.680 19.210 (4) RSS3 fob BKK (4)/(1) (4)/(2) (4)/(3) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Average Min Max 24.860 78.09 1.15 1.760 26.250 39. and 10% (5%-18%) higher than domestic ribbed smoked sheets.360 21.27 1.430 23.18 1.15 1.310 37.110 41.900 53.450 27.550 70.350 23.870 38.15 1.470 45.3 Thai Natural Rubber Prices Local market grade 3 Unsmoked sheets (U3L) Central Market grade 3 smoked sheets (U3C) Export fob Bangkok grade 3 rib-smoked sheets (R3BK) Chapter 2 Page 23 .756 19.17 1.100 18.14 1.18 Source: Compiled from The Rubber Research Institute of Thailand and The Office of Rubber Replanting Aid Fund Figure 2.170 79.19 1.860 44.280 30.05 1.08 1.250 29.9 Thai Domestic Natural Rubber Prices (1998-2007) (Baht/ton) Baht/ton Year (1) Fresh Latex (2) USS3 Local Market (3) RSS3 Central Market (Had Yai) 25.890 43.31 1.730 48. 17% (12%-27%) higher than un-smoked sheets.090 57.850 74.18 1.27 1.550 22.084 18.14 1.31 1.860 1.540 69.15 1.12 1.18 1.20 1.27 1.fresh latex.19 1.850 23.18 1.690 52.

2. The record price here was derived from the May – December average one month forward price 49.26 538.06 950.46 614.62 621.39 850.00 651.76 1.57 993.05 599.47 # 1.39 1113.207.08 1.00 985.54 611.2 Thai Natural Rubber Export Prices The RSS3 are coded fob Bangkok prices.26 698.00 1.121.61 1. Most well-known prices are in TOCOM (The Tokyo Commodity Exchange). which is a competing input in tire manufacturing (United Nations Conference on Trade and Development.091.10 depicts the relevant price series in current world natural rubber markets.43 1157.61 598.99 469.00 589.420. The Rubber Research Institute of Thailand.22 baht / $US.54 RSS3 fob BKK RSS3 TOCOM RSS3 AFET TSR20 fob BKK TSR20 SICOM TSR20 CIF NY 1379. SICOM (Singapore Commodity Exchange) and the newly opened AFET (The Agricultural Futures Exchange of Chapter 2 Page 24 .29 709.00 857. The Office of Rubber Replanting Aid Fund and The Agricultural Futures Exchange of Thailand. In addition.352.60 1052.64 752.18 570. natural rubber is also coded in futures markets.23 1.19 1.53 1. Also the sharp rise in oil prices since 2001has raised the relative price of synthetic rubber to natural rubber.The sharp rise in natural rubber prices from 2001 is considered to be due to economic growth especially in China.10 Thai Natural Rubber Export Market Prices (1996-2004) ($US/ton) Concentrated LATEX fob BKK 1996 1997 1998 1999 2000 2001 2002 2003 2004 1.07 952.31 549.06 1285.106.18 795.98 613.79 1.82 772.06 1. tires and natural rubber input respectively.00 703.04 1420. Table 2.00 776.72 525.04 664.11 765.60 baht/kilogram at the exchange rate of 40.64 696.05 572.51 640. causing increases in demand for vehicles.195.06 Source: Compiled from The International Rubber Study.05 515.64 964.83 754.224.136. Table 2. # The Agricultural Futures Exchange of Thailand started its operation in 2004.79 629.4.012.37 673. The escalation in oil prices also led to price rises in commodities including natural rubber.321. 2009).94 726.005.00 1.

When simultaneously considered with the concentrated market structure as described in Section 2.6. South Asia. some potential for buyer market power to exist in the natural rubber industry is identified. natural rubber industry has social and political consequences (Budiman. Indonesia and Malaysia and consuming countries like the US. In Indonesia. prices in central markets are related to fob prices. packers and latex producers. Japan and Chapter 2 Page 25 . 2002). In Malaysia. In India. official prices are a little bit higher than international prices (Thevar. The importance of the small holder is increasing. SICOM and AFET also have effects on overall market prices. Prices from future markets. namely TOCOM. On the consuming country side the RSS3 prices are related to Japan imports. Natural rubber is also significant as a social commodity. Its domestic consumption in producing countries is minimal. Hence the market structure of natural rubber supplies has developed up to the global level as an upstream industry of many elastomer consumer products led by the tire industry and automobile accessories. TSR20 prices can be found cif in New York as well as European country ports.5 and Section 2. This section has demonstrated the price structure of natural rubber. France. prices follow SICOM prices and are discounted by a little. 2. prices announced by the country‟s Rubber Board are based on reports from a panel of dealers. The supply chain starts from rubber tree plantation mostly dominated by small holding farmers. Major users are found in the world automotive industry in industrialized countries including their multi-national enterprises in various markets around the world. South America and Africa. Hence the industry is important to the producing countries and there is a concern over the economic efficiency of its trading between exporting countries like Thailand.5 Thai Natural Rubber Market Structure Natural rubber has developed from an indigenous product of the Amazon basin to a global level useful commodity produced from more regions such as the South East Asia. Therefore. 2004). Consuming country market prices are mostly from New York. In Thailand.9 and Figure 2. The high price mark-up (Table 2.3) is evident.4. 2.3 Other Export Market Prices In global export markets each producing country announces market prices. It involves more than thirty million farmers worldwide producing up to 80 % of world natural rubber supply.Thailand).

088. Thai export income from natural rubber products comprised income from the group of vulcanized rubber goods described in Figure 2. In 2005 there were about 1. Natural rubber annual yield is $US 4. natural rubber production has been growing and Thailand has become the top producing country now.5 billion in 2000 and recovered to $US 3. There were 1. The number of employees in government institutions related to natural rubber is 5. it is considered essential to have fair natural rubber prices.47% in 1995 to 2.4 billion by the year 2004.241. It dropped to $US 1.1. technically specified rubber (40%). technically specified (block) rubber (40%) and concentrated rubber (22%). during recent decades there have been sustainability problems with low natural rubber prices and hence low income for natural rubber farmers.005 tons. In the past decade they generated 33% (1995) to 53% (2000) of natural rubber income despite the fact that these rubber products comprise only 10-11% of total natural rubber production.5 kilogram /hectare. This is an issue that is criticized frequently and there are attempts to boost value added to natural rubber rather than merely exporting it as commodity.43%. concentrated latex (24%) and other types. Average growth was only 1. Three major stocks are smoked sheets (31%). The quantity of natural rubber consumed in 12 At the price of 1. If not for the booming years of 2003 and 2004.000 natural rubber farms with approximately six million rubber farmers. Instead.588 million hectares are productive areas.10% in 2004. Natural rubber is one of Thailand‟s relevant export earning crops in its agricultural sector.000 per family12.Germany. It can be seen that the increasing price in 2003 and 2004 helped to increase natural rubber income significantly from 1. In Thailand. In 2004 crude natural rubber export income comprised sheet rubber (36%). the natural rubber industry does not reflect a corresponding outcome. The critical evidence is that despite the growth in the automobile industry and tire industry. Average output was 1. In the year 2007 production of natural rubber reached 3. The natural rubber industry creates jobs and reduces labour migration from provinces to cities. Therefore. Natural rubber export earnings in Thailand was $US2. the market structure of the natural rubber industry in Thailand is not only on the firm and industry level but being extended to a country and global level.056. the figure would be even less.988 million hectares that are cultivated with natural rubber trees and 1.812.3 billion in 1995. As a producing and exporting country for natural rubber. Although natural rubber prices have recovered due to some positive factors mainly led by the economic growth in emerging regions many involved parties are still cautious about its sustainability.500 $US/metric ton Chapter 2 Page 26 .

manufacturing.1 Primary Producers Market Rubber farmers are the first unit in the supply chain.a state enterprise first created for the purposes of natural rubber planting.5. gloves (19%). producing countries such as Thailand have to provide price support and plantation subsidies. 14 13 14 An estate is defined to be a plantation if it is more than 40 hectares. Like other farmers of agricultural products. the rest is used in other miscellaneous products (Rubber Research Institute. Chapter 2 Page 27 .a state enterprise established to aid natural rubber tree replanting including supporting farmer‟s natural rubber plantation. natural rubber prices fluctuate but generally have followed a downward trend in real terms.90 baht / kilogram: 5% is provided for research and development administration.5 kilograms. processing and marketing including researching and promoting farmers (The Rubber Estate Organization.natural rubber consumer products are distributed across vehicle tires (42%). 2. rubber brands (9%).established mainly for technological research and development and reporting on the results for natural rubber planting.  The Rubber Research Institute of Thailand . market distribution and farmer organization promoting (The Office of the Rubber Replanting Aid Fund. Exporters have to pay taxes to subsidize plantations. Export tax (cess) is 0. Due to the small size of producing units and the homogeneity of the product. 2008).083. Mature area is 76%. marketing and liaison with foreign institutions of natural rubber (The Rubber Research Institute of Thailand. 10% for operation costs of planting aids and about 85% for planting aid especially replanting specific natural rubber trees.  The Office of the Rubber Replanting Aid Fund .812. processing. The average yield per hectare is 1. 2008). natural rubber farmers are not sufficiently well remunerated by their market price. elastic products (9%). Natural rubber also has limited marketing channels due to relatively small number of processors and exporters. Major institutes administering the Thai natural rubber industry are:  The Rubber Estate Organization . Therefore. The Thai natural rubber industry comprises of a lot of small farmers with a homogenous product. 2007).4 hectares in Estates13 (which is 15 % of the total) with the rest in small holdings. 2008). Total planting area is 2.

The next unit in the supply chain is the distributor channel. In 2000 exporter numbers had increased and the CR4 ratio dropped to 40%. 2. If the value is below 1. The first level is the local or village level. which is divided into 3 levels. which is un-smoked rubber sheets from small farmers and sell to secondary markets. Consequently this is a potential area where oligopsony power could develop. The concentration ratios inform a rather high concentration degree of export firms during part of the period. 1994 pp.Hirschmann Index found in the year 2000 as displayed in Table 2. Chapter 2 Page 28 .800 (Ferguson & Ferguson.41).2 Export Market Table 2.6). Table 2.12 15 15 This HHI approach is used by the US Department of Justice for its merger guidelines (section 8.000 the market is regarded as not concentrated. Exporters sometime buy from small farmers too.11 displays concentration in export firms. There are five or six major firms who handle the bulk of exports. The structure of exporting firms can be assessed from the four-firm ratio and the Herfindahl. squaring the percentage share of the market in deriving the indices.11 Concentration in Rubber Exporters by Number of Firms (1955-2000) Year Top 4 firms % share Total number of exporters 1955 1960 1965 1970 1972 2000 68 21 55 25 74 16 75 20 78 18 40 318 Source: Columns 1 to 5 are obtained from Jumpasut (1981).5. From 1955 to 1972 there were approximately 20 exporters and market concentration (CR4 ratio) increased as high as 78%. Last column 2000 is compiled from The Rubber Research Institute (2001) and The Rubber International (2001). Next level is exporters most of which manufacture the smoked rubber sheets and block rubbers and export them. The second market level is at the town level where dealers buy both smoked and un-smoked rubber. At this level mobile dealers buy crude rubber. The market is regarded as highly concentrated if the value is above 1.

18 53.12 the four firm concentration ration in Thai natural rubber exporting firms is only 40. 30 June 2001 Note: CR4 =  (percent market share of 4 firms). This does not indicate high concentration.14 57. natural rubber trading has increasing concentration throughout the channels from farmer‟s fresh latex to manufacturer firms‟ processed outputs. Ltd. The concentration trend is transferred to the global market level as natural rubber exports are managed by a few exporting firms. Southland Resource Co.17 7. However.. including their affiliates across countries. Ltd. Chapter 2 Page 29 . Ltd.12 Natural Rubber Exporter Concentration by Company Sale Quantity (2000) (Top Ten Thai Natural Rubber Exporters) Metric tons % Market share Cumulative % market share 15..54 33.4 Source: The Rubber International volume 3. HHI =  (% market share)2.. Ltd. Anyhow products from thousands of latex producers have flowed through dealers and are concentrated in only a few hundred of exporting firms.03 63. among which 40% of the product is managed by only four firms.. Southland Rubber Co. Ltd.88 5.4. no. firm names might not be a valid distribution unit here.30 47. some studies of the Thai natural rubber industry indicate high concentration and complicated links (e.14 9. Therefore. 1992). According to Table 2. cross share holding among firms). Thai Tech Rubber Co.57 61. Therefore.14 24. Ltd..3 HHI 570.166 15.Table 2.77 2. Ltd. Ltd.66 CR4 40.62 6. Ltd.68 40. Tong Thai Rubber Co. Vong Bandit Co..43 3.46 2. B.3%.80 66. The links are also country border crossing among producer countries in the region (Songprasert. and the HHI is 570.96 4.34 100% Teck Bee Hang Co...g. Sang Tong Rubber Co.51 32. Others Total 328 203 177 165 149 129 96 75 60 55 729 2.37 8.. Right Rubber Co. Ltd Sri Trang Agro-Industry Public Co. Thai Hua Rubber Public Co.

Ltd. Inoue Rubber Company has majority ownership from its parent Chapter 2 Page 30 .1 498. Siam Tire Prapadaeng Co.27 100% 48.21 8. Ltd. Ltd.21 18.192.0 963. 2006). Ltd.6 Million $US 203.72 9.447.576. Thai Bridgestone Co.29 % share Cumulative % market share 48.2.7.54 5. Otani Tire Co.84 38.800.90 84.60 36.03 23.8 1.00 28. CR4 is 72.50 4.44 89.3 Tire Manufacturing Market The motor vehicle tire industry is the most important natural rubber consumer industry and hence is closely linked to sustainability and welfare issues in the natural rubber industry in Thailand.02 11.528. HHI 2. Ltd.13 Thailand Tire Manufactures Capital Concentration (2003)# Capital investment Million baht Siam Michelin Co. Inoue Rubber (Thailand) Co. the dominance of the major multinational tire manufacturers extends into markets such as Thailand. V Rubber Co. and Thai Bridgestone is 60% owned by the Japanese Bridgestone company. Lion Tires (Thailand) Co.49 baht/$US However. Table 2.8 970.16 5.7 1.93 65.3 1.13. Ltd is the largest firm representing almost half of the market capitalisation of tire manufacturers.38 23. Ltd.0 784.520.5.662.21 56. These manufacturers have also set up subsidiary plants in natural rubber producing countries such as Thailand.94 94. Ltd.4 Source: compiled from Export Import Bank of Thailand (2006) # Data are for the year 2003.4 surpassing the guideline of 1. Techno Asia Tire Co.4 1. Ltd.85 2. Exchange rate was 41.48 2. Goodyear (Thailand) is 60% owned by the US Goodyear company.74 CR4 72.9 479. Ltd. Not all tire manufacturing is undertaken in the home countries of the major tire manufacturers.42 97. Ltd.6 17. Total 8.81 6.75 26. Goodyear (Thailand) Co. From Table 2.56 422.662.74 78.7 % and HHI is 2.00 6.93 72.90 12. SR Tire Co. Siam Michelin Co. Siam Michelin and Siam Tire Prapadaeng are majority owned subsidiaries of Michelin Group of France. An examination of tire manufacturing firms in Thailand reveals a mixture of both local and foreign owned companies (Export Import Bank of Thailand.079.

Chapter 2 Page 31 . 2.14 demonstrates similar situations with the structure of natural rubber farming in Thailand Indonesia and Malaysia. energy and public service 4% and other inputs 16%. depreciation (8%). Natural rubber is an important component of the raw materials. Lion Tires is a specialist producer of bicycle tubes and tires and Inoue Rubber is a specialist producer of motorcycle tires and tubes. Otani Tire is a 100% Thai owned company and is a specialist producer of large and heavy duty commercial tires.7 million tons in 2007. Output dropped during the two World Wars but then continued growing.000 tons 6000 4000 2000 0 1880 1900 1920 1940 1960 1980 2000 2020 World Rubber Production Table 2. world natural rubber production averaged 62.4 displays global natural rubber production quantity.4 World Natural Rubber Production (1900-2004) World Rubber Production 10000 8000 1.6. Figure 2. Production costs for vehicle tire comprises raw materials (60%).1 World Primary Production Figure 2. 2. wages (12%).800 tons for the time period under study and increased to 9.6 Global Level Natural Rubber Market Structure At the global level.company incorporated in Japan and Lion Tires is a subsidiary of the Vittoria Group of Italy.

79 1.4 80% 1.300.769.1 679.11 30.5 10% Thailand 2.14 0.80 94.6. Malaysia has the highest proportion of small holding shares and almost all areas are mature.2 53. reflecting its being the earlier producing country.11 72.69 90. 2004) Country Total Estates Small Holding Mature area Yield / hectare (kilogram) 2.9 351.282.90 5. Clearly the farming stage is dominated by small holdings: above 85% of the total in each country.0 111.2 World Export Market The world net imports market structure for the year 2004 is displayed in Table 2.5 90% 76% 839.16 83.Table 2.5 Malaysia 1.5 71.4 90% 1.06 88.883.0 93% 1.0 136.0 15% 200.875.000 tons % Market share Cumulative % market share 42.65 Thailand Indonesia Malaysia Vietnam Cote D Ivoire Liberia India Cameroon 2.155.15 World Net Exports Market Structure (2004) Natural Rubber Net Exports 2004 1.627.05 10.4 1.0 493.262.0 Indonesia 3.0 42.18 1.0 Source: compiled from The Rubber Study Group and The Rubber Research Institute of Thailand. Mature areas account for over 75% in all countries.000 hectares.812.85 Chapter 2 Page 32 . Table 2.0 85% 1.66 93.87 92.15. 2.63 2. Thailand‟s farms have the highest average yield followed by Indonesia and Malaysia.083.14 Small Holdings and Estate Areas under Rubber Plantation (1.0 10% 126.

It was not until the 1990s that Thailand had diversified non-latex natural rubber exports from smoked sheets into both smoked sheets and block rubber. since each producer country‟s supply has a degree of specialized product.15.838. Major exporting countries were Thailand.3 Natural Rubber Export Country and Buying Country Concentration When considered from the buyer country side. total net exports in the world market for natural rubber was 1.18 2.5 24. Indonesia for block rubber and Malaysia for concentrated latex. Chapter 2 Page 33 . Indonesia and Malaysia results is as follows. 1990).9 40.240.3 indicating market concentration.38 0. Since 2000 there have been significant emerging supplying countries such as Vietnam.838.Table 2.65 0.49 0.15 (continue) Guatemala Philippines Sri Lanka Myanmar Nigeria Cambodia Other Countries Total 52.83 million tons in 1950 and increased to 6.0 11. The outcomes indicate CR4 = 88.34 97. The world level overall export industry concentration can be viewed from the selling countries concentration in world natural rubber markets as displayed in Table 2. Cambodia and Myanmar.6 30. This poses the possibility that concentration in the exporting country suppliers of natural rubber may offset the concentration in the buyers‟ side of the market that is considered below (Scherer & Ross. such as Thailand for ribbed smoked sheets.3 Source: Compiled from The Association of Natural Rubber Producing Countries.72 97.50 96.7.9 43.6.0 6. and Malaysia.7% and HHI = 2.0 0. 2. the effects of concentration could be partly understated. concentration for each particular exporting country namely Thailand.90 100% CR4 88.0 132.70 0.85 0. Laos.85 97.20 96. At the global level. However.12 95. HHI 2. Indonesia.24 million tons in 2004.

256 3.53 6.6.3%). Asia Pacific and Europe. Indonesia natural rubber export market structure is displayed in Table 2.25 5.9%).02 78. The CR4 during 1975-2000 for Indonesia was 81.58 2.5.939.51 2. Singapore and EU.39 50.3%). The HHI was 2. Singapore (22. HHI 1.2.2 Indonesia Indonesia export natural rubber to US.567 1.08 12.47 62.3.6.16 Gross Exports from Thailand to Natural Rubber Consuming Countries (1975 – 2000) (mill tons) % Market share 38.1%).42 1.344 3. Overall outcome indicates buyer concentration. well over the benchmark level of 1800. Table 2. Table 2. During 1975-2000 Thai gross natural rubber exports were dominated by Japan (38. France (12. The CR4 is 72.494.0.4%).55 9.1%.36 88.27 83. Chapter 2 Page 34 .49 72.78 86. and Japan (4.945 CR4 72. 2. accompanied by the corresponding four-country concentration ratio and (CR4) and the Herfindahl-Hirschman index.0 % and the HHI is 1939.17. The top four buyers were US (42.16 summarizes the export destinations for Thai natural rubber during 1975-2000.39 12.67 Cumulative % market share 38.2.78 90.5%).02 9.17. The corresponding buyer shares are displayed in Table 2.605 26.484 694 652 418 2.33 100% Japan US France EU Singapore Malaysia USSR Taiwan China Other countries Total 10. EU (11. US (12.240 2.5 Source: Compiled from The Association of Natural Rubber Producing Countries.1 Thailand Thailand exported natural rubber to many countries in the regions of North America.0%) and other countries in EU (9.5%).3.685 1.

92 65.4 Source: The Association of Natural Rubber Producing Countries Chapter 2 Page 35 .95 6.44 74.708 34.92 41.05 83. HHI 1.186. HHI 2.4.93 52.384 3.76 4.89 100% EU Singapore US Republic of Korea China Japan USSR Australia Other countries Total 9.20 4.1.151 1.17 Gross Exports from Indonesia Natural Rubber to Consuming Countries (1975-2000) (mill tons) % Market share 42.53 2. Singapore and US.01 10.724 28.227 1.18 Gross Exports from Malaysia to Natural Rubber to Consuming Countries (1975-2000) (mill tons) % Market share 26.49 6.24 76.494.11 Cumulative % market share 26.48 100% US Singapore EU Japan USSR Other countries Total 12.18.295 694 4.42 59. Table 2.651 1.11 0.52 81.43 16.92 15.3.636 2.92 22.599 CR4 81.204 3.425 156 8.677 CR4 59.28 4.32 11.37 65.52 Cumulative % market share 42.57 70. The buyer countries‟ shares are informed by Table 2.45 25.411 2.335 5.6.275 6.3 Malaysia Malaysia exports natural rubber to EU.2 Source: The Association of Natural Rubber Producing Countries 2.33 74.Table 2.

US (10. The remaining 90.The CR4 during 1975-2000 for Malaysia is 59.7% was attributed to Thailand.5%.3% and 12.3% of its natural rubber from Asia. global natural rubber consuming countries impact on Thailand.5% from Singapore. When viewed from the importing country side. during 1975-2000 the combined quantities of Thai. The remaining 86.4% respectively. 13. Indonesian and Malaysian natural rubber export to Japan.1% respectively. France and Europe on Malaysia and Japan on Thailand.9%).99 % of its natural rubber from Asia. The four top buyers are EU (26. The remaining 64.7% respectively. Thailand produces mainly sheet rubber which is used by Japan for tire manufacturing. Table 2. Singapore (15%).7% from Singapore. It can be seen that the USA imported most of its natural rubber from Indonesia.3% and 17. The USA imported 99.4. The USA has the most impact on Indonesia. Chapter 2 Page 36 .8% was imported from Thailand. Indonesia and Malaysia as: 70. Indonesia and Malaysia because they are essential consumers of natural rubber output from these countries. Indonesia and Malaysia as: 13. Indonesia and Malaysia as: 10. the EU from Malaysia and Japan from Thailand. with 15. 8.5%) and Republic of Korea (7%). which is re-export trading since Singapore does not produce natural rubber.6% and 40. with 7.19 summarizes the specific trading feature between countries as follows.4 %.7%. The EU imported 80.9% was imported from Thailand. This may reflect consumption purposes as the USA uses a lot of block rubber and it is mostly produced by Indonesia. However. Japan imported 98.7%.6% of its natural rubber from Asia. Results do not indicate potential high concentration. Hence. with 13.3% from Singapore.186. 55. in the studied period Malaysia is found to decrease its natural rubber production and becomes one of the importing countries from Thailand. USA and EU are as follows. HHI is 1.

It reduced to 32% in the year 1970 at the time of the synthetic rubber boom. In 2000 the tire sector consumption of natural rubber was around 30% plus less than 15% for synthetic rubber. Italy. Then it recovered to 37% by the 1990s. All rates are average rates between the years 1975-2000. Japan. In contrast.68 55.4 World Tire Market At the world level.73 13.66 JAPAN 70. Rubber Statistical Bulletin and Quarterly Natural Rubber Statistical Bulletin.99 0.30 99. Most general sector products are used in the automotive sector e.Table 2.4 Sources: compiled from International Rubber Study Group.34 17. which is the time of surging oil prices and synthetic rubber prices. France.28 12.g. the tire sector‟s consumption share in synthetic rubber increased to 25% by 1970s and reduced to 12% in 2004. General sector consumption comprises natural rubber and synthetic rubber that are used to produce products other than tires.67 86. 13. Germany. various copies. Tire sector consumption comprises natural rubber and synthetic rubber that are used in all kinds of vehicle tires production.34 19. Table 2.19 Export Shares of Natural Rubber Producing Countries and Natural Rubber Imports of Consuming Countries From Exporting Country: Thailand Indonesia Malaysia Sub Total 1 Singapore Sum Total 2 Other Sri Lanka < 1% To Importing Countries (% of Total Imports) US. 2.69 13.1 90. rubber parts and accessories used in vehicles. and India. Accordingly.63 40.20 displays natural rubber and synthetic rubber used in selected tire sectors where data are available: USA. rubber products are divided into tire sector consumption and general sector consumption.01 EU 10.54 80. UK.6 1.87 7.49 8.6. In 2004 tire sectors share of total natural rubber consumption was 33%. Chapter 2 Page 37 .80 15.73 98.44 64. tire sector consumption of natural rubber is almost 50% of total consumption.

1 reports the details of such groups.4 721.50 33.441.79 34.30 21.8 1.54 36.0 2. Results provide concentration evidence. Within the one-third of natural rubber consumption by tire sector as revealed in Table 2.1 1914 2. Prominent firms usually provide direct investment in new affiliates and/or mergers with local country firms.2.8 679.91 32.81 33.49 14. HHI is 2164.1 363.1 Tire Industry Concentration in Natural Rubber Consumption.1 in Appendix 2. Japan (6%) and Germany (6%).05 31. The CR4 is 76.000 tons) Natural Rubber Use in Selected Tire Sector Year 1946 1950 1960 1970 1980 1990 2000 2004 291.2 2. 16 By 2000. the tire industry is covered by only a few business groups.9 %. world employment in tire industry totals to 296.6.216 employees. In addition the group members have established links among each member.92 % to World Natural Rubber Consumption Synthetic Rubber Use in Selected Tire Sector 601.46 39. Table A.96 14. Chapter 2 Page 38 .4.8 956.725.5 969.4 2. 16 Accordingly.9 2.8 49. Following sections evaluate the concentration degrees in the tire industry at world level.68 25. It is made by USA (19%). 2.1 1. China (10%).482.17 12.6.261. the quantities of natural rubber used are concentrated in the top four countries.20 Global Tire Sector Consumption of Natural and Synthetic Rubber (1946-2004) (1.04 14.882.34 13.16 % to World Natural Rubber Consumption Source: Calculated from The International Rubber Study Group The world level tire industry comprises several conglomerates that operate at a multinational level.0 2.21.Table 2.126.5 36.168. causing concentration in the market. France (14%).391.

729 540 60.59 99.9.2 Tire Industry Concentration by Country Sale Volume.97%).11 Year 2000 Japan US France Germany Italy Korea $US mill 21.370 4.6 13.53 86.85 8.000 tons) % Market share Cumulative % market share 37.72 89.18 6.46%).164.15 3. Results indicate high concentration.6 15. The CR4 is 78.731 2.0 2.91 3.74 76.04%) and Germany (7.00 59.711.97 19.0 4.876.22 displays the results.47 78.62 82. 2.6 Source: Compiled from International Rubber Study Group.955.6% and HHI is 1. France (19. In 2000.17 4.70 4.807 5.89 CR4 76.85 68.429 37.Table 2.89 8. HHI 2.00 22.842 2.43 71.944 4.58 Cumulative % market share 30.6.52 0.46 52.15%).482.92 83.359 13.200.5 Chapter 2 Page 39 .46 21.124. Table 2.7.4.107 3.22 Concentration in Tire Sale Volume by Producing Countries % Market share 30. Table 2. the top four countries for tire sale volumes are Japan (30. US (21.11 100% US Japan France Germany India UK Italy Brazil China Total 22.5 2.237.21 Concentration in Natural Rubber Consumption by Tire Producing Countries 1960-2000 total use (1.04 7.80 6.89 94.

67 5.955.37 68.4%) and Continental A. Table 2.0 4.91 1. Other companies have less than 5% shares.599. Cooper Tire & Rubber Co. 2.HHI 1. Ltd.3 Source: compiled from Tire Business (2002) Chapter 2 Page 40 .8 3.60 1.462.0 1.5 2.6.7 Source: Compiled from Tire business (2002). (7.55 2.83 19.027.A.05 100% CR4 64. Groupe Michelin (19%).8 % market share 19.1 69.4. Goodyear Tire and Rubber Co.341. the four top tire companies are Bridgestone Corp (19.G.80 100 CR4 78.783. HHI 1.65 94.35 7.13 75.6 69.3 Tire Industry Concentration by Company When considered by company sale volume.200.36 80.4 and the HHI is 1. Kumho Industrial Co.514. Ltd Continental A.600.341.8% ).4.0 3.725. Ltd.802.48 0.0 466. Ltd.78 17.2% share).076.0 12. Toyo Tire & Rubber Co.0 1.876.23.83 38. Yokohama Rubber Co.3.6 1.200.04 18.Table 2.19 89.63 2.15 4.22 64.0 13.6 1.66 92.0 2.01 3.G.76 78.454.0 12.87 57. Others Total Mill $US 13.235.22 (continued) China India Taiwan Russia Other Countries Total 2. Sumitomo Rubber Industries Ltd Pirelli S. The CR4 is 64.322.38 72.27 82.6. Ltd (18.200.99 1.13 94.P. as displayed in Table 2.750.23 Concentrations in Tire Sale Volume by Producing Companies (2000) Company Bridgestone Corp. Groupe Michelin Goodyear Tire & Rubber Co.75 3.96 Cumulative % market share 19.0 2.0 2.

global tire manufacture is one industry that has had many mergers. and Continental. Details are presented in Appendix 2. However.4% of the tire market by sales volume (Table 2. resulting in groups of conglomerate corporations that operate across countries. They also have joint ventures across their groups. Michelin. USA and Germany respectively). as demonstrated in Table 2.1. e.7 Conclusion This chapter has outlined the supply chain for natural rubber industry at domestic and global levels.g. There is also a strong correlation between company level concentration and company home country level concentration data. natural rubber producing countries such as Thailand.9% of the natural rubber inputs into tire manufacture (Table 2. the data do provide strong evidence of concentration in the global tire manufacture . Continental) that are headquartered in four developed countries (France. Hence the raw concentration ratios measured by company name understate the position. Examples are Goodyear.1).Overall results do not indicate extremely high concentration. Goodyear and Toyo.13.21). The home countries of the four top producers have 78. Bridgestone.6% of the tire market by sales volume (Table 2.natural rubber consumption industry whether measured by company level data or country level data. However. Japan. each of which has several majority-owned subsidiaries abroad. there is not total concordance of production and country location in this industry. including. However. The corresponding top four companies have 64. Bridgestone.23). Tire manufacture is located in a number of countries. The above tables demonstrate a pattern of concentration in the tire manufacturing industry with four dominant companies (Michelin. In summary the key findings are as follows. and Continental and Yokohama. The Havea tree produces up Chapter 2 Page 41 . Precise data on the country location of all tires produced are not available.22) and 76. Continental and Michelin. although these companies and their respective home countries dominate the global tire manufacturing industry and the global consumption of natural rubber. 2. The dominant manufacturing companies retain significant control of the global industry however by ownership of multiple subsidiary manufacturing companies both within and without their home countries (see Appendix 2. It is not possible to completely disentangle the company-country production data that has been taken from different sources. Goodyear.

This could be further diminished due to Chapter 2 Page 42 . For the period of the study. During WWII. USA (12%). Latex can be transformed to different types of rubber stocks. Natural rubber is economically relevant since it generates considerable export income. Vehicle tires are the most prominent natural rubber product. The CR4 is 89% and the HHI is 2. Indonesia and Malaysia produce block rubber from most of the products. It is also important socially since it supports millions of small holder producing units (8590%) of all plantations. The top four buyers for Indonesia were US (43%). EU (11%) and Japan (5%). 30%. Planting natural rubber takes 5-7 years for the tree to mature. Thailand. town markets and export markets. The tree was introduced to some Asian and African countries. and SICOM Futures. the TOCOM futures. Singapore (22%). Singapore (15%). Export market product is traded in fob Bangkok prices. Natural rubber and synthetic rubber are substitutable to a degree according to use and relative costs. Thai natural rubber futures are traded in The Agricultural Futures Exchange of Thailand. Indonesia and Malaysia. Malaysia‟s top four buyers were EU (27%). Current major producing countries are Thailand. Central markets help support the prices in local and town markets. Since then rubber consumption has comprised both natural rubber and synthetic rubber. Other relevant prices are the TSR20 New York cif prices. The overall CR4 is 72%. Thailand has both rubber sheets and block rubber. 11% and 6% respectively). The ratio varies by tire type and size. Sheet rubber and block rubber are the most consumed types. A vehicle tire consumes 4 pounds of natural rubber and 6 pound of synthetic rubber on average. During 1960-2000 the major tire industry countries consumed 25-29% of the world‟s total natural rubber production and 19-35% of world total synthetic rubber consumption. US (11%) and Republic of Korea (7%). the top four buying countries from Thailand were Japan (39%). There is a potential for concentration on the exporting country side to be diminished by the concentration effects on the importing side. Malaysia and Vietnam were the top four net exporting countries in 2004 (42%. Results are supported by high HHI.to 99% of world natural rubber. natural rubber production was restricted and synthetic rubber was invented. France (12%) and other EU countries (10%). The natural rubber market in Thailand comprises local markets.838. Indonesia.

natural rubber consumed in the tire sector is concentrated in USA (37%). US (22%). Groupe Michelin (19%). The top four producers based on company sales volume for the year 2000 were Bridgestone Corp (20%). the natural rubber consumer industry such as vehicle tire manufacture is concentrated in the hands of a small group of conglomerate enterprises that cross national borders. impacting upon many cultivating farmers. The general information presented in this chapter establishes a basis for further development of the thesis. the theoretical concepts required for economic Chapter 2 Page 43 . The top four producers based on country sale volume for the year 2000 were Japan (30%). the natural rubber export industries are dominated by particular buyer countries for each seller country namely: Japan for Thailand. As such there is potential for market power to be exercised by the supplier countries of natural rubber could be counterbalanced by the market power on the natural rubber buyer side. The natural rubber producer industry at the country level is concentrated in the hands of a few manufacturers. Hence oligopsony market power is a potential feature in these markets. In Thailand domestic tire firms consume up to 43% of locally consumed natural rubber. although natural rubber trading is a small economic item in each producing country. Tire manufacturing is the relevant natural rubber consuming industry for this study. As such there is potential for market power to be exercised by the tire manufacturing countries on the global level tire market (oligopoly).each individual supplying country being closely tied to an individual buyer country. Goodyear Tire & Rubber (18%) and Continental A. but locally consumed natural rubber is only 10%-11% of the country‟s total natural rubber production. it is significant for each producing country. Hence there is potential for market power to be exercised in the natural rubber markets from the buyer side (oligopsony) and this potential can be analysed via company level or country level data. At world level.877.165. Throughout our study there are several areas in the natural rubber industry that have potential for market power from the buyer side. This concentration is also reflected in country level data with the major developed countries dominating the consumption of natural rubber for tire manufacture and the consumption of the manufactured tires. US for Indonesia and EU for Malaysia. The CR4 is 77% and HHI is 2.G. Secondly. Japan (23%). CR4 is 64% and HHI is 1. In conclusion. France (9%) and Germany (8%). In Chapter 3. France (19%) and Germany (7%).200. The CR4 is 79% and HHI is 1. (7%). Finally.

a theoretical model that accommodates the measurement of both oligopsony and oligopoly is adopted in Chapter 4 . In addition.analysis and measurement of market power by the global tire industry over the natural rubber industry are examined. theoretical and empirical literature of a variety of methods to assess market power of oligopoly as well as oligopsony. It surveys microeconomic theory of market structure. Chapter 2 Page 44 . empirical studies of the tire industry and natural rubber industry are reviewed. Given the potential for market power to be exercised by the tire manufactures either as the buyers in the input market (the supplier side of the natural rubber input market) or the seller in the output market (the consumer side of the tire output market).

2 Competitive and Non Competitive Markets The essential characteristics of a perfectly competitive market are the presence of a great number of sellers and buyers. free entry and exit and complete access to information and technology. an imperfectly competitive market comprises a small number of sellers or buyers. The profit maximization condition for this firm is to produce an Chapter 3 Page 45 . Conclusions drawn from this chapter form the basis for the development in Chapter 4 of a general model for oligopsony market power analysis and its empirical counterpart for application to the global tire industry and the global natural rubber market. A firm in the output market faces a downward sloping demand curve. In the last parts of this chapter related studies on the tire industry and the natural rubber industry are reviewed. In contrast. In subsequent parts the approach to theoretical and empirical basis for the measurement of oligopsony is examined. product price and long run average total cost are equal. a standard product. As such an individual firm operating within perfectly competitive markets has no influence over price in either its output or input markets – it is a price taker in both markets. In output markets. It is no longer a price taker. This implies a Pareto efficient outcome in that: resources are used most efficiently to produce the goods and services most desired by society. The first parts of the chapter reviews the theory dealing with market power in output and input markets. the long run equilibrium condition for profit maximization for the firm is to supply at the production level where long run marginal cost. 3. This occurs where the input price paid for the factor is equal to the value of its marginal product to the firm.1 Introduction Chapter 2 has provided the industry background for natural rubber industry and tire industry. In input markets the firm will employ factors to the point where the marginal cost of employment is equal to the marginal return from the factor. This chapter provides the specific theoretical background for market power analysis in input markets (oligopsony market power) required to analyse the performance of the tire industry in the natural rubber market. the goods and services are produced at minimum cost and identical resources receive identical prices.Chapter 3 Market Power and the Natural Rubber Industry 3.

The distinction derives from the demand curve facing the firm in its product market: as P = MR in a perfectly competitive market. With imperfectly competitive input markets the firm will no longer be so small as to have no influence on price. This is due to the firm being a price taker in the input market. the demand curve for an input from a firm producing for an imperfectly competitive output market is its marginal revenue product (MRP) curve (i. then the equilibrium level of input Chapter 3 Page 46 .e. Hence the effective supply curve for the firm will be the marginal resource cost (MRC) curve where MRC > w (the input supply price). Its relative market buying power will be such as to influence the input supply price. These outcomes imply that resources are not used efficiently to produce the goods and services desired by society and identical resources do not receive identical prices. w = VMP).MP = MR. If output market is competitive also. However. The supply curve facing a firm for an input can also vary across market types. Figure 3. Assuming a linear demand curve for inputs.e. The supply curve for the firm in a perfectly competitive input market is perfectly elastic (a horizontal line). The difference being the extra cost required to supply infra-marginal units when the price of the marginal unit increases. the firm might not produce at the minimum average cost and will likely earn economic profits (price exceeds average cost).MP = MRP. the supply curve for an input in an imperfectly competitive input market will be upward sloping as the buyer will no longer be a price taker. 3. Again it will no longer be a price taker and as such will face an upward sloping supply curve for each factor.1 illustrates the position for firms in a competitive input market with a market input supply curve that is infinitively elastic. For a firm in a competitive market the demand curve for an input is the value of its marginal product (i.MP. The firm producing for a perfectly competitive output market is a price taker and hence VMP = P. w = MRP). For the firm selling its product into an imperfectly competitive market its demand curve is downward sloping and MR < P and hence MRP < P.MP where P is the price for its output product.output where marginal cost equals marginal revenue but marginal revenue will be less than product price. In the long run.3 Equilibrium Conditions in Input Markets Price and employment conditions for inputs are different for different combinations of input and output markets. However. then VMP = P.

2a illustrates the equilibrium conditions for input employment when the input market is non-competitive and the supply curve is upward sloping. The employment in a competitive input market is xcc. The employment will be xmm. at price wmm for a non-competitive input market and a non-competitive output market (MRC = MRP). at price wmc. at price wcc. The input employment is xmc.1 Input Employment in a Competitive Input Market Input Price wcc = wcm MRP Input inverse supply (S) VMP Input Quantity xcm xcc Figure 3. The quantity employed is xmc. If the output market is non-competitive. The input employment in a competitive input market is xcm at price wcm=wcc if the output market is non-competitive (where S = MRP). Figure 3. Figure 3. The quantity employed is xcm. at price wcc if the output market is competitive (where S = VMP). The input employment is xmm. the employment level is determined by the intersection of the marginal resource cost (MRC) and the value of marginal product (VMP).employment is where market input supply price (w) equals the value of marginal product (VMP). the equilibrium level of input employment is where input supply intersects marginal revenue product (MRP) curve. If the output market is non-competitive. If output market is competitive. at price wmm. The resulting input quantity employed is xcc. the equilibrium will be where marginal resource cost (MRC) intersects marginal revenue product (MRP).2b compares the input employment results between competitive input market and non-competitive input market. at price wcm = wcc. Chapter 3 Page 47 . at price wmc for a non-competitive input market and a competitive output market (MRC = VMP).

1 summarizes the four cases of input employments. Table 3. Chapter 3 Page 48 .3b Comparing Input Employment in Competitive and Non-Competitive Input Markets Input Price MRC Input Inverse Supply (S) wcc=wcm wmc wmm MRP Input Quantity VMP xcm xmm xmc xcc The two equilibrium levels of input employed in non-competitive input markets (xmc and xmm) are less than xcc in the case of competitive input markets and the prices (wmc and wmm) are less than wcc in the case of competitive input markets.2a Input Employment in a Non-Competitive Input Market Input Price MRC Input Inverse Supply (S) wmc wmm MRP VMP Input Quantity xmm xmc mm Figure 3.Figure 3.

Hence the possibility of an oligopolistic market structure with countervailing buyer and seller market power. The focus of this study of potential market power of tire manufacturers in the input market for natural rubber is on the third and fourth cases in Figure 3. w = wcm = wcc = MRP. w = wmc < wcc. x = xmc < xcm < xcc 4 Imperfectly Competitive Imperfectly Competitive MRC = MRP.4 to 2. the history and structure of the natural rubber industry does not support a proposition of market power residing with the natural rubber sellers even during the periods of INRO operation. w = wmm < wmc < wcc. As described in Chapter 2.1 Optimality Conditions for Input Employment and Input Price in Various Types of Market Structure Input Market Structure 1 Perfectly Competitive 2 Perfectly Competitive 3 Imperfectly Competitive Output Market Structure Perfectly Competitive Imperfectly Competitive Perfectly Competitive w = wcc = VMP. specifically sections 2. x = xcm =xmm < xmc < xcc Optimality Conditions These outcomes represent a social welfare deterioration caused by the absence of perfect competition in the input market. The only Pareto efficient outcome for the input market is that generated by a perfectly competitive input market linked to a perfectly competitive output market for the product produced by the input in question. or even the extreme bilateral monopoly case is not explored in this section. wcm.Table 3.2a. The greater the degree of non competitiveness across the two markets. wcm. the greater will be the degree of Pareto inefficiency and social welfare deterioration.e. Both cases involve an oligopsony outcome whereby the source of the non-competitive market structure is assumed to derive from the market power of the buyer of the input rather than the seller of the input. (i. x = xcm < xcc MRC = VMP.. noncompetitive input markets with competitive output markets (oligopsony/competitive) and non-competitive input markets with non-competitive output markets (oligopsony/oligopoly). Instead as oligopsony is the Chapter 3 Page 49 . x = xcc. They represent Pareto inefficient outcomes.6.

The Lerner index can be converted to L  demand elasticity (  where  is the direct 17 q p ). critics argue that the concentration ratios and the Herfindahl-Hirschman Index do not inform about market entry conditions and the competitive behaviour of market participants (Ferguson & Ferguson. q is the producing firm‟s output). Conventional tests for the presence of oligopoly include market concentration ratios such as the CR4 and the Herfindahl-Hirschman Index (HHI). based on profit maximization condition. the greater is the Lerner index of market 17 Proof: based on Martin (1994) pp. p is the product price and MC is the producing p 1 firm‟s marginal cost. and  is the absolute value of q p ). The Lerner Index (Lerner. 43-44 and Salvatore. p is market product price. 1934) has been adopted as a basic general measurement of market power in output markets. Since a monopolist can restrict output hence raising prices. the higher the p q difference between price and marginal cost. q is individual firm‟s product quantity.Whereas the attractions of this approach include their ease of application.416-419). Thus.25-27.q p p q 1  pq  p(1  )  p(1  ) where MR is marginal q q q p  revenue.proposition to be tested the next sections examine in more detail the theoretical base for empirical analysis of oligopsony market power. 3. Marginal revenue is MR  p. 1997 pp. p q 1 marginal revenue (MR) = marginal cost (MC).4 Oligopsony Analysis A simple approach to oligopsony analysis is to adapt standard tests for output market power (oligopoly) for input market power testing (oligopsony). this basic general measurement of market power is derived as L p  MC where L is the Lerner index. A structural change approach is also found in the literature as is the conjectural variation approach that has the Cournot model as its theoretical foundation. 1994 pp. It implies that MC  MR  p(1  ) and the conventional direct demand elasticity (  L p  MC  p 1 p  p(1  )  p  1  Page 50 Chapter 3 . In addition.

the dispersion of sales across buying industries) whereas the buyer concentration ratios were computed from the nation‟s input-output table and weighted by each industry‟s share on total Chapter 3 Page 51 . The Lerner index is constructed on the output market optimality condition (MR = MC). To consider oligopsony market power. or by attempts to avoid legal scrutiny.1 Buyer Concentration Approach Studies of the impacts of buyer concentration on seller‟s profits are based on the concept of countervailing power proposed by Galbraith (1952) who argued that the conflict of interest between firms of equal power on different sides of the market could be a factor limiting the exercise of market power. and Cournot models with conjectural variation. The Lerner index does not identify whether the procurement for the input employed is via a competitive input market (input supply curve is a horizontal line) or non-competitive input market (input supply curve is upward sloping). it is argued that sometimes a high Lerner index does not imply high profits because the firm might be benefitting from a low average cost at that specific production level. such as natural rubber market in this thesis.4. In addition. the Lerner index in its strict form is not directly applicable to an oligopsony market. They are discussed as follows. not incorporating the shifts over time of demand and costs (Salvatore. structural changes and market power analysis. Lustgarten (1975) estimated the pricecost margins of 327 four-digit US manufacturing industries as a function of seller market structure variables (seller concentration and capital-sales ratio) and buyer market structure variables (buyer concentration and purchase per firm per year. buyer side market power theories are required. the less is the market power. the higher the demand elasticity for the product.power. However. 3. Studies that do include influences from the buyer side‟s market power can be classified according to approaches on: buyer concentration. Another issue is that prices might be altered by limit pricing. Hence. 1997). For inputs the marginal rule has to be adapted to accommodate the input market optimality condition (MRP = MRC). These two market structures have different implications for price level and output product quantity as described in previous sections. But its principle does lend itself to equivalent measures for input markets as is discussed below. It is also argued to be in a static context. in the context of a potential imperfectly competitive input market.

inputs. Results indicated that seller concentration variables had positive impacts on price-cost margin. The impacts of buyer market structure variables on price-cost margin were found negative. This implies that concentration on the buying side of the market limits control of price on the supplying side of a market and hence price is lower. This result supports the countervailing argument. However, the study did not contemplate any welfare losses resulting from buyer concentration. Decreases in profitability due to buyer concentration (as defined by the price-cost margin) were found for a group of low seller concentration manufacturers but not for a group of oligopolist manufacturers (Kelly & Goss, 2000). This study was applied to US retailers‟ manufacturing suppliers. The study argued that the finding was contradictory to economic theory which predicts that buyer concentration effects will be confined largely to firms in oligopolistic industries because economic profits are available to be redistributed to buyers with market power. A more recent study also found that the number of buyers is a source of countervailing power (Engle-Warnick & Ruffle, 2005). In this experiment, a two buyer session (case) was found to achieve significantly lower prices than four buyers. Furthermore, it was found that the source of the price gap, compared to other factors, is the number of buyers. This was identified in the experiments of two-buyer cases where the monopolist adopts cautious or conservative pricing for fear of provoking demand withholding, thus resulting in lower price than for the four buyer case. The results are argued to provide the basis for a behavioural theory of buyer countervailing power where the number of buyers may be a key parameter. In addition, it was found that cost-important inputs (i.e. inputs that are highly relevant to production) had negative impacts on price-cost margins. This implied that purchasing industries tended to bargain down prices of inputs that were relevant to production more than less important inputs. Relatively unimportant inputs were likely to have higher margins (Bradburd 1982). The effect of buyer concentration can be offset by output transfers under administrative control (Newmark 1989) and vertical integration (Martin 1986).

3.4.2 Structural Changes and Market Power Analysis An example of a second approach to oligopsony market power was provided by an early study by Just & Chern (1980) who argued that cost information is usually inadequate to be applied to the testing of Lerner measure. However, one can obtain indirect evidence Chapter 3 Page 52

of market power from market behaviour. If there is an exogenous shock on one side of the market which is perfectly competitive, the resulting demand and supply, (i.e. price and quantity equilibrium), should remain unaffected. However, if there is any market power on the other side, the price cost relation will shift. The study by Just & Chern (1980) was of the US tomato processing industry during the 1970s. During that time there was an exogenous shift in the supply side due to the replacement of labour input by machines. Hence variable costs were replaced by fixed costs. Supply was shifted to the right and became more inelastic. The estimated demand was found to shift downward and became more inelastic. However, competitive market theory would indicate a price fall and quantity increase due to rightward supply curve shifts. Consequently, it was concluded that the outcomes were evidence of oligopsony power and price leadership behaviour in the tomato processing industry. Limiting factors in this approach include correct identification of the possible causes of the shifts and its sensitivity to specification errors in the demand and supply functions. Bresnahan (1987, 1989) used the demand and supply structural approach to trace for collusion in the automobile market. The analysis was based on the structure of the residual demand curve facing the automobile manufacturing firms. Although it was a study on oligopoly aspects, it provided a basis for an expansion to an oligopsonistic analysis as for example in Durham & Sexton (1992) who analysed the oligopsonistic market power potential via an inverse residual supply on the specific input to the employer firm. If the residual supply comprises, in addition to input price elasticity, an element of the reaction function of rival input suppliers, then it is considered that the output producing firm facing this residual supply curve is capable of exploiting market power on the input supplier. Parallel to these examples of the structural changes approach is the conjectural variation approach discussed in next section.

3.4.3 Cournot Model with Conjectural Variation Approach The basic Cournot model is a well known simultaneous quantity setting model (Varian 1996). However, the Cournot model is criticized for two aspects: first for the assumption that a firm perceives that the other firm‟s output is independent of its own quantity setting decision and secondly for the assumption that a firm maximizes its own profits without cooperative or collusive behaviour with other firms. Chapter 3 Page 53

In order to generalize the basic Cournot model, some variations on the model‟s theme are proposed. They allow for cost differences between oligopolists, quantity leadership and limit pricing behaviour, conjectural variations and cooperation (Martin 1996). Within the conjectural variation framework, the Cournot model is extended to relax the assumption that a particular firm expects that rival firms do not adjust their outputs in response to its own output changes. Consequently, the extended model allows for an individual firm‟s expectation that the other firm (in the duopoly model), or firms (in the n-firm model) might adjust their outputs with respect to the firm‟s output. The Cournot model with conjectural variation is depicted in Table 3.2.

Table 3.2 Cournot Model with Conjectural Variation
Let I be firm I’s profit. p the market product price, ci firm i’s cost function, mci its marginal cost. qi the firm’s output and Q the market output.  is the product demand elasticity ( Qi is the sum of rivals’ output changes (

Q p ). p Q

q j q i

i j

), where qj is other firm’s output).

(1) Cournot General Model (n-firms, cost differences) (2)

 i  pqi  ci (qi )

(3)

 i p  p qi  mc i  0 qi Q p  mci qi 1   p Q   i p Q  p (1  i )qi  mc i  0 qi Q qi p  mci qi 1 Q    (1  i ) p Q  qi

Cournot General Model with Conjectural Variation (n-firms, cost differences) (2a)

(3a)

Source: Compiled from (Scherer & Ross, 1990)

From Table 3.2, firm i‟s profit in the Cournot general model is depicted by equation (1). The optimality condition is derived in equation (2). Equation (3) manipulates (2) into price-cost margin measurement of market power, which equals to market output elasticity weighted by firm i‟s market share. When modified with conjectural variation, the optimality condition is equation (2a), which allows for firm i‟s expectation (
Qi ) qi

about rivals‟ responses to its output changes. The derived price cost margin measure

Chapter 3

Page 54

(Lerner index) is depicted by equation (3a), where the term ( for market performance, as summarized in Table 3.3.

Qi ) becomes an indicator qi

Table 3.3 Conjectural Variation and Market Performance
Firm i’s Conjecture Market Performance

1

Firm i expects rival firms to totally offset its output changes. Result resembles a perfect competitive equilibrium condition Firm i expects rival firms to offset some of its output changes.

Qi = -1 qi Qi <0 qi

p  mci =0 p p  mci 0 p p  mci 0 p p  mci 0 p

2

3

Firm i expects rival firms not to respond to its output changes, being a basic Cournot case.

Qi =0 qi Qi >0 qi
Qi =1 qi

4

Firm i expects rival firms to match some of its output changes.

5

Firm i expects rival firms to fully match its output changes. This is a collusive behaviour and it equates to a monopoly equilibrium condition.

p  mci 1  * p 

(

p  mci Qi 1   * if qi p 

(1 

qi ) Q

qi Q

) where

 * is output

demand elasticity:

Q p p Q

Source: Compiled from (Scherer & Ross, 1990)

From Table 3.3

Qi varies from -1 to 1, reflecting rivals moving from offsetting to qi

matching firm i‟s output and equilibrium output falls while price rises. If conjectural variation is zero, it implies that the firm expects that other firms do not react to its output changes, reflecting a basic Cournot oligopoly model. If conjectural variation is 1 it implies that the firm expects its rivals to change output by the same amount. This reflects an oligopoly with full collusion case (if the firm‟s market share is less than 1) or a monopoly case (if the firm is the sole producer in the market). If the conjectural variation is -1, it implies that the firm expects that other firms react by fully offsetting

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Firm i expects rival firms not to respond to its output changes. Appelb. This is a collusive behaviour outcome. q j Q industry output with respect to the output of the j‟th firm …” (p289). If the Page 56 . C&T = Chang & Tremblay (1991) From Table 3. Firm i expects rival firms to fully match its output changes.its output changes and market output is not affected by its output. C&T Market Performance Qi = -1 qi Qi <0 qi Q 0 qi p  mci 0 p 2 0 Q qi 1 p  mci 0 p 3 Qi =0 qi Qi >0 qi Qi =1 qi Q 1 qi 4 0 Q qi 1 p  mci 1  * p  where  is output demand elasticity: * 5 Q 1 qi Q=qi Q p p Q Notes: S&R = Scherer & Ross (1990). Az = Azzam (1997).3 as is illustrated in Table 3. Appelbaum (1982) defines the firm‟s conjectural variation elasticity as Q q j being the “… conjectural elasticity of total . Az 1 Firm i expects rival firms to totally offset its output changes. Result resembles a perfect competitive equilibrium condition Firm i expects rival firms to offset some of its output changes. being a basic Cournot case.4 Appelbaum (1982) and Chang & Tremblay (1991) define conjectural variation as Chapter 3 Q qi where Q is the sum of all firms‟ outputs. For example whereas Azzam (1997) employs a conjectural variation elasticity defined for its rivals output responses as defined in Tables 3. Of interest is the use of alternative measures for conjectural variation.2 and 3.4. This is the same characteristic for a competitive output market. Appelb = Appelbaum (1982). This alters the interpretation of the measure values in Table 3. Firm i expects rival firms to match some of its output changes.3. Table 3.4 Comparing Conjecture Variation Definitions and Resulting Implications Market Structure Firm i’s Conjecture S&R.e. total market output. It equates to a monopoly equilibrium condition. i.

If resource price is less than the VMP. in the oligopsony literature we examine examples of studies of oligopsony market power in the next section. The p approach can be analogously applied to an identification of firm i‟s conjectural variation in input markets. especially agricultural products. The corresponding assessment of market performance by p  mci is identical in both approaches. In case 2. whereas it is zero in Scherer & Ross (1990) & Azzam (1997) and the conjectural elasticity is simply the firm‟s market share. firm i expects rival firms to partially match its output changes and its conjectural variation is between zero and 1. one must incorporate a measure of input market power. To expand the Cournot conjectural variation oligopoly model to an oligopsony model. In the monopoly case the quantity of total market output changes is solely based on firm i and hence its conjectural variation to market output and corresponding conjectural elasticity is 1. whereas it is between < 0 in Scherer & Ross (1990) & Azzam (1997). which can be achieved from literature in oligopsony model discussed in section 3. whereas it is -1 in Scherer & Ross (1990) & Azzam (1997). Given the dominance of this theoretical framework. firm i expects rival firms do not react to its own output change hence the conjecture to total market output change by its own output changes is 1. In the Cournot case. firm i‟s conjectural variation varies from zero to 1. This is the same for Scherer & Ross (1990) & Azzam (1997). hence its conjectural variation to market output is zero. Both markets share a common feature in that there are many homogenous suppliers versus a small number of buyers. The literature on oligopsony market power that uses conjectural variation is generally found in markets for labour and commodities. as introduced in section 3. This is the optimal price in perfectly competitive markets.2. firm i expects rival firms to partially offset its output changes and its conjectural variation is between zero and 1.market is competitive firm i would not expect market output to be affected by its output changes because they would be offset by rival firm reactions. Consequently market power is measured as the deviation of actual price from the shadow price in perfectly competitive markets. In most studies the concept of shadow price is employed. Chapter 3 Page 57 . whereas it is > 0 in Scherer & Ross (1990) & Azzam (1997). Shadow price is the value of marginal product (VMP) that is produced from the specific input. which indicates a less than competitive market for outputs and/or inputs. then there is evidence of input price distortion.5. In case 4. Therefore.

rubber. electrical machinery and tobacco industries during 1947-1971. Many studies in the analysis of oligopoly and oligopsony have been based on this paper (for examples: Schroeter. oligopoly and oligopsony market power and price risk components. Schroeter & Azzam (1990. the literature does include a number of studies of market power in a variety of industries that provide a basis for this research.3. Hence Appelbaum identified the importance of both market demand and conjectural elasticity in generating market power. 1991 and Azzam. They examined the issue of marginal cost. Chang & Tremblay. namely the textile. Chapter 3 Page 58 . The measure developed by Appelbaum was based on the definition of oligopoly being the difference between price and marginal cost. no study was found to have been undertaken of the impact of oligopsony. Azzam & Pagoulatos. Appelbaum applied a measurement of oligopoly power to four industries in the US. by the global tire industry on the Thai natural rubber industry. 1990. Although it did not accommodate estimation of input market power.5 Studies of Oligopsony Market Power Analysis with Conjectural Variation Approach Following an extensive literature review. 1991) extended the conjectural variation models from single homogeneous product industries to joint production of two demandrelated products. using the model extended from Cournot oligopoly with conjectural variations. Nevertheless. 1997). it was argued that the degree of deviation from a perfectly competitive market is determined by the combination of these two elasticities. They incorporated a degree of price uncertainty component in price margins and argued that ignoring this component would lead to erroneous inferences of imperfectly competitive conduct in the product market. this study is a heavily cited paper that provided a base for extensions to estimate both output market and input market power. Appelbaum (1982) provided an important early study using the conjectural variation approach to assess the potential of oligopoly market power in output markets. 18 18 P  MC  i  where i is the firm‟s conjectural elasticity in output market and  is output P demand elasticity derived from an inverse demand function. Manipulation converted this definition to a measure that becomes the value of output market conjectural elasticity times the elasticity of the inverse demand for input . 1988. These studies include applications for oligopoly (output markets) and oligopsony (input markets). Therefore. Key examples are as follows.

The factors that link marginal cost to input prices are the input supply elasticity and the firm‟s conjectural variation in input market. cost-efficiency and concentration was examined by Azzam (1997) with a model that examined the concept of trade off between market power and cost efficiency from a policy perspective.7% and had no effect on prices in 21. the degree of output and input market power was small. Combining oligopoly and cost efficiency effects. A good example is found in Schroeter (1988) who converted marginal cost into an expression including input prices . Azzam & Espana (2002) proposed that market power and its effects on market efficiency are mixed. They allowed inputs to be used in variable proportions in their study of market power in the US meat packaging industry (19591982). mc’i is other inputs‟ marginal cost . 19 19 p  (1  i  )  wM  (1  i )  mc'i where p is output price. Thus Schroeter extended the market power concept to include two market components. ) qi Q elasticity of an inverse supply for input .9% of the industries. Their study applied the conjectural variation approach to oligopoly power to food industries in the US. increased prices in 68. Azzam & Pagoulatos (1990) criticized Schroeter for his assumption of fixed proportions between outputs and inputs thus forcing the corresponding conjectural elasticities for inputs and outputs to be identical. However. the other for measuring oligopsony power in the input market being the ratio of firm output conjectural elasticity and price elasticity of input supply. One is the measurement of oligopoly power in the output market: the ratio of firm output conjectural elasticity and price elasticity of output demand. Lopez. qi is the firm‟s output and i is the firm‟s conjectural elasticity ( Chapter 3 Page 59 . concentration decreased prices in 9. Schroeter applied his measure to the US beef packaging industry (1951-1983) and concluded that it was not competitive since the output conjectural elasticity was non-zero.The link between market power. They found that concentration increases were related to oligopoly power in 81% of the industries studied and to significant gains in cost efficiency in 34% of the industries. They linked the oligopoly power effects in output prices and cost-efficiency effects of industrial concentration.4%. wM is the price of input and  is price   Q qi . As stated above the approach developed by Appelbaum (1982) has been extended to include input market power. They found that both output and input conjectural elasticities were not zero thus the industry was imperfectly competitive.

Further examples of the conjectural variation approach that are of interest to this study include the following.54 for pulp paper). The results found the processors‟ market power potential was not high and they argued that this was due to increasing extensive rivalry between processors in neighbouring regions.2 for pulpwood). 1994) but did not provide an empirical application. Durham & Sexton (1992) studied the oligopsony market power of tomato processors on a group of competing regional farmers in California.24 because the sawlog supply had a low elasticity.4. Different market power index measures are derived and subsequently reinterpreted to provide a country level model for examination of the global tire manufacturing industry and its link to a country level natural rubber industry. The pulpwood industry had a similar price distortion degree. Despite these low values for market power. A deficiency of this study was the absence of analysis of market power on the output side and output market power tends to be a part of the overall effect as demonstrated by Chang & Tremblay (1991) whose model is further developed in Chapter 4 based on alternative interpretations of various components of the original model. It was found that imperfect market competition had distorted the benefit distribution of innovation from farmers to marketing firms – an outcome predicted by oligopsony theory. It could also be reduced to the Lerner index or the Herfindahl-Hirschman index. the corresponding price distortion was as high as 0. His estimates for the average conjectural elasticities during the years 1958-1988 were non-zero but low (0. (1997) extended the model of Huang &Sexton (1996) to assess the Chapter 3 Page 60 .3). 0.17 for sawlog and 0. despite higher oligopsony power because its supply elasticity was higher (0. His study of market power in the wood and sawlog industry incorporated the estimation of VMP within a system of estimating equations based on a profit function and shadow prices. They extended these models to duopsony cases (Chang & Tremblay. Murray (1995) argued that previous studies were restricted by difficulties in measuring VMP.4. indicating some oligopsony power.29. Alston et al. The index measures the extent that input price paid by a firm deviates from the value of marginal product for the input. They extended Bresnahan‟s approach on the demand side (3.2) to Appelbaum‟s approach on the supply side (3. The index was also able to be transformed to an industry level.Chang & Tremblay (1991) used the conjectural variation approach to develop an index of oligopsony/oligopoly power.04 for sawlog industry and 0. Huang &Sexton (1996) applied the conjectural variation approach to measure returns to the mechanical potato harvesting in Taiwan.

Higaki et al. retailers and consumers in the supply chain. U. Hockmann (2007) assessed the degree of competition in milk purchasing by the processing industries in Hungary during the transition period. Sexton (2000) provided an extensive review and evaluation of empirical research of market power in the US agricultural sector. O‟Donnell et al. loggers.K. Anders (2005) applied the conjectural variation approach to assess the oligopoly and oligopsony market power in German regional retail meat markets. (2001) studied the state of competition in the Japanese wholesale tomato market. It was found that the total benefits were reduced by imperfect competition and the share shift from producers and consumers to processors. (2006) tested for the presence of downstream market power exerted by supermarkets in vertically related UK food markets. Sun (2006) applied the conjectural variation framework to evaluate the impact of US regulations on the forest product industry which comprises landowners.effects of supply shifting generated from research-induced technical changes on participants in the agribusiness when markets are oligopolistic and oligopsonistic. Muth & Wohlgenant (1999) criticized the use of fixed proportions in production functions and proposed a model with variable proportion technology which could be applied to markets in which data for some inputs are not available. A low level of oligopsony market power was found despite a high level of domestic buyer concentration. and Canada. Their results indicated lower levels of market power than those found in previous studies and they argued that imposing restrictions such as fixed proportion technology on the structural model tends to overstate the estimated results. Alternatives to the conjectural variation approach were considered necessary to identify factors other than market power. India Kenya and oligopoly power from US. Azzam (1998) applied the conjectural variation framework to test the relationship between captive supplies and open-market prices under imperfect competition. Zhang & Sexton (2002) utilized the conjectural approach as part of an analysis for the decreased effects that agricultural food producer received due to oligopsony market power. Weerahewa (2003) applied the conjectural variation approach to assess the degree of oligopoly and oligopsony power the tea-processing industry in Sri Lanka. It was found that the policy had welfare transferring impacts with consumers experiencing much of the welfare loss from the regulation policy. millers. (2007) estimated the degree of competition in 13 Chapter 3 Page 61 . Lloyd et al. Wilcox & Abbott (2004) tested for multinational corporations‟ potential oligopsony market power in the West African nations‟ farm level cocoa bean markets.

Although they approached the measurement of market power using a variety of methods. one point of commonality was the employment of duality theory and shadow price concepts. Their differences derive mainly from their cost and profit function specifications. conjectural elasticities in output and input markets as well as the elasticities of demand for inputs and supply of outputs) is needed to obtain a valid measurement of market power. The shadow price was drawn from optimality conditions for profit maximization.Australian grains and oilseeds industries.e. Typically under the application of duality theory. These studies share a general methodology: from a profit function optimality condition they derive hypothesis tests for the presence of any oligopsony behavior together with measurement of the degree of oligopsony market power. Their findings support the claim that the higher the degree of imperfect competition. the higher is the degree of oligopsony/oligopoly market power and vice versa. Hence an analysis of market competitiveness (i.5 summarizes some relevant issues arising from these studies. Oligopsony/oligopoly power was defined as the deviation of the input price actually paid from the value of its marginal product. either Shephard's Lemma or Hotelling's Lemma were invoked to generate input demand and output supply functions. oats and triticale from farmers. barley. They found evidence of market power by the flour and cereal food product. Chapter 3 Page 62 . beer and malt and other food product industries as buyers of wheat. Table 3. Most of the studies identified above found evidence of oligopsony market power.

w) p  (1  i  )  wM  (1  i )  mc'i   i  0 l i  M k 1  j  p  q j   wk  xkj p  (1  j  )  MPx1 j  w1  (1  j )    j  j  0 j for output market.Table 3. wM Q q j 21 Given n firms in the industry.. ci is the firm‟s cost function.  Market power measurement j  for input market Given n firms in the industry: i is firm i‟s profit. x1j is the specific input used by firm j.  is the absolute value of output demand elasticity q j Q x1 j X 1 ( X 1 w1 Q p ) and  is the input elasticity ( ). j= ( 1 j ) . wM is material input price. xk is input k.5 Relevant Conditions in Oligopsony Studies Schroeter (1988) Profit function Optimality condition Hypothesis test for competitive market performance Market power measurement Azzam & Pagoulatos (1990) Profit function Optimality condition Hypothesis test for competitive market performance 21 20  i  p  qi  wM  qi  ci (qi . mc’i is firm i‟s marginal cost from other input. i is the firm‟s conjectural elasticity 20 ( Q qi . MPkj  marginal product. wk is input price. X1 is the specific input..  is the value of output demand elasticity ( Q p ) and  is the material input supply ) p Q qi Q elasticity ( Q wM ). j is firm j‟s profit.. w1 X 1 p Q Chapter 3 Page 63 . qi is the firm‟s output. p is market product price. qj is the firm‟s output. j = ( xkj is input xkj‟s Q q j X x1 ) . input is a fixed proportion to output. k= 1.¸m. w is a vector of other inputs‟ prices. p is market product price.

 is the input supply elasticity ( q j Q w ).  is Q qi . w1 is the specific input price. qi is the firm‟s output.  i 2 is value of output demand elasticity (- X 1 w1 Q p ) and  is the input supply elasticity ( ). Azzam & Pagoulatos (1990). Chang & Tremblay (1991). ) p  w  i  1 Optimality condition qi w   (1   i )  mci Q  Hypothesis test for competitive market performance Market power measurement M ( p  w) H  (1  )   mc w  Source: Compiled from Schroeter (1988). r is rental costs. x1i is a specific input.   q j . w(Q) is the input price where input is a fixed proportion of output.  is a vector of 23 other inputs‟ prices. k is capital input. j = 1. is firm qi w Q 2 n i‟s expectation about firm j‟s responses to its input changes.n.Table 3. ci is the firm‟s cost function. i is firm i‟s profit. p is market product price. Azzam (1997). Given n firms in the industry.  i 1 is VMP‟s coefficient.…. i i i 2 i i Chapter 3 Page 64 .  is the i3 i i x1i x1i q i x1i qi Q Given n firms in the industry.5 (continued) Chang & Tremblay (1991) Profit function 22  i  p  qi  w1  x1i  rki q dw dX dp dQ Qi    qi  i  p  1  1  x1i  w1  0 dQ dQi x1i x1i dX1 dx1i Optimality condition Hypothesis test for competitive market performance  i1  1 and  i 2   i 3  0 i i  VMPi  w1   ( ) i VMPi 1  Market power measurement Azzam (1997) Profit function 23  i  ( p  w(Q))  qi  ci (qi ..  is X 1 . mci is firm i‟s marginal cost.  (q   )  q . p is market product price. i is firm i‟s profit. VMP = value of marginal 22 product.  q i j i i a weighted average of the n firms‟ conjectural variations. w1 X 1 p Q Q ..  is X 1 X 1 . qi is the firm‟s output.

consider the following model. MCxk is the marginal cost for inputs xki.. In firm i‟s input market. qi is the firm‟s output. Assume a certain industry has n firms where: i is firm i‟s profit. ci   wk xk k 1 m MC xk  ci xk wk X k   xk X k xk wk X k X k xk    ) X k wk xk X k  wk   wk (1   wk (1  i )  For the specific input use by firm i: x1ti. i is the output X 1 X 1 conjectural elasticity Q qi . the MCx1i is MCx1i  w1 (1  i )  Page 65 Chapter 3 .m. x1j is a specific input.  is the x1i x1i qi Q value of output demand elasticity (- Q p ) and  is the input supply elasticity ( p Q X 1 w1 ). w1 is the specific input‟s price. The Optimality condition for firm i‟s factor employment is that its marginal w1 X 1 revenue product (MRP) = marginal resource cost (MRC). ci is the cost function. the MRC can be derived as follows. p is market product price. MPx1i is the input x1i‟s marginal product. Let ci be the firm‟s cost function. 1. with price wk for k = 1.. In firm i‟s output market: MRP  MR  MP  ( p  qi  p(1   p p Q qi  ) Q qi x1i Q p Q qi qi    ) p Q qi Q x1i qi     (1  i )  p  MPx1i  (1  i )  VMP  (1  i ) x1i    2. VMP is the value of marginal product.To summarize this general methodology.  i is the input conjectural elasticity .

it tends to encounter problems with respect to the concepts of concentration and barriers to entry. Accordingly. For instance. 1994). the more likely is the validity of the results. However. marginal revenue and conjectural elasticities. i  i    VMP  wk  Chang & Tremblay (1991) derive in order to measure the degree i VMP 1  of oligopsony market power.   This condition can be manipulated to provide for specific purpose analysis depending on the purpose of each particular study. This is the so-called Gorman Polar form of production technology. Chapter 3 Page 66 . the more mature the market. From firm i‟s optimality condition for input employment MRP = MRC. given certain conditions. the more constant the consumers‟ taste. These conditions include a specific level of marginal costs. That is the firms in the industry are assumed to have linear and parallel expansion paths and therefore values of marginal products and marginal costs are constant and equal across firms. given other things remain static. as will be developed in Chapter 4. Concentration ratios make sense only when the large firms are distinctly large. There are some limits to this structure-conduct-performance approach. their conjectural elasticities are guided along with this condition and hence equal across firms. (Ferguson & Ferguson. marginal resource cost and input price are equal or not. This approach allows different firms to have different cost curves but the curves are all linear and parallel (Appelbaum. it is possible to use industry-level data in place of firm-level data. For instance. The weakness and strength of the conjectural variation approach are extensively addressed in the literature. But it should be noted that this requires some particular conditions for the framework to be effective. In equilibrium each firm equates marginal costs to its perceived marginal revenue hence. it analyses whether output price. 1982). VMP(1   i ) = w1 (1  i ) . In particular. the more saturate the level of technological change. The symbols for elasticity variables for output market ( and ) and input market ( and ) were adopted from the original Chang & Tremblay (1991) model whereas discussions elsewhere in this thesis are discussed in the reverse order of input market / output market (oligopsony / oligopoly).3. One limitation of these models is their application of firm level model to industry level data. Another critique for the framework is that it is a static analysis.

It is claimed that the net effects of the oligopoly and oligopsony market power can be enhancing. He pointed to the problems associated with assuming a firm‟s observed behaviour captures the firm‟s conjectured views on its competitors‟ behavior. However. At best this approach thus provides an average as against a marginal measurement of the conduct parameter. 2000). Corts (1999) argued that the conjectural variation approach fails to measure market power accurately.High profits may arise from efficiency due to their ability to operate at the minimum efficiency scale. The results indicated that the structural (conjectural variation) approach worked well if it was properly specified and the variance of the error structure was not too high. 1999. his alternative total factor model was seen to have weaknesses in determining the degree of monopsony market power unless it was restricted to constant returns to scale (Hyde & Perloff. weakening or indeterminate depending on the functional forms employed. despite increased criticism from a theoretical viewpoint. The conjectural variation approach is criticized as weak by Hall (1988) because it depends on the level of error variance and the returns to scale of the production function. The ability of the model to distinguish various types of market structure was found to depend on the returns to scale of the production function. the level of error variance and the returns to scale of the production function. another weakness was that Hall‟s method was inadequate if one expected to determine the degree of monopsony power. the conjectural variation approach to generation of market power measures was extremely popular for empirical studies (Corts. Chapter 3 Page 67 . 1994). accounting measures of performance may not properly reflect economic profits and costs such as in the case of long-lived capital assets (Carlton & Perloff. He further commented that. They made a comparison between the structural approach and the total factor production approach pioneered by Hall (1988). the conjectural variation approach is weak because it depends on the model specification. Finally. p228). According to Hyde & Perloff (1994). otherwise there would be serious biases. The Hall‟s method worked well when production function was constant returns to scale. For instance Chen & Lent (1992) claim that use of linear output demand and linear input supply models produces indeterminate effects.

In response to these arguments some robustness tests were developed to compare the results from conjectural testing with results from directly measured price-cost margins (Genesove & Mullin. 2004) and a nonparametric measure (Love & Chumway. Recent examples include Morrison-Paul (2001a. However. Sexton (2000) found that the gains from cost efficiency were insufficient to cover welfare losses arising from oligopoly and oligopsony market power. First via its latent effects on cost efficiency that would widen the price cost margin by more than the effect of market power and secondly via its cost saving effects that could be considered as a trade off for welfare losses stemming from market power cases. Examples include Levinsohn (1993) who linked the conjectural variation framework to an output growth function generated by a Taylor expansion. 2001b) which carefully formulated various functional forms to capture the cost structure of the US beef industry. The conjectural variation approach is appealing for the ability to identify the conduct of firms in a general range covering competitive case. Alternative approaches to estimation of market power and industry conduct include a latent modelling of structure model (Mccluskey & Quagrainie. Hall (1988) and Chapter 3 Page 68 . Cournot case and monopsony (monopoly) case. These could be regarded as structural changes in social factors such as taste and healthy lifestyle concerns as well as economic factors such as input substitution and technological progress. 1997). The cost efficiency effect was captured by the elasticity of total cost with respect to output. Alternative approaches such as these can be used to compare with conjectural variation measures. Hence it has been frequently used and continues to be gradually refined. However. 1998 and Wolfram. The model was used to assess whether international trading has helped to curtail domestic market power in certain import competing manufacturing industries. such factors could be transformed into variables for application as exogenous variables in conjectural variation models if deemed appropriate. intermediate case. Azzam (1997) measured the cost efficiency effect of marginal changes in price-cost margin by industry concentration whereas Azzam et al. The issue of technology plays at least two roles in market power analysis. There may be other explanations for the price-cost margin results other than the effects of concentration and market power. 1994). (2004) separated the cost efficiency effect from the market power effect via the estimation of a total factor productivity growth function.

pricing in the US cattle procurement tends to be based on the spot price. The conjectural variation approach has also been applied to a wide range of applications including examples at the macroeconomic level such as international trade agreements in order to identify optimal trade conditions and optimal tax levels (Kiyono. this practice will curtail prices in the spot market. 2006) and to identify trade effects on domestic currency exchange rates (Yu. (Xia & Sexton (2004). Sexton & Zhang (2001). (1997). Studies of that illustrate such refinements and extended applications include: Huang & Sexton (1996) Alston et al. Azzam et al. A study of price dynamics (the speed of price adjustment in wholesale market compared to retail market) following demand shocks (due to food safety scares) using cointegration analysis found that the wholesale market price was six times less flexible than the retail market price hence reflecting a less competitive market at the wholesale level with a tendency to absorb more of demand shocks than the retail market (Saghaian.pricing procurement. For example the bidding for cattle in the US beef packing industry was found non competitive (Crespi & Sexton. bidding. (2005) employed this framework to test for oligopsony market power in US rice milling. Although these studies did not explicitly employ the conjectural Chapter 3 Page 69 .Crespi et al. producers and marketers and estimation of social dead weight losses deriving from market power. the distribution of welfare losses across consumers. contract pricing and Saghaian (2007) wholesale and retail markets. X. processing. The common practice of contract. are found in Crespi & Sexton (2004). (2004) applied a total factor productivity growth model to provide comparison tests for market power with results from a conjectural variation approach. When the same set of buyers operates in both the contract and cash markets. contract. 2004). Zhang & Sexton (2002) and Weldegebriel (2004). Other refinements and applications include: consideration of market power throughout each stage of the market supply chain from the farm to the retail consumer. hence causing anticompetitive impacts (Xia & Sexton. Other applications that do not focus directly on market power assessment but are implicitly linked to imperfect competition in a vertically coordinated market involving such activities as: bidding procurement. 2004). 2007). wholesale selling and retail marketing. The impact of exogenous shocks on key variables in conjectural variation models have been examined by Chen & Lent (1992). Sexton (2000). 2007).

Even studies that had referred to the need for directly estimated marginal productivity. The findings from this section are adopted in the next chapter for the development of a general theoretical model for transformation into an empirical model to test for market power in the tire and natural rubber industries. In contrast.6.variation approach.4 to 2. not only for market power but also other aspects such as optimal tax levels and country level optimal trade agreements. the natural rubber supply chain. Both are determined by the quantity of vehicle production and the number of vehicles in-use. Only a few studies analysed oligopoly and oligopsony simultaneously such as Schroeter (1988) and Azzam & Pagoulatos (1990). Nonetheless. 1991). demonstrates a potential for the tire industry oligopsony power on the natural rubber industry as well as tire industry oligopoly market power on the tire consumers. to apply this approach still requires some extensions to the standard models With respect to the pricing and market structure addressed in Chapter 2 Section 2. did not present any empirical analysis (Chang & Tremblay. Thus. A new passenger car needs five tires. they all focused on the potential for market power along specific supply chains. However. Accordingly. specifically at the level of tire manufacturing. this thesis applies the theory of oligopsony by simultaneous analysis of oligopsony / oligopoly of the natural rubber and tire industries using explicit estimation of marginal productivity from an output production function. acknowledging the weaknesses and restrictions of the Cournot model with conjectural variation approach. the next sections in this chapter provide a survey of studies in the global tire and natural rubber markets.6. In conclusion. the literature discussed above comprises studies that are mostly of oligopoly or oligopsony alone. 3. they did not estimate explicit output production functions to derive the exact marginal productivity required in a conjectural variations approach.1 Tire Production Tire production can be considered to be divided into two categories of vehicles: cars and commercial vehicles. the approach is still appealing to use for analysis.6 Empirical Studies of the Tire Industry 3. A new commercial Chapter 3 Page 70 .

which in turn.62 5.11 8. Table 3. 8. each passenger car produced generates 8.15 2.86 Vehicles in-use - U. 2000). they were only able to estimate a ratio of 1.6.79 3.6 illustrates that using the identity of new vehicle tires plus replacement tires equal to total tire production. The demand for tires on new cars is not related to the price for tires as tires represent only a small portion of the costs of a vehicle.56 1.56 tires per vehicle per year in Japan and 1. based on the commonly accepted reason that cost Chapter 3 Page 71 . The outcomes they found for US. France.vehicle is estimated to need an average 6. is led by vehicles production and vehicles in-use.S. Other factors considered were the impact of technology and learning for which they applied a time trend to proxy the effect of learning-by-doing. 1997).20 units in Japan and 6. These figures produced by Burger & Smit (1997) provide a useful framework by which one can trace the consumption of natural rubber for vehicle tire production.8 tires (Burger & Smit.11 units of tire production in the US. Japan and Germany can be summarized in Table 3.86 units in Germany For vehicles in-use.33 units in France. 3.S. France Japan Germany Commercial vehicle tire production (tire units per vehicle per year) Country Vehicle production (units) U.82 tires per vehicle per year in. France Japan Germany 5.20 6.33 3.82 Table 3. It is the replacement tire demand that is determined by tire prices because users can delay the replacement if prices are high (Carree & Thurik.6 Tire Production Passenger car tire production (tire units per vehicle per year) Country Vehicle production 8.94 Vehicle in-use (units) 1.

2 Tire Demand Previous studies of tire demand are found in Jovannovic & MacDonald (1994) and Carree & Thurik (2000).76 and -0.76.6. The impact of the radial tire was less for commercial vehicle tires than for passenger car tires. No production function estimations were found in this or any other study of tire production and hence there are no previous estimates of the marginal productivity of natural rubber for tire production for use as benchmarks for the estimates produced in this study.24 A second major factor was the introduction of the radial tire in the 1970s that led to a reduction in tire replacement need. price and a net entry system of equations estimation to obtain an average price elasticity of demand for tires of 0. Table 3. in a study of the life cycle of the US tire industry. It was found that tire demand had a price elasticity of 0.reduction always improves over time (Carree & Thurik. St is motor vehicles registered for 1 year or longer. Mt is motor vehicle output. The estimated price elasticities of -0. Pt is tire real price index.S.S. Carree & Thurik (2000). 2000).7 Tire Demand Elasticity Study Jovanovic & Macdonald (1994) Region/time U.48 25 24 Since the first commercial tire was produced in 1906.48. (1913-1973) Qt  a0 M t  (a1  a2QUALt  a3 log(Pt ))St   Qt Where Qt is tire output. are useful benchmarks for the model results reported for this study in subsequent chapters. the value of year – 1905 is employed to address learning-by-doing effects. 25 This is calculated from average tire demand and motor vehicle registered. The estimation results for these two studies are reported in Table 3. extended the results of Jovannovic & MacDonald (1994) using the same data in parts of their model. -0.7.76 Carree & Thurick (2000) U.48. -0. Jovannovic & MacDonald (1994) used an inverse demand function with a constant elasticity to model the tire demand equation for the time period 1913-1973. They used output. Chapter 3 Page 72 . 3. (1913-1973) Model Elasticity 1 p  Qt  ( t ) d1 d0 Qt = tire quantity pt = tire prices.

Chapter 3 Page 73 . which have direct impact on tapping behaviour and uprooting. as natural rubber trees take 7 years to mature and stop producing latex upon reaching 30 years of age. normal production is a function of natural rubber tree quality and area planted: qi   f ( )  yt  a t  where: qi = normal production of natural rubber. Normal production is determined by the yielding quality of natural rubber trees and the planted area.  t f() yt- at Supply behaviour in the long-term is thus similar to that found with perennial crops. Natural rubber supply has elements of actual production and normal production. Yielding quality depends on tree vintages. actual production should be equivalent to total production less normal production. Therefore. In the short-term. current investment decision making in the production of natural rubber is based on expectations about future prices. They concluded that natural rubber is a competitive industry and that an important aspect of natural rubber industry structure is that farming is mostly in small holdings (which are less than 40 hectares).3. This section reviews a number of studies on natural rubber production and price that are of relevance to this study. hence the net changes in production is the response to weather and economic factors.1 Natural Rubber Supply Elasticity Burger & Smit (1997) studied the natural rubber market policy and outlook.7 Empirical Studies of the Natural Rubber Industry. age = t- = area of vintage  still remaining in year t. i.7. For definition purposes Estates are classified as having more than 40 hectares. It also depends on technological progress. 3. = year of planting = year of tapping = embodied technical progress function = ideal yield profile.e.

Accordingly. However. and the calculated normal levels of production in the world. Na Ranong & Triumvorakul (2002) found that INRO was able to generate some profits from the buying and selling of its stocks. 26 The elasticity for Malaysia was based on price / per capita income. when in the rainy season it is difficult to tap the natural rubber trees hence outputs are reduced.14 These estimates provide useful benchmarks for the analysis in Chapter 5. the problem for INRO was the conflict of interest between importing (buyer) and exporting (seller) members and the resultant prices which were not advantageous for natural rubber producers.8 Table 3. In the first stage the world natural rubber price was regressed on a vector of exogenous variables such as a price-index of minerals. In addition.29 0. Burger & Smit (1997) used a two-stage estimation technique to obtain a natural rubber supply function.Typically. during 1980-2000. the International Natural Rubber Organization (INRO) operated a buffer stock of natural rubber in order to stabilize its prices. Chapter 3 Page 74 . the total world consumption of rubber (natural rubber plus synthetic rubber).22 0. ores and metal. To obtain projections for natural rubber supply. 3. (except for the INRO‟s last term) and achieve a degree of prices stability. when price increases.8 Natural Rubber and Price Stabilization As described in Chapter 2. The estimated values for natural rubber supply elasticity are provided in Table 3. formers tend to tap more latex for more income and uprooting and replanting are postponed.8 Natural Rubber Supply Price Elasticity Country Thailand Indonesia: Smallholdings Malaysia: Estate and Small Holding 26 Natural Rubber Supply Price elasticity 0.

9 Conclusion This chapter has provided the background theory for oligopsony/oligopoly analysis. Consequently.8. In a review of natural rubber supply studies it was found that tire demand has two components namely demand from new vehicle production and demand for replacement tires. 3. The degree of oligopsony/oligopoly power is defined as the deviation of actual input prices from the value of their marginal products (shadow price) with the shadow price being derived from the profit maximization conditions. They found that the combined effects of falls in the Thai baht. A review of the literature on measuring market power identified three approaches: buyer concentration. New vehicles‟ Chapter 3 Page 75 . Hence. the 15% fall in world price was argued to have raised the real domestic price by 25%.1 Natural Rubber Prices and Currency Exchange Rates Burger. the Indonesia Rupiah and the Malaysian ringgit was a drop in the world price for natural rubber by 15%. the deviation from the competitive standard is considered potential evidence of market power. The analysis was first framed for a perfectly competitive market that was then used as a benchmark to evaluate production and employment in imperfectly competitive markets. Given that the combined real currency depreciation was 40%. effects from structural changes and the conjectural variation approach. Smit & Vogelvang (2002) studied the effects of the 1997 exchange rate depreciation in major producing countries on natural rubber prices. an analysis of input and output market competitor behaviour. It began by reviewing the theory of production and price in output markets and employment and price in input markets. Findings support the claim that the higher the degree of imperfect competition. is needed as well as the elasticities of demand for inputs and supply of outputs. Typically studies using this approach adopt a duality theory approach namely the application of Shephard's Lemma and Hotelling's Lemma to derive demand functions for inputs and supply functions for outputs respectively. that is conjectural variation in output and input markets. Following discussion of the theoretical background.3. The conjectural variation approach is considered to be of most relevance for the approach adopted in this thesis. this chapter has provided an industry background into aspects of tire production and tire demand. the higher is the degree of oligopsony/oligopoly market power and vice versa. to obtain a valid measurement of market power.

Previous estimates of natural rubber elasticity for Thailand. 2000).demand for tires does not have a price effect since it is a small item relative to the cost of the whole vehicle. the findings in this chapter assist the development of a general theoretical model.14 respectively (Burger & Smit 1997). and its corresponding empirical application in Chapters 4 and 5 to analyse the degree of market power that global tire industry might exercise on the global natural rubber market. 0. Indonesia and Malaysia are 0. Demand for tires from vehicles in-use responds to tire prices.22.29 and 0. The International Natural Rubber Organization (INRO) was found to have had a degree of stabilization on natural rubber price during its existence. Previous estimates of US tire demand elasticity are -0. The studies also concluded that the natural rubber industry is competitive. Together with the background study of the markets for tires and natural rubber provided in Chapter 2.76 (Jovanovic & Macdonald 1994) and -0. Chapter 3 Page 76 .48 (Carree & Thurik. Supply is price sensitive as farmers can vary tapping intensity and tree uprooting rates in responses to price changes despite the fact that in the long term natural rubber planting is based on perennial crop theory.

the market power index developed by Chang and Tremblay is extended via identification of four different interpretations according to alternative interpretations of various components of the original model. The Lerner index can be shown to be consistent with other market power measures such as concentration ratios. 4.2 The General Model A foundation concept for the measurement of market power is the Lerner index: that market power is the difference in output price and marginal cost divided by output price. The theoretical model is derived from that developed by Chang & Tremblay (1991). In the subsequent chapter. This chapter develops a theoretical model from which a market power index is derived. many subsequent studies have extended the basic Lerner concept in a variety of different ways.Chapter 4 A General Model of Oligopsony Market Power 4. It also provides for measurement of both oligopsony and oligopoly power simultaneously. This model and its market power index forms the basis for the empirical analysis of oligopsony power for global tire and natural rubber industries found in the next chapter. the theoretical model developed in this chapter is converted to an empirical form for estimation.1 Introduction The theoretical concepts of market power and economic analysis were identified in Chapter 3. Chapter 4 Page 77 . The market power index derived from their model comprises a series of elasticities that all are potentially estimable even though Chang and Tremblay themselves do not apply their index to empirical example. and the HerfindahlHirschman index. In this study. Application of the four derived market power index measures is then reinterpreted to provide for application to a global/country level model for examination of the global tire manufacturing industry and its link to a country level natural rubber industry. market shares. Market power indexes are then derived for each of the four alternative model interpretations to evaluate whether oligopsony market power is present at a country level for natural rubber inputs into the global tire manufacturing market. Accordingly.

Their theoretical approach requires modelling both product and input markets for a specific output and input commodity. firm i requires inputs xki. The inverse demand function for this output commodity is given by. Chapter 4 Page 78 . It comprises an output product demand function. which requires some minimal scale sufficiency. The firm also employs some other inputs which are traded in competitive markets. Q   qi is market output and q i is the output of firm i for i = 1. Input Supply Function To produce this commodity. A non-competitive output market is possible if n is small enough such as when entry may be blocked by technology. The market power index (based on the Lerner measure) is derived from the firm‟s optimality condition for profit maximization with respect to the employment of the specific input. 2. whereas their natural rubber input are imported from other lesser developed countries. the output product production function and the input supply function. where k = 1 … m.This study is based on the particular model developed by Chang & Tremblay (1991). The derived index is then able to be interpreted for a number of different market structures. The Chang & Tremblay model and its variant versions developed for this study are derived as follows. (4:1) P  p(Q) Where: P is output price. The model is found to be suitable for achievement of the aim of this study which is the measurement for any possible existing market power in the global tire industry on the natural rubber industry. Owing to the fact that world tire manufacturing is controlled by a small number of multinational companies headquartered in the world‟s major economies. this model is capable of modification from the original design application at an industry/firm market power analysis level to a global/country market power analysis level. Output Demand Function The output commodity is assumed homogeneous and produced by i producing firms. 3…n firms in the industry. In this study the specific input of interest (x1i) is natural rubber which is from this point on denoted as xri.

h1  XR   xri - W k 2 m k  xki The input employment levels that maximize the firms‟ profits are derived from the conditions π πi  0 and i  0 respectively. then non-competitive buyer behaviour is possible in the market for xri. Given that input xr is the focus of our xk i xri model we derive the optimality condition for purchase of xr as follows.2.As in the output case.WR  xri - W k 2 m k  xki where i denotes firm i‟s profits. k = 2.m are the vectors of prices and quantities of other inputs respectively.1 Optimality Condition and the Derivation of Market Power Index for Model 1 The firm‟s profit function comprises: (4:4) πi  P  qi . including xr and all other inputs such as physical capital in order to maximize the firm‟s profit. In addition: dWR 0. Output prices (P) and input prices (WR) are market determined prices as identified in (4:1) and (4:2). if n is small. Chapter 4 Page 79 . 27 4. the problem of the firm is to choose the optimal level of inputs.…. dXR Output Production Function Let the production function of the firm be (4:3) qi  f i(x ki ) According to economic theory. Hence (4:4) can also be represented as: (4:4a) πi  pQ   qi . 27 For capital the input price would be the rental price of capital. Let the inverse market supply of the specific input XR be given by: (4:2) WR  h1(XR ) Where: WR is the per unit price of XR and XR=xrj is total supply of the specific input XR from j supplier firms. Wk and xk .

WR P MPXRi  . our index for measuring input price distortions is defined as the difference between the value of the marginal product of the input (VMP) and the input price (WR) divided by the value of the marginal product (VMP). for input xri. i  dQ qi : is the i‟th firm‟s output conjectural elasticity with respect to total  dqi Q industry output.(4:5) qi dP dQ  q i dWR dXR    qi  P   xri  WR  0 . i  dXR xri : is the i‟th firm‟s input conjectural elasticity with respect to the  dxri XR industry‟s total factor demand for XR. ε WR XR : is the inverse price elasticity of supply for input XR as derived from the  XR WR inverse supply curve. xri Chapter 4 Page 80 . where VMP is given by P(MPXRi). Our market power index for XR namely MPIXRi is derived by rearranging the optimality condition (4:5) such that it comprises measurable variables in the form of marginal products and elasticities. MPXRi  qi : is the marginal product of the XR of the i firm. (4:6)   qi   dWR XR   dXR xri   dP Q   dQ qi   qi  dQ  P   dq  Q   xr  P   xr  P   dXR  WR   dxr  XR  WR  WR  0  i   i  i   i    Within (4:6) we can identify a number of standard variables and denote these variables as follows. First we rearrange (4:5) as follows. MPI XR i  PMPXRi  . η P Q  : is the inverse price elasticity of demand for product Q as derived from the Q P inverse demand curve. dQ dqi xri xri dXR dxri As discussed in Chapter 3. This can be presented in the following form.

MPXRi ) to both sides. P.MPXRi 1    i Simplify as follows: (4:8) P. the market power index in (4:8a) requires estimation of each of the four elasticities: (.MPXRi  WR    i     i   VMPXRi P. i.MPXRi  P.MPXRi  WR   i     i  P. Four approaches are identified for estimation of MPIXRi. i.1) Chapter 4 WR  11  Pi   21  q i1   31  xr i1    Page 81 .MPXRi / P. The first approach (empirical Model Number 1). The values for  i1 and i1 can be derived by the estimation of the optimality equation (4:5) in the following format.. Rewrite (4:5) as: (4:10.MPXRi P.MPXRi     i  WR  WR  0 Rearranging (4:7) gives P. we denote as MPIXRi1 such that: (4:9) MPI XRi1     i1     i1 1     i1 The values for  and  will be derived from empirical estimation of equations (4:1) and (4:2) respectively.MPXRi    i  1  WR   i  1 Bringing key variables to the right hand side yields: WR   i  1  P. (4:7)    i  P.MPXRi 1    i For empirical application.Substitution of these elasticity terms into (4:6) provides for the following more convenient expression.MPXRi WR   i  1  1 P.MPXRi 1    i This now provides us with a market power index that is expressed in terms of four elasticities (4:8a) MPI XRi  VMPXRi  WR P.).MPXRi   i  1 Multiply both sides by -1 and add (P.

1) qi P xr i dP  q i   qi dQ xr i (4:14. dxri (4:13. the slope of the input supply curve ( ) and the marginal product of the dXR dQ qi ) which are estimated from equations (4:1). i1 allows the market power index in (4:9) MPI XRi1     i1     i1 to be obtained. If H0 is not rejected then: WR  qi  P and hence the input xri is being paid the value of its marginal product.1) q i1   (4:15.1) are: the slope of the output demand curve ( dWR dP ). significant positive values of 21 indicate the presence of Chapter 4 Page 82 .1) the values for 21 and 31 are then used to calculate the two conjectural elasticities  i and i as: (4:16. In particular. i1. xri input xri ( After estimating equation (4:10. 1     i1 The null hypothesis of input market efficiency (no market power) can be stated in terms of the three coefficients in 4:10. (4:2) and (4:3) respectively.1) Substituting the estimates for .1) xr i1  dWR  xri dXR Three key components of the variables in (4:10.1 as H0: 11 = 1. 21 = 31 = 0.1)  i1   21   i1   31  qi Q xri XR (4:17. then i1 = i1 = 0 and MPIXRi1 = 0.Where: (4:11. thus indicating a perfectly competitive input market. .1)  31  Pi    dXR . xr i Further.1)  21  dQ dqi (4:12. if 21 = 31 = 0. Rejection of Ho indicates the presence of non competitive markets.

Similarly the input supply elasticity (ε) in the derivation above is defined as WR XR as reflects its intended XR WR derivation from the inverse supply curve WR=h1(XR).2 Reconciliation of the Derived Market Power Index and the Chang & Tremblay Index The derived MPI in (4:9) above differs from that developed by Chang &Tremblay (1991) article. Critical differences arise due to interpretation of the elasticities  and ε and the subsequent construction of the MPI. In the market power index derived for this study demand elasticity is defined as: inverse demand curve P = p(Q). as would be derived from a normal supply function. 1  ε* in contrast to the market power index model 1 derived for this study as: (4:8a) MPI XRi    i     i 1    i The mix of inverse and direct elasticities raises both theoretical and estimation questions that are not addressed by Chang &Tremblay (1991) who recommended that the direct elasticities (* and ε*) be derived from econometric estimations of inverse Chapter 4 Page 83 . This is the conventional price elasticity of P Q P Q as reflects its estimation from an Q P demand for a normal demand curve (Q = p(P)). The interpretation of MPI and the presence of various market structures are considered in more detail later in this chapter. However.oligopoly in the output market and significant positive values of 31 indicate the presence of oligopsony in the input market.2. As a consequence Chang &Tremblay (1991) express their market power index as: i (4:8b) MPI XR i 2  ε*  i i η* . Hence ε as WR XR defined for the inverse supply curve becomes 1/ ε = ε* for the Chang &Tremblay model. Chang &Tremblay defined output commodity demand elasticity as:  Q P  . Chang &Tremblay defined ε as: XR WR . 4. Hence  as defined for the inverse demand curve becomes -1/ = * for the Chang & Tremblay model.

4.2) and calculate the conjectural elasticity estimates: i2. The assumption that inverse elasticities are equivalent to direct elasticities by implication assumes that inverse functional forms are equivalent to direct functional forms. estimate equation (4:10. Chapter 4 Page 84 . P is output price and η*  Q P  is the direct price elasticity P Q of demand for product Q as derived from the direct demand curve. and i2. equation (4:19) for * and in parallel to Model 1. These elasticities are derived from different functional forms with different theoretical foundations in respect of the causal relationships between dependent and independent variables.demand curves (that is as  and ε) and then inverted to obtain * and ε*. namely MPIXRi2 is i 2 (4:20) MPI XR i 2  ε*  i2 i 2 η* 1  ε* For empirical application.2.2. This index we refer to as Model 2 and its derivation is as follows. Econometric assumptions can be violated by incorrect model specifications. However. (4:19) XR=h2(WR) Where XR is the market supply of the specific input. The value for the market power of Model 2. WR is the per unit price of XR and ε*  XR WR : is the direct price elasticity of supply for input XR as derived from the  WR XR direct supply curve. estimate equations (4:18) for *. a direct version of tire demand is given by: (4:18) Q = q(P) Where Q is market output. It is not considered valid to assume -1/ = * and 1/ ε = ε*.2. analogous to that adopted for Model 1.3 Optimality Conditions and Derivation of Market Power Index for Model 2 To derive the Chang and Tremblay index described in section 4. it is possible to derive the Chang and Tremblay index without transgressing the theoretical foundations.

2) the values for 22 and 32 are then used to calculate two conjectural elasticities as: (4:16.2) xr i 2   After estimating equation (4:10. Given: (4:21) Q  f 2(qi ) Chapter 4 Page 85 .4 The Derivation of Market Power Index for Model 3 An alternative approach to the derivation of the conjectural elasticities  i and  i is possible.  dXR   dXR  dXR      dWR   dWR  (4:15. in each individual firm‟s (or country‟s) market share of the global industry.2) WR  12  P i 2   22  q i 2   32  xr i 2     22  dQ dqi dXR .2) (4:14. This is then used to develop a proxy measure for the individual firm‟s conjectures on industry responses to its behaviour. where ≡ . *. dxri qi P xr i (4:12.2. over the studied time period. 4. Consider the following approach that uses direct estimation of the i‟th firm‟s (or in this case the i‟th country‟s) observed response to industry changes.   qi .(4:10.2)  32  Pi 2    (4:13. i2.2) qi2  qi 1 1 dP ≡ .2)  i 2   32  xri XR Substituting values for *.2) Where: (4:11.2)  i 2   22  qi Q (4:17. where  dQ  xr i  dQ  dQ      dP   dP  1 1 dWR  xri . and i2 into (4:20). a value for the MPIXRi2 is derived. Fundamentally this approach simply measures the average response.

and. i3 and i3 into the market power expression (4:25). Japan and Germany. equation (4:21) for i3. can then be derived.  dqi Q dXR xri . delivers a value for the market power index for Model 3.5 The Derivation of Market Power Index for Model 4 For this model the conjectural elasticity values from (4:23) and (4:24) are applied to direct versions for tire demand (4:18) and natural rubber supply (4:19). The values: (4:23) αi 3  dQ qi . 4. Consequently. we estimate the following equations: equation (4:1) for . it implies that the Chapter 4 Page 86 . we estimate equation (4:19) for *. France. 1  ε* For empirical application.3 Interpretation of the Market Power Index The market power index (MPIXRi) measures the economic rents.e. for Model 4 which provides for an alternative estimation approach for the Chang and Tremblay version of the market power index in (4:8b). . equation (4:21) for i3. The market power index is:  dxri XR (4:24) β i 3  (4:25) MPI XRi 3    i3     i3 1    i3 For empirical application. and equation (4:22) for i3. Substituting these values provides the Market Power Index (4:26). a portion of the value of the marginal product which is not covered by market prices hence could be gained by the oligopsonist and oligopolist firms. 4.(4:22) XR  f 3 ( xri ) For i = US. equation (4:2) for . Substituting values for:.2. to provide the market power index: i3 (4:26) MPI XR i 4  ε*   i3 i3 η* . and equation (4:22) for i3 . equation (4:20) for *. i.

28 It can be seen also that the level of MPIXRi is determined by the values of . the higher the MPIXRi. The index has some useful properties that should be examined. the Cournot equilibrium case (equal market shares in either markets) and the Robinson classic case (monopsony input market and monopoly output market). Firstly. Consequently inefficiency in resource allocation is increased by low values of . when defining the industry market power index for input (natural rubber) market as  (MPI XRi  xri ) . . It approaches 1 as the input price approaches 0. Similarly.1 illustrates diverse types of market structures and their impact on the value of the MPIXRi index. i. the MPIXRi index is general since it covers a variety of market structures. 407. when defining the industry market power index for output (tire) input market if (   i ) q market as  ( MPI XRi  i ) it approaches the Herfindahl-Hirshman index in the output market if Q dQ dqi  1. and i. 28 From Chang & Tremblay (1991) pp.pricing mechanism is not perfect and thus inefficiency might be evident in input and output allocation. Between these two extreme cases. by its definition. it approaches the Herfindahl-Hirshman index in the XR dXR dxri  1 . Accordingly. and . It can be seen that the index is general in that it covers cases like the Lerner case (competitive input market and monopoly output market). the value of MPIXRi ranges from 0 to 1. the greater is the inefficiency in resource allocation.  Chapter 4 Page 87 . Secondly. and i. It is 0 when input XR receives a price that equals the value of its marginal product: WR=PMPXRi. and high values of i. Table 4.

i=0 Oligopsony /Competitive MPI XR i  ε  i 1  ε  i Oligopsony / Oligopoly 0< i <1 5: 0<i<1. 0<i<1 Monopsony / Oligopoly ε  η  i 1 ε 9: i=1. i=1 Monopsony / Monopoly (Robinson case) MPI XR i  εη 1 ε 4. the use of rayon as the Chapter 4 Page 88 . 0<i<1 3: i=0. i=0 i = 0 2: i=0. Key amongst these were the invention of cord tires and straight-side tires which replaced clincher tires in 1913. 0<i<1 x11 x12 q1 q2 or   .Table 4. The nature and background of the tire industry as discussed in chapter 2 outlined how the industry began a hundred years ago and has since passed through phases of invention. i=1 MPI XR i  ε  i  η   i 1  ε  i 0 Competitive / Competitive Competitive / Oligopoly Competitive / Monopoly (Lerner case) MPI XR i  η   i MPI XR i   η 4: 0<i<1. the invention of the Banbury mixer in 1916 to mix rubber with other compounds. i=1 Oligopsony / Monopoly MPI XR i  ε  i  η 1  ε  i 7: i=1. production innovation and structural change. X1 X1 Q Q implies Cournot case of equal market shares.1 Market Power Index and Market Structures Market structure: Input / Output MPI General Model (4:8a) 1: i=0. i=0 Monopsony / Competitive MPI XR i  MPI XR i  ε 1 ε i = 1 8: i=1.4 Application of the Model to Global Natural Rubber and Tire Industries Characteristics of the tire industry and natural rubber industry render it appropriate to shift the model from an industry/firm level to global/country level. MPI XR i  ε  i  η   i 1  ε  i 6: 0<i<1.

However. Firms that did not have sufficient production scale could not afford these technologies. Jovanovic & MacDonald 1994. data are also more readily available at a country level. this input is imported from supplying countries. Therefore. the subsequent replacement of rayon by nylon and the invention of synthetic rubber as a substitute for natural rubber in the 1940s. they could not survive the competition (Gort & Klepper 1982. Goodyear in the USA. e. The presence of a global industry structure also raises the question as to whether the global tire manufacturing industry has the potential to exert market power over the natural rubber industry at a country level. Specifically. such as the advent of mass marketing methods. the application of a firm level model to country level model poses theoretical as well as conceptual and empirical considerations.fabric from which tire cords were made in 1930s. the subsequent replacement of nylon by polyester and the invention of belted biased tire design in 1960s. This is the so-called Gorman polar Chapter 4 Page 89 . Advances in technology and management improvements. As the tire producing countries do not produce natural rubber. France and Japan. from Indonesia is the USA and from Malaysia is the European Union.g. Accordingly. during the time studied by this thesis (19602000). the invention of the tube tire in 1950s. the world tire industry comprises a few multinational producers that not only are operating in a global industry but are also purchasing inputs such as natural rubber from country level suppliers. countries such as Malaysia. (French 1991) generated lower marginal costs. The literature argues it is possible to substitute industry-level data for firm-level data if the firms in the industry are assumed to have linear and parallel expansion paths such that the values of marginal products and marginal costs are constant and equal across firms. For empirical analysis. These data also reveal a country-wise pattern of natural rubber exports from supplying countries to tire manufacturing countries in that the destination of most of natural rubber exports from Thailand is Japan. and radial tires in the 1970s. marginal costs tend to be similar among firms and a few prominent firms dominate the world tire industry. Bridgestone in Japan and Continental in Germany who produce and supply tires all over the world. Michelin in France. higher output and lower prices. Klepper & Kenneth 2000 and Carree & Thurik 2000). consequently. Indonesia and Thailand supplied natural rubber to the key tire producing countries: namely the USA.

it can be argued that conjectural elasticities are not constant over time. tire production is usually classified by vehicle type namely: passenger car tires. With many small competing natural rubber producers this is not considered an unreasonable assumption. Figure 4. a portion of natural rubber production from country j such as Thailand. Accordingly. bus tires and off-highway tires. 29 A detailed analysis of the data available for empirical analysis was undertaken in Chapter 2. Chapter 4 Page 90 . Malaysia and other producing countries is consumed domestically. The dominance of the industry by major producers with manufacturing plants in both within and without their home countries via subsidiary and joint venture companies was demonstrated. Hence. which is the major portion used to produce passenger car tires and commercial vehicle tires. Germany and other consuming countries.form of production technology. Japan. This application requires all industry level variables to be reinterpreted as global variables and firm level variables to be reinterpreted as country level variables. commercial vehicle tires. In the destination countries. France. It allows for different firms to have different cost curves but the curves are all linear and parallel (Appelbaum 1982). Indonesia. The rest is exported to destination countries such as the USA. Passenger car tire and commercial vehicle tires are the two most important types. in equilibrium each firm equates marginal costs to its perceived marginal revenue and their conjectural elasticities are hence equal across firms. Data deficiencies were identified with respect to specific location of all tires produced. This is due to the changing structure of the industry. truck tires. It was concluded that there was potential for market power to be exercised in the natural rubber markets from the buyer side (oligopsony) and this potential could be analysed via either company level or country level data. some of the imported natural rubber is consumed in the general sectors such as construction and irrigation. In addition. The rest are employed by the tire sector. The general model is thus capable of application from its original industry/firm level to global industry/country level. the aggregate value of the conjectural elasticities over time changes too (Gohin 2003).1. 29 However. As depicted by Figure 4.1 illustrates the flows of natural rubber from producing countries to its various production uses in a global industry context.

These models are designed for empirical application as described in the next Chapter. A summary of the different market power index models and the different approaches to their empirical application is summarized in Figure 4. to yield a natural rubber marginal product for tire production in each country. In Step B the natural rubber supply equation is estimated in order to retrieve the natural rubber price elasticity. The inverse tire demand function is estimated in order to obtain the tire price elasticity. This model is extended to incorporate 4 different interpretations which we labelled as models 1 to 4. The model is based on the model developed by Chang and Tremblay (1991).2. tire demand and tire sector Chapter 4 Page 91 .5 Conclusion and Summary This chapter has described a general model for the derivation of a market power index that can be used to assess the oligopsony/oligopoly power of global tire manufacturing countries consuming natural rubber inputs from supplying countries. Model 1: the derivation of the market power index starts from Step A.1 The Flows of Natural Rubber from Producing Countries Country j’s Natural Rubber Production  Country j’s Domestic Natural Rubber Consumption  Natural Rubber Consumption in Country i’s General Sector  Tire Production in Country i  Passenger car tires + Commercial vehicle tires = most of tire production Natural Rubber consumption in Country i’sTire Sector  Country j’s Natural Rubber Exports to Destination Country i 4. In Step D the estimated coefficients are used to transform tire price. In Step C each specific country‟s tire production equation is estimated.Figure 4.

B. The corresponding market power  i3 index is derived as: MPI XR i 4  ε*   i3 η* 1   i3 ε* . The direct tire demand function is estimated in order to obtain the tire price elasticity. H and I. both in the product market and in the input market. The estimated values for conjectural elasticities are α i 3 and  i 3 . Finally. In Step B the direct natural rubber supply equation is estimated in order to retrieve the natural rubber price elasticity. In Step F the estimated coefficients (‟s) are used to calculate each firm‟s conjectural variation elasticities. Finally. In Step E all of the three transformed variables are employed to estimate the optimality equation. in Step G the market power index for Model 1is calculated as MPI XRi1     i1     i1 1     i1 Model 2: the derivation of market power index starts from Step A.natural rubber inputs. tire demand and tire sector natural rubber consumption. Model 3: An alternative approach to derive the market power index is to directly estimate each firm‟s conjectural elasticities in the product and input markets in Step H. Chapter 4 Page 92 . Then in Step F the estimated coefficients are used to calculate each firm‟s conjectural variation elasticities. Model 3 comprises Steps A. This gives estimates for the ’s. H and I. B. each specific country‟s tire production equation is estimated. In C. In Step E all the three transformed variables are employed to estimate the optimality equation. In Step D the estimated coefficients are used to transform tire price. in Step G the market power index for Model 2 is calculated i2 as: MPI XR i 2  ε*   i2 η* 1  i2 ε* . 1     i3 Model 4: Model 4 comprises Steps A. to yield a natural rubber marginal product for tire production in each country. The market power index is thus derived as: MPI XRi1 3     i3     i3 . both in the product market and in the input market.

 *  dXR WR dWR XR Model 1 & 2 Tire Production Function and Marginal Products C (4:3) qi  f i(xri )  Model 1    → MPXR i  qi xri  Model 2    Calculate variables  P . xr i  qi 1 qi2    qi  dQ  xr i    dP  xr i   1  xri  dXR     dWR   E Model 2 Estimate Optimality Condition (4:10.  i 2   32  i XR Q  Model 1 Calculate MPIXRi1 G (4:9) MPI XRi1     i1     i1 1     i1 Model 2 Calculate MPIXRi2 i 2 (4:20) MPI XR i 2   ε*  i2 i 2 η* 1  ε*  Chapter 4 Page 93 . q i . qi    qi .  i1   31  i XR Q   i 2   22  xr qi . xr i Calculate variables Pi 2   P . dQ xr i  dWR xr i   xri dXR  Model 1 Estimate Optimality Condition (4:10.2a Summary Derivation of the Market Power Index for Model 1 and Model 2 Steps A (4:1) Model 1 & 3 Inverse Tire Demand Model 2 & 4 Direct Tire Demand (4:18) Q P  p(Q) .1) qi P .  *  Q P  P Q Model 1 & 3 Inverse Rubber Supply B (4:2) Model 2 & 4 Direct Rubber Supply (4:19) XR WR  h1(XR ) . xr i D qi Pi  P xr i  dP  q i .   P Q  Q P  q(P) . q i .Figure 4.2) WR  11  Pi   21  q i  31  xri → 21 and 31  Model 1 Calculate Conjectural Elasticities    WR  12  P i 2   22  q i  32  xri → 22 and 32  Model 2 Calculate Conjectural Elasticities    F  i1   21  xr qi .   dWR XR dXR WR  h2(WR ) .

Figure 4.3b Summary Derivation of the Market Power Index for Model 3 and Model 4 Model 3 & 4 Direct Estimation of Conjectural Variation Elasticities H Q qi  qi Q dXR xri Natural Rubber Market: (4:22) XR  f 3 ( xri ) → (4:24) βi 3   dxri XR Tire Market: (4:21) Q  f 2(q i ) → (4:23) αi 3   Model 3 Calculate MPIXRi3 I (4:25)  Model 4 Calculate MPIXRi4 MPI XRi1 3     i3     i3 1     i3 i3 (4:26) MPI XR i 4  ε*  i3 η* 1  i 3 ε* Chapter 4 Page 94 .

However. If two or more series are I(1) and a linear combination of them is stationary then the series are said to be cointegrated and hence exhibit a long run relationship. Estimation results are reported and the required elasticities for each version of the market power index are obtained and used to derive market power indexes on a country basis. Results using both Dickey-Fuller (DF & ADF) and Phillips-Perron (PP) tests confirm nonstationarity across all series. Testing for cointegration is undertaken by assessing whether or not the residuals from an OLS estimation of the relationship are stationary. Regression analysis was employed for the analysis. However.1 Introduction This chapter provides the empirical application of the general model developed in Chapter 4. The approach adopted was summarized in the concluding section of Chapter 4. This is undertaken by application of DF. Nonstationary data can generate spurious regression results when using OLS estimation techniques (Ramanathan. further testing confirmed all series were stationary in first difference form (integrated to order one I(1)). Standard approaches to testing for nonstationarity were applied to all key variables. The results were consistent for all variables using PP tests but a small number of variables failed to reject the null hypothesis of nonstationarity using the DF and ADF approach.Chapter 5 Data Analysis and Empirical Estimation 5.2 Data Tests for Nonstationarity Time series data are typically nonstationary. Test results are summarised in Appendix 5.1 Nonstationary data series may still exhibit a long run relationship. That is they do not exhibit time invariant mean. variance and serial correlation found with stationary data series. The first step requires specification of functional forms for estimation of each of the general model equations. 1998). Rejection of the null of nonstationarity in the residuals is used to confirm that OLS estimation can be used to Chapter 5 Page 95 . model specification is contingent on data characteristics so variables for each equation are analysed and tested for nonstationarity prior to functional specification. ADF and / or PP approaches to the residuals of the OLS regression. 5.

Q P  ln(Q) For the direct tire demand model. the estimation approach uses OLS estimations of long run relationships rather than short run error correction model relationships. from which we derive the slope   P P  [ 11  13 ln(VI )]. 5. The inverse demand function (5:1). Significantly a negative error correction coefficient is required in such a model to confirm the relationship and its adjustment to the long run equilibrium relationship is not explosive (Ramanathan. 1998). (5:1) ln( P)   10   11  ln(Q)   12  ln(VP )   13  ln(VI )  ln(Q)   14  ln(GDPPUS ) A log-log functional form is employed for (5:1).3.identify the long run relationship (Enders. 1995. 1998 ).3 Estimation of the Tire Demand Function Tire demand is modelled in both inverse and direct form. the world tire demand (Q) is modelled as a function of tire price (P) and the corresponding vector of shifting variables comprises world vehicle production (VP). SHAZAM. and US per capita income (GDPPUS). and the inverse elasticity: Q Q  P Q  ln( P)     11   13  ln(VI ) . models tire price (P) as a function of world tire production output (Q).2 and estimation results for error correction models of inverse and direct natural rubber supply functions are found in Appendix 5. These results also support the cointegration test findings of a long run relationship. . world vehicle production (VP) . A further extension of the cointegration concept involves the estimation of an error correction model that can be used to identify the short run relationship between the particular series. 1997 and Ramanathan. A summary of the test results is found in Appendix 5. This approach was applied to all the major functional relationships and the results confirmed the presence of a cointegrating relationship. the interaction of world vehicle in-use (VI) and Q. Given the focus of this study is long term and requires estimation of long run elasticities. world vehicle in-use (VI) and a time trend (T). Tests on error correction models for the major functional forms found correctly signed error correction coefficients. Chapter 5 Page 96 .

Data for natural rubber and synthetic rubber consumption in tire manufacture are available for USA. A significant omission from the data is China and hence despite its significant consumption since 1990s China is excluded .1 Variable Description for the Estimation of the Tire Demand Function Variable P Description Tire prices: US tire price index deflated by US consumer price index. US per capita income deflated by US consumer price index.K. Japan. from which we derive the slope * = Q Q Q P  ln(Q)   21 and the direct elasticity  *      21 P P P Q  ln( P) Variables that are employed to estimate the demand functions are summarised in Table 5.1 Table 5. did not have separate data until recent years. Chapter 5 Page 97 . Spain. Italy. U. Russia and the Republic of Korea.. In contrast the ratios vary more significantly for special tires such as racing tires (35% / 65%) and off-highway tires (80% / 20%). 30 30 Of course. natural rubber consumption data could be used in place of natural rubber used in tire sector in such cases. Base year 1995 = 100 A time trend. The summation is also based on the consideration that natural rubber and synthetic rubber input ratios used in passenger car tire and commercial vehicle tire are very close viz: 55% / 45% and 50% / 50% respectively. Brazil and India.(5:2) ln(Q)   20   21  ln( P)   22  ln(VP )   23  ln(VI )   24  ln(T ) A log-log functional form is employed for (5:2). Accordingly the selected definition for tire production is also more suitable for tire production function estimation. Q VP VI GDPPUS T Tire production is classified as passenger car tires plus commercial vehicle tires since data records for some countries such as China. base year: 1995=100 World tire production World passenger car and commercial vehicle production World passenger car and commercial vehicles in-use. France. Germany.

Table 5.6.35 116.2 Tire Price Index (P) (deflated by US consumer price index) Chapter 5 Page 98 .94 35.63 4.923.26 231.2 Summary Statistics for Tire Demand Variable P P (Deflated) Q (mill) VP (mill) VI (mill) GDPPUS ($) Mean 71.83 145. each new car requires at least five tires.576.34 12. tire production should be determined by both vehicle production and vehicles in-use.70 81.147.501.1 Tire Price Index (P) Figure 5.00 197.00 Minimum 35. Figures 5.27 246.As previously noted.90 748.00 Standard Deviation 25. US per capita income is used as a proxy for income factor determining demand for tires.77 22.00 30.1 to 5.2.46 408. Summary statistics for the tire demand variables are displayed in Table 5.00 These data are represented graphically in Figures 5.114.1 to 5.18 14.00 199. Therefore.00 13.92 37.80 54.00 Maximum 100.10 1.6: Tire Demand Variables Figure 5.92 674.

) Figure 5. This algorithm provides standard tests for autocorrelation (DurbinWatson and Lagrange Multiplier) that were used to determine an appropriate order of autocorrelation correction to apply each individual equation.) Figure 5.0 with second order autocorrelation correction. Chapter 5 Page 99 .0837 + 3. Heteroscedasticity is a more serious problem for cross sectional than time series data however standard diagnostic tests provided by the SHAZAM algorithm did not reveal any significant problems.0. at the global level. R2and t-statistics. The estimation was undertaken using the non-linear algorithm in SHAZAM V9.0922ln(VI).5 World Passenger Car and Vehicle In-use (VI) (mill.3.4 World Passenger Car & Commercial Vehicle Production (VP) (mill.1 Estimation Results for Tire Demand Inverse Tire Demand Estimation Results (Equation 5:1) Estimation results for equation (5:1) are shown in Table 5. 31 The regression estimations in Chapter 5 were undertaken using the non-linear algorithm in SHAZAM V9. Multicollinearity was tested by careful examination of the impact of variations in model specification on coefficient estimates. a tire is an inferior good with respect to US per capita income.3 World Tire Production (Q) (mill) Figure 5.6291. 31 The estimated results in Table 5.6 US Per Capita Income (GDPPUS) ($US deflated) 5.Figure 5.3. The income elasticity is -5. indicating that. An error term is not identified for all equations in this Chapter.3 for price elasticity are derived from -3.

9589) -3. Equation (5:1) applies a simpler structure to estimate an inverse demand curve. The argument that each new vehicle needs at least 5 tires is applied by fixing 12 = 5. M is output of motor vehicles.5900 to -0. It ranges from -0. which they expected to be positive and greater than these two negative effects.3439.152)*** US per capita income (GDPPUS) Chapter 5 Page 100 . They compensated the potential negative effects of tire quality (QUAL) and tire prices (P) on tire output (Q) by assigning a1. dQ The inverse demand function estimated as (5:1) can be compared to that estimated by Carree & Thurik (2000.709)*** -5. The corresponding direct demand elasticity is -0.2152.Q) 12 12 13 3.0922 (4.1518. P is the price index of tires and S is the number of motor vehicles registered.8229 to -0.1738 (-1.0837 (-5. It ranges from -20.0000 # Tire quantity (Q) Vehicle production (VP) Vehicles in-use Tire quantity (VI.6291 (-5.Overall price elasticity is determined by quantity demanded and vehicles in-use. It ranges from -6. Table 5.5875 to -1.3979. This reflects the need to deduct 5VI from total tire output in the demand equation because it will not be altered by tire price changes. 3804.260): Qt  a0  M  (a1  a2  QUALt  a3  log(Pt ))  St   tQ where Q is output of tires. The slope    dP is -4. p. QUAL is a quality index applied as a dummy variable (QUAL = year – 1930 for the period 1913-1930 and 0 afterward). Carree & Thurik expected a0 to be greater than five because each new vehicle needs at least 5 tires.9624. The average value during 1962-2000 is -3.039)*** 5.3 Equation (5:1) Inverse Tire Demand Function Estimation Results ln( P)   10   11  ln(Q)   12  ln(VP )   13  ln(VI )  ln(Q)   14  ln(GDPPUS ) Coefficient (t-value) Constant 10 11 -0.

4.2.8229 *** denotes rejection of null hypothesis at less than 1% level of significance.0 via OLS with second order autocorrelation correction.3979 -0.0164 0.3804 -0.3 (continued) Durbin-Watson R 2 2.9624 -20. world vehicle production (VP).3705. world vehicles in-use (VI) and a time trend (T).4. GDPPUS did not display significant results in our estimation for equation 5. * denotes rejection of null hypothesis at 10 % level of significance.2 in order to address the net effect of tire demand growth (which increases overtime due to the growth in population as well as economic transaction) and tire demand decreases (due to tire quality improvement.2152 dP = () (P/Q) dQ . Chapter 5 Page 101 . the results indicate that the direct price elasticity of world tire demand is -0.260) who proposed that tire quality has been improving overtime and help users to postpone new tire demand). as argued by Carree & Thurik (2000.Table 5. The slope of the demand function with respect to price is -3.1518 to -0. # denotes imposed value Direct Tire Demand Estimation Results (Equation 5:2) The direct tire demand function models world tire demand (Q) as a function of tire price (P). T is included in equation 5.3439 -6. ** denotes rejection of null hypothesis at 5% level of significance.8080 Inverse demand elasticity () Mean Min to Max Slope=´ = Mean Min to Max Direct demand elasticity ( =1/) Mean Min to Max * -3. The estimation was undertaken using SHAZAM V9.4.0.5875 to -1. The equation is estimated in log-log form and estimation results are displayed in Table 5.5900 to . p. From Table 5.1439.

606)*** -0.226)** 0.3705 -3. Jovanovic & Macdonald (1994) estimated direct US market tire elasticity as -0.551)*** 1.48 for the same period.4 Equation (5:2): Direct Tire Demand Estimation Results ln(Q)   20   21  ln( P)   22  ln(VP )   23  ln(VI )   24  ln(T ) Coefficient (t-value) Tire Quantity (Q) Constant 20 21 22 23 24 -1. The second value is estimated from a direct tire demand and the value is -0.9700 0. that is -0.37. Table 5.5 compares the estimated results above with the results from other studies.3600 (4. In contrast.1022 (-4.76 but they were derived from inverse functions.2424 (-2.9955 * Tire price (P) Vehicle production (VP) Vehicles in-use (VI) Time trend (T) Durbin-Watson R 2 Direct demand elasticity  -0. this study estimates two values for direct world tire market elasticities. ** denotes rejection of null hypothesis at 5% level of significance. Chapter 5 Page 102 . * denotes rejection of null hypothesis at 10 % level of significance.38. The first value is estimated from an inverse tire demand.Table 5.1439 dP *) = (1/ *(P/Q) dQ *** denotes rejection of null hypothesis at less than 1% level of significance.4956 (6.034)*** 0. Carree & Thurik (2000) estimated direct US tire market elasticity as -0.008)*** -0.3705 (-5.

76 -0. (1913-1973) Direct elasticity -0.  ln( XR) For the direct natural rubber supply function (5:4).5 Comparative Estimates of Tire Demand Elasticities Study Jovanovic & Macdonald (1994) Carree & Thurik (2000) This study: Inverse demand function (1/) Direct demand function (*) World (1960-2000) -0. world natural rubber supply (XR) is modelled as a function of natural rubber price (WR).48 The inverse elasticity and direct elasticity estimated from this section will be employed to measure market power in following sections. the interaction of Japan‟s currency exchange rates (ERJA) and natural rubber price WR.4 Estimation of the Natural Rubber Supply Function Natural rubber supply is modelled in both inverse and direct form. the interaction of rain quantity (RAIN) and world natural rubber supply XR. from which we derive the slope:  = WR dWR = {11  13 ln( RAIN )  15  INRO}  . 5. The inverse natural rubber supply function (5:3) models natural rubber price (WR) as a function of world natural rubber supply (XR).S. a structural change dummy variable for a change in the mix of Chapter 5 Page 103 . and the inverse elasticity: dXR XR dWR XR dXR WR   ln(WR) = 11  13 ln( RAIN )  15  INRO . world natural rubber supply (XRt-2) with a two-year lag. the interaction of the presence of International Natural Rubber Organization (INRO) and world natural rubber supply XR.3705 Region U. Singapore (ERSP). (5:3) ln(WR )  10  11  ln( XR )  12  ln( XRt  2 )  13 ln( RAIN )  ln( XR )  14  ln(WS ) t 3 15  INRO  ln( XR )  16  ln( ERJA)  17  ln( ERTH )  18  ln( ERSP )  19  ln( RQM )  120  ln(T ) A log-log functional form is also applied for (5:3). the concentration ratio for the tire industry (RQM) and a time trend (T). Thailand (ERTH). Thai currency exchange rate (ERTH).Table 5. the currency exchange rates of Japan (ERJA).A.3804 -0. the synthetic rubber price (WSt-3) with a three year lag. the interaction of the presence of the Natural Rubber Organization (INRO) and natural rubber price WR.

A time trend Structural change dummy variable for a change in the mix of natural rubber and synthetic rubber following introduction of the radial tire . 1995 = 100 World Natural Rubber Production Rainfall quantity in millilitres. Table 5. deflated by Japan’s consumer price index 1995=100. Singapore’s currency exchange rates(S$/ $US).6. from which we derive the slope: = XR dXR = {21  22  INRO  23  ln( ERJA)} and the natural rubber supply dWR WR dXR WR dWR XR   ln( XR) = 21  22  INRO  23  ln( ERJA) .6 Variable Descriptions for the Natural Rubber Supply Function WR XR RAIN WSt-3 INRO ERJA Natural Rubber Price: RSS1 natural rubber prices.(1970 -2000 = 1) ERTH ERSP RQM T DRXSM The variables for natural rubber supply functions are selected on the following basis.32 Thailand’s currency exchange rates (Baht/US$). (5:4) ln( XR)  20  21  ln(WR)  22  INRO  ln(WR)  23  ln( ERJA)  ln(WR)  24  ln( ERTH )  25  DRXSM  26  T A log-log functional form is employed for (5:4). Japan. deflated by Thailand’s consumer price index 1995=100. France. Top seven tire producing countries are US. ERTH and ERSP ) by their CPI is to remove the inflationary component of local country nominal exchange rates caused by ordinary economic transactions as well as government monetary and fiscal policies. transferred to $us/ tons and deflated by US consumer price index.  ln(WR) direct elasticity  *  Variables that are employed to estimate the natural rubber supply functions are summarized in Table 5. Germany. UK and India. deflated by Singapore’s consumer price index 1995=100. Top seven countries’ quantity /total quantity ratio. Synthetic rubber price lagged by 3 years The International Natural Rubber Organization Japan’s currency exchange rates (100Yen/US$). fob Malaysia ringgit/ton. Chapter 5 Page 104 . Italy. Natural Rubber Prices (WR) 32 To divide the country currency exchange rates (ERJA.natural rubber and synthetic rubber following introduction of the radial tire (DRXSM) and a time trend (T).

However.Natural rubber has local prices. Export prices are announced by producing countries daily. Indonesia and Malaysia. There are three alternative variables for world natural rubber production: actual natural rubber production. export prices (fob). The series is continuous. Chapter 5 Page 105 . Prices of each of type are closely related. It is then transformed to $US and deflated by the US consumer price index. blocked rubber or standard rubber and concentrated latex. The natural rubber futures market prices which are frequently referred to are prices from: The Tokyo Commodity Exchange (TOCOM). Japan and Singapore. The first factor is normal production which is determined by the quantity of planted areas plus planting technology including 33 33 Block rubber is applied in tire industry too but less so than sheet rubber until recent years. Natural rubber exports and natural rubber used in the tire sector have been tested but results indicate that they do not produce statistically significant relationships to natural rubber prices as well as natural rubber production. some studies such as Burger & Smit (1997) investigated individual country natural rubber supplies and adopted local country prices deflated by local country consumer price indexes. SICOM‟s RSS3 rubber prices can be applied for WR since most rubber used in the tire industry is RSS3 type and much trading is done through Singapore. This thesis adopts the data from all countries‟ natural rubber production data. which is considered the best reflection of global inflation. First. import prices (cif) and futures market prices. Natural rubber prices are classified according to product types such as ribbed-smoked sheets (RSS1 to RSS5). New York. Therefore. able to be traced back to 1960 and it is a price of sheet rubber. World Natural Rubber Production (XR) World natural rubber production is dominated by the three largest producers namely: Thailand. RSS1 prices can also represent natural rubber prices. the Singapore Commodity Exchange (SICOM) and the Agricultural Exchange of Thailand (AFET). Thirdly. A number of natural rubber price series are candidates for the natural rubber price variable (WR). the RSS3 price series is not readily available for early periods. natural rubber production is affected from two factors. which has been applied in tire manufacturing . Other studies have used alternative data. Major import prices are in London. According to Burger & Smit (1997). Local prices are derived from local central markets. Secondly. this thesis applies the fob Malaysia Ringgit price series for RSS1 as data for WR. natural rubber exports and natural rubber used in tire sector.

domestic consumption and domestic stocks. In addition.vintages of the trees. Thus production data involves some elements of consumption and does not fully represent production.e. A dummy variable for the presence of the International Natural Rubber Organization (INRO) is applied to the natural rubber supply equation. is adopted for the estimation variable. following more natural rubber tree cultivation. However. Malaysia and Indonesia are all in the same climate zone. the quantity of rainfall in Songkhla. natural rubber would be used more. Synthetic Rubber Prices (WS) A Proxy for Synthetic Rubber Prices is adopted from the Export value of the copolymer of styrene and butadiene (SBR) from the USA (International Rubber Study Group. Burger. Whenever synthetic rubber prices are not competitive. namely the tropical zone. It acted as a buffer when price was on a down trend. Thus. Rain prevents natural rubber tapping hence reduces natural rubber supply. This study applied a time trend to incorporate for normal production. although only to a certain extent. The second factor is from tapping intensity which responds to natural rubber prices and other economic factors such as income. supply shifters for natural rubber) are considered as follows. INRO is Chapter 5 Page 106 . the natural rubber supply data used in estimation should be the relative quantity of actual production to normal production. Thai natural output is the largest during the study period. Price Stabilization Regulatory (INRO) INRO was established to stabilize natural rubber prices. Rain quantity in millilitres (RAIN) Data for the rain variable can be measured by rain quantity. Consequently. Therefore. Data for rain quantity is adopted from Thailand since Thailand. it has been argued that farmers often compensate by tapping more frequently. Smit & Volgelvang (2002) argue that the nature of data gathering in natural rubber producing countries is based on exports. which develops along with time trend. Besides. Synthetic rubber is considered a competing input to natural rubber. various issues). natural rubber production is derived from the sum of exports. when considering the production data. which is a major natural rubber producing province in Thailand. Other variables that affect natural rubber prices (i. Lagged production tends to increase stocks hence decreases price.

Singapore‟s currency exchange rate affects natural rubber prices in both exporting and importing aspects since Singapore re-exports natural rubber to third countries. As the Thai exchange rate (Baht/$US) increases. except for Thailand in 1997 onwards. During the period of study. Impacts on natural rubber prices are also possible through the future commodity exchange market namely the Singapore Commodity Exchange (SICOM). Increases in the currency exchange rates of Japan and Singapore (100 Yen/US$ and S$/US$) should be a positive shifting factor as they should render the natural rubber price more profitable. Italy. Japan. The Concentration of Tire Producers (RQM) The concentration ratio for the seven top tire producing countries in total world tire production (CR7 concentration ratio) is used to measure changes in competitiveness of the tire manufacturing industry. a depreciation of a country‟s currency decreases that country‟s imports and increases that country‟s exports. the natural rubber price. This might apply to natural rubber import behaviour. Chapter 5 Page 107 . becomes less profitable hence should have downward shifting effects. and hence should have intervening effects on the relation between natural rubber price and production. The seven countries are the US. and India. France. producing countries‟ currencies were quite stable. Germany. which used to be intuitively set as 1$US/kilogram. they are tested in the model too. 34 These are the top seven countries that data are available from the International rubber Study Group. This is accommodated in the natural rubber supply estimation by a dummy variable dating from the introduction of radial tires in 1970. On the other hand it might lead to selling of natural rubber in futures markets namely: the Osaka market and the Tokyo Commodity Exchange (TOCOM) in order to gain from future exchange rate fluctuations and thus depressing rubber prices. ERSP) Generally. ERTH.expected to eliminate price fluctuations. Currency Exchange Rates (ERJA. However.K. U. 34 The Structural Changes in the Natural Rubber / synthetic Rubber Consumption Rates (DRXSM) A structural change in the manufacturing mix of natural rubber and synthetic rubber occurred when radial tires were introduced. Data for each country‟s currency exchange rate per $US are employed.

06 20.00 930.57 0.42 0. Hence natural rubber supply is increased and this has downward shifting effects on natural rubber prices.840. Table 5.91 2.68 Standard Deviation 684.32 3.38 94.41 1.00 62.71 2.36 130.Technology (T) Technological progress overtime is represented by a time trend.20 1737.50 24.10 395.109.040.90 821.10 360.20 6.63 0.80 237.00 1.956.06 94.20 35.40 3956.136.7-5.03 1.06 4.88 618.56 Maximum 3.89 267.00 3515.42 666.053.00 3. The time trend also helps to address growth in the area planted and the normal production as against actual production of natural rubber (Smit.60 4.00 327.7.98 0.442.29 311.34 23.07 Minimum 935.268.99 1709.50 798.40 2.30 456.000 tons) (millimetres) (US$/ton) (deflated) ERJA (100 Yen/US$) (deflated) ERTH (Baht/US$) (deflated) ERSP (S$/US$) (deflated) RQM (CR7 Ratio) Mean 2.05 98.00 1582.21 illustrate the data graphically.93 1.65 0.7 Summary Statistics for Natural Rubber Supply Function Variable WR (fob Mal. Chapter 5 Page 108 .288.05 745.40 41.84 593.06 0. Technology advances overtime increase yields per area.00 1968. 2001). Summary statistics for these natural rubber supply variables are displayed in Table 5.05 5.66 3.ringgit/ton) $US $US (deflated) XR RAIN WS (1.331.60 1.79 Figures 5.74 563.

000 tons) Figure 5.12 Synthetic Rubber Price (WS) ($US/ton) Chapter 5 Page 109 .Figure 5.7 Natural Rubber Price (WR) (fob Malaysia Ringgit/ton) Figure 5.9 Natural Rubber Price (WR) (deflated by US consumer price index) ($US/ton) Figure 5.11 Rainfall (RAIN) (millimetres) Figure 5.8 Natural Rubber Price (WR) ($US/ton) Figure 5.10 World Natural Rubber Production (XR) (1.

15 Japan’s Currency Exchange Rate (deflated by Japan’s CPI) (ERJA) (100 Yen / $US) Figure 5.16 Thai Currency Exchange Rate (ERTH) (Baht/$US) Figure 5.20 CR7 Concentration Ratio in World Tire Production (RQM) Chapter 5 Page 110 .Figure 5.18 Singapore’s Currency Exchange Rate (ERSP) (S$ / $US) Figure 5.17 Thai Currency Exchange Rate (deflated by Thai consumer price index) (ERTH) (Baht / $US) Figure 5.19 Singapore’s Currency Exchange Rate (deflated by Singapore consumer price index) (ERSP) ($S/$US) Figure 5.14 Japan’s Currency Exchange Rate (ERJA) (100 Yen / $US) Figure 5.13 Synthetic Rubber Price(WS) (deflated by US CPI) ($US/ton) Figure 5.

Based on the 1995 price. the endogenous variable. Japan‟s currency exchange rates (ERJA).21 The Ratio of Natural Rubber and Synthetic Rubber Consumption in World Tire Sectors (RXSM) (Ratio) The natural rubber price dropped to its bottom level in the year 1972 and then recovered until 1980.200 $US/ton. rainfall (RAIN).4. the CR7 Chapter 5 Page 111 . natural rubber prices dropped from 3.9 displays a downward movement in natural rubber prices except for two peaks in 1973 and 1979. natural rubber price (WR) is regressed on natural rubber production quantity (XR) and a vector of shifting variables comprising: two-year lagged natural rubber production (XRt-2). the presence of the International Natural Rubber Organization (INRO). prices fluctuated through cycles of 5-6 years. Figure 5. When considered in real terms. This might reflect attempts to restrict prices within a range of 800-1.Figure 5. Thailand‟s currency exchange rate (ERTH). Singapore currency exchange rate (ERSP). 5. During the presence of INRO.956 $US in 1960 to 563 $US in 1999.1 Estimation Results of the Natural Rubber Supply In equation (5:3). three-year lagged synthetic rubber prices (WSt-3).

8 The estimation was undertaken using the SHAZAM V9. They are natural rubber production.3441.4930 – 0.0 via OLS with first order autocorrelation correction. The direct supply elasticity is  *  0. planted area and palm oil prices. other variables have negative effects on natural rubber prices.concentration ratio (top seven tire producing countries market share RQM).4980 with a range from 0. The average slope    to 9. However. with a range from 2. Palm oil was considered relevant as a substitute product since the late 1970s but various measures for palm oil were found to be not significant. Rubber trees take about six years to become mature and produce natural rubber therefore natural rubber output should have a 6-7 year lag behind cultivation. Three variables that did not provide significant estimates were the number of raining days (rain quantity provided statistically significant results).8368.3005 with a range from 0. The equation is estimated in log-log form. Table 5. the planted area did not produce significant results as the data series is not continuous.3106(INRO).5785 dXR = 0.3405. Two variables have lagged effects on natural rubber prices.8 Equation (5:3) Inverse Natural Rubber Supply Function Estimation Results ln(WR )  10  11  ln( XR )  12  ln( XRt  2 )  13 ln( RAIN )  ln( XR )  14  ln(WS ) t 3 15  INRO  ln( XR )  16  ln( ERJA)  17  ln( ERTH )  18  ln( ERSP )  19  ln( RQM )  120  ln(T ) Coefficient (t-value) Constant 10 3.7369ln(RAIN) – 0.9063 to 3. Inverse Natural Rubber Supply Function (Equation 5:3) Estimation results for equation (5:3) are shown in Table 5. and synthetic rubber price.2606 to 1  Chapter 5 Page 112 . Price elasticity to quantity supplied is derived as 3.950)*** dWR = 3.2983. and a time trend (T). The overall average inverse price elasticity is  = 3. lagged by three years.9583 (11. lagged by two years. Estimated results indicated that whereas quantity supplied is positively related to natural rubber price.

243) ** -0.608) *** -1.9675 0.4930 (10.1890 (-9.770)*** 1.587) *** -0.2983 0.2606-0.2092 (-13.7369 (-5.3106 (-2.2289 (-2.0549 (-5.Table 5. * denotes rejection of null hypothesis at 10 % level of significance.491) ** -0. France.3441 *** denotes rejection of null hypothesis at less than 1% level of significance.1008 (-3.9848 Quantity supply lagged by 2 years (XRt-2) Synthetic rubber price lagged by 3 years ( WSt-3) Natural rubber quantity * INRO (XRINRO) Japan’s currency exchange rates (ERJA) Thailand’s currency exchange rates (ERTH) Singapore’s currency exchange rates (ERSP) 35 CR7 concentration ratio (RQM) Time trend (T) Durbin-Watson R 2 Inverse supply elasticity () Mean Min to Max Slope=´= 3.9063 to 3.3005 0.860)*** -1. Italy.3405 2. UK and India.4980 0. Germany.8 (continued) Natural Rubber Quantity (XR) 11 12 3.832) *** Natural rubber quantity * rainfall quantity (XRRAIN) 13 14 15 16 17 18 19 110 -0.8368 dWR dXR Mean Min to Max Direct supply elasticity  =1/ Mean Min to Max * 3.9361 (-6.348) *** -5.6001 (-7. Chapter 5 Page 113 . ** denotes rejection of null hypothesis at 5% level of significance.044) *** -0. Japan. 35 Top seven tire producing countries are US.5785 to 9.374) *** -0.

The average natural rubber supply price elasticity is  = 0.0 via OLS with first order autocorrelation.1551 – 0.0555(INRO) .83 with a range of 0. Thailand‟s currency exchange rate (ERTH).1091 to 0. Japan‟s currency exchange rate (ERJA).1494 with a range of 0. World natural rubber production (XR) is regressed on natural rubber price (WR) with a vector of shift variables comprising: the presence of the International natural Rubber Organization (INRO). Estimated results indicate that the natural rubber supply direct elasticity  = 0. Equation (5:4) was estimated using the SHAZAM V9.0417ln(ERJA). The model is estimated in log-log functional form. Estimates results are displayed in Table 5.Direct Natural Rubber Supply Function (Equation 5:4) Equation (5:4) estimates a direct natural rubber supply function. changes in the ratio of natural rubber to synthetic used in world tire sector (DRXSM) and a time trend (T). The slope of the natural rubber supply function with respect to price is 8.2285.9.9342 to 31.0.4550. Chapter 5 Page 114 .

0555 (-2.9965 * Natural rubber price (WR) Natural rubber price INRO (INRO WR) Natural rubber pricex Japan exchange rate (ERJA WR) Thailand’s exchange rate (ERTH) Structural Change in the ratio of natural to synthetic rubber consumption in tire sector (DRXSM) Time trend (T) Durbin-Watson R 2 Direct supply elasticity  Mean Min to Max 0.0417 (-2. * denotes rejection of null hypothesis at 10 % level of significance. Elasticities are estimated from both inverse and direct supply curves. Burger & Smit (1997) studied natural rubber supply from different countries during 1973-1993. 8.046)** 0.0460 (16.8307 0.1551 (6.455 Table 5.1091 to 0.9933 0.9342 to 31.030)** 0.804)*** 0.0491 (2.2285 dWR dXR Mean Min to Max *** denotes rejection of null hypothesis at less than 1% level of significance.679)** -0.1494 0.9993 (-20. The estimated elasticity of natural rubber supply will be used to calculate the market power in next sections.2881 (5.Table 5.10 compares the above estimated results to results from other studies. In contrast this study examines the elasticity at a world level during the period 1960-2000. Chapter 5 Page 115 .223)*** -0.9 Equation (5:4) Direct Natural Rubber Supply Function Estimation Results ln( XR )   20   21  ln(WR)   22  INRO  ln(WR)   23  ln( ERJA)  ln(WR)   24  ln( ERTH )   25  DRXSM   26  T Coefficient (t-value) Constant 20 21 22 23 25 24 26 -0.430)*** 1.450)*** 0. ** denotes rejection of null hypothesis at 5% level of significance.

Fox & Diewert (1997) and Cohen & Paul (2003). Diewert (1971). a synthetic rubber input (xsi). Flexible functional forms can accommodate second-order derivatives and provide useful applications of the production function such as permitting partial elasticities of substitution between inputs to vary . Examples for its applications can be found in Schroeter (1990). A Generalized Leontief functional form (GL) is employed for estimation of the production function. Murray (1994).14 - #2 This Study: Inverse supply function (1/) 0. (2003).14 0. cost functions and profit functions.30 This Study: Direct supply function ( *) 0. Accordingly.22 0. the country‟s vehicle production (VPi). the world oil price (WO). The tire production function (5:5) is transformed from a firm level production function to a producing country (qi) production function. Japan and Germany) is set as a function of a natural rubber input (xri). Diewert (1978). 5. No estimation in world level. Chapter 5 Page 116 . the country‟s vehicles in-use (VIi) and a time trend (T).29 #1 0. (1978). The GL functional form is one that is frequently employed when estimating production functions.Table 5. 36 36 Discussion on properties of Generalized Leontief flexible functional form can be found in Diewert (1971). the tire output for country i (qi where i refers to USA.10 Comparative Estimates of Natural Rubber Supply Elasticities Thailand Indonesia Estate 1973-1993 1976-1993 Indonesia small holding 1975-1993 Malaysia Estate 1976-1993 Malaysia small holding 1978-93 1960-2000 World Burger & Smit (1997) Direct Elasticity 0.15 #1 #2 No significant estimate are available. The GL is a flexible functional form.5 Estimation of the Tire Production Function A tire production function of the general form qi  f(xri ) is required to obtain a value for marginal product of natural rubber ( MPxri ). Diewert (2003). France.

e. these categories are small items relative to passenger and commercial vehicle tires hence their production data is not individually reported in world level data (International Rubber Study. Russia and the Republic of Korea. namely tire sector and general sector consumption. Spain. Italy. Tire Production (qi) In accordance with tire demand estimation. tire production is classified as passenger car tires plus commercial vehicle tires since most countries have separate data records except for some countries such as China. Data for natural rubber and synthetic rubber consumption in the tire sector can be obtained for USA. Natural Rubber and Synthetic Rubber Inputs (xrUS and xsUS) Consumption of elastomer is often divided into two sectors. Germany. which did not have separate data until recent years. Given that the input ratio of natural rubber to synthetic rubber used in passenger car tire and commercial vehicle tires are close (55%/45% and 50%50%) total tire production is defined as the sum of passenger and commercial tires. Tire sector consumption comprises natural rubber and synthetic rubber that are used in all kinds of vehicle tires production. U. Japan. General sector consumption comprises natural rubber and synthetic rubber that are used to produce products other than tires.(5:5) 1/ 2 1/ 2 q  δ0  δ1  xri  δ2  xsi  2  δ3  xri  xsi  WO  δ4  xri  T  δ5  xsi  T  i δ6  T  δ7  T 2  δ  (VP )  δ  (VI ) 8 i 9 i From (5:5) the marginal product for natural rubber is obtained as: MPxri   i  qi 1/ 2 1/ 2  δ1  δ3  xri  xsi  WO  δ4  T xri The data applied to the tire production model are selected on the following basis. Most general sector products are used in automotive sector i. and Brazil and India. rubber parts and accessories used in vehicles. Chapter 5 Page 117 . various copies). It is recognized that the ratios of natural rubber to synthetic rubber varies more significantly in specialist tires. However. For example racing tires and off-highway tires have natural rubber /synthetic rubber ratios of 35%/65% and 80%/20% respectively.K. France.

5. Interaction terms such as: US quantity of natural rubber used in the tire sector (xrUS) and the time trend T. Chapter 5 Page 118 . 5. world crude oil price (WO). its price impacts on the price of synthetic rubber. which is a substitute input for natural rubber in tire production. they are not available for some countries such as China. Therefore. the quantity of synthetic rubber used in its tire sector (xsUS). tire production is affected by world oil prices. Country Vehicle Production and Vehicle In-Use (VPi and VIi) As already noted. US vehicles in-use (VIUS) and a time trend. Estimations were undertaken using the non-linear algorithm in SHAZAM V9.However.1 US Tire Production Function Estimation When the tire production function (5:5) is applied to USA (5:5US). 37 World Oil Prices (WO) As petroleum is a key manufacturing input for synthetic rubber. Thus. US tire output (qUS) is modelled as a function of US natural rubber inputs used in its tire sector (xrUS). US quantity of synthetic rubber used in the tire sector (xsUS) and the 37 However.0 via OLS with corrections for autocorrelation using an iterative Cochrane-Orcutt procedure. Hence the study does not test for market power from China tire manufacturing on the natural rubber market despite its significant growth in natural rubber consumption since the 1990s . each new car requires at least five tires and a vehicle in-use also consumes tires. natural rubber consumption data could be used in place of natural rubber used in tire sector in such cases. tire production should be determined by vehicle production and vehicles in-use. Time Trend (T) Technology improves manufacturing costs overtime. A time trend is used as a proxy measure for the impact of technology.

the term T2 and US vehicle Production (VPUS) did not provide significant estimates.92 12.49 149.63 170.time trend T.14 221. Total vehicle in-use in the US.90 15.97 73.32 208.76 947.24 Standard Deviation 39.38 69.66 14.12 Data Summary for Variables in the US Tire Production Function Variable qUS (mill) Mean 203.37 10.000) xsUS (1.11 Variables Description for US Tire Production Function Variable qUS xrUS xsUS WO Description Tire production (US passenger car tires and truck tires) Quantity of natural rubber used in tire sector in the US.00 1507.34 1130.10 37.58 Maximum 276.12.00 2.000) WO (US$/barrel) Deflated VIUS (mill) Chapter 5 Page 119 .(passenger car and commercial vehicle) A time trend VIUS T Table 5. The tire production function for USA was hence simplified to: (5:5US) q  δ0  δ1  xrUS  δ2  xsUS  2  δ3  xrUS US 1/ 2  xsUS 1/ 2  WO  δ  (VI )  δ  T 4 US 5 From (5:5US) the US marginal product for natural rubber is: MPxrUS   US  qUS = δ  δ  XR 1/ 2  XS 1/ 2  WO 1 3 US US xrUS The variables employed to estimate the US tire production function are summarized in Table 5.48 xrUS (1. Deflated by US consumer price index.37 545.18 25. Table 5. Quantity of synthetic rubber used in tire sector in the US. Spot Oil Price (West Texas Intermediate).04 Minimum 116.60 682. World crude oil price.18 45.78 282. 1995=100.11. Summary statistics for the US tire production function are displayed in Table 5.

Figures 5.23 Quantity of Natural Rubber Used in US Tire Sector (xrUS) (1. Figure 5.000s) 38 Note some figures include a notation change however QUS = qUS. XRUS = xrUS.000s) Figure 5. VIUS = VIUS. Chapter 5 Page 120 .27 US Vehicle In-Use (VIUS) (1.27 display these variables in graphs38.000s) Figure 5.22 Quantity of US Tire Production (qUS) (1. XSUS = xsUS.22 to 5.25 World Crude Oil Price (WO) ($US/barrel) Figure 5.24 Quantity of Synthetic Rubber Used in US Tire Production (xsUS) (1.000s) Figure 5.26 World Crude Oil Price (WO) (deflated by US consumer price index) Figure 5.

Results are summarized in Table 5.13.0192 (2. the quantity of synthetic rubber used in its tire sector (xsFR).Table 5.937) *** -0.0 with second order autocorrelation correction.4240 (7. * denotes rejection of null hypothesis at 10 % level of significance.3646 Mean Min to Max *** denotes rejection of null hypothesis at less than 1% level of significance. Chapter 5 Page 121 .8821 0.5.3556 xrUS with a range from 0.350) *** 0.2 France’s Tire Production Function Estimation When the tire production function (5:5) is applied to France (5:5FR).13 Equation (5.US (xrUS) Synthetic rubber inputs . and a time trend.3556 0.3254 to 0.9796 Natural rubber inputs .3254 to 0. France‟s vehicle production (VPUS).106)** 0. world crude oil price (WO).310)*** 0.5US): US Tire Production Estimation Results q  δ0  δ1  xrUS  δ2  xsUS  2  δ3  xrUS US 1/ 2  xsUS 1/ 2  WO  δ  (VI )  δ  T 4 US 5 Coefficient (t-value) Constant 0US 1 US 2 US 3 US 4 US 4 US 0. ** denotes rejection of null hypothesis at 5% level of significance. The estimation was undertaken using the non-linear algorithm in SHAZAM V9.6942 ( -2.3717 (6.985)** -0. The q marginal product for natural rubber in the US was estimated as US= US = 0.5344 (3.258)** 1. it estimates France‟s tire output (qFR) as a function of France‟s quantity of natural rubber used in its tire sector (xrFR).3646. 5.0157 (-1.US (xsUS) 2(xrUS) 1/2 1/2 (xsUS) (WO) US’s vehicles in-use (VIUS) Time trend (T) Durbin-Watson R 2 Natural rubber marginal product US =  qUS = δ  δ  xr 1/ 2  xsUS 1/ 2  WO 3 US xr US 1 0.

15.38 69. The tire production function for France (5:5FR) was: (5:5FR) q FR 1/ 2 1/ 2  δ0  δ1  xrFR  δ2  xs  2  δ3  xr  xs  WO  δ  VP  δ5  T FR FR FR 4 FR From (5:5FR) France‟s marginal product for natural rubber is derived as: MPxrFR   FR  q FR 1/ 2 1/ 2  δ1  δ3  xr  xs  WO FR FR xrFR The variables that were employed to estimate the France‟s tire production function are listed in Table 5.The interaction terms: quantity of natural rubber used (xrFR) and the time trend T.60 15. the term T2 and France‟s vehicles inuse (VIFR) did not provide significant estimates.14.14 3.92 xrFR (1. The data for these variables are summarized in Table 5.71 205.49 2.15 Data Summary for France’s Tire Production Function Variable qFR (mill) Mean 45. Total vehicle production in France (passenger car and commercial vehicle) VPFR Table 5. Quantity of synthetic rubber used in Tire sector in France.97 1.18 0.90 Standard Deviation 15. Spot Oil Price (West Texas Intermediate).72 41.000) xsFR (1.92 12. 1995=100.60 37. Table 5.40 2.60 49.59 10.66 14.25 Maximum 67.98 147.35 76. synthetic rubber used (xsFR) and the time trend T.00 197. World crude oil price.74 Minimum 14. Deflated by US consumer price index.18 25.620 130.38 35.14 Variable Description for France’s Tire Production Function Variable qFR xrFR xsFR WO Description Tire production (France’s passenger car tires and truck tires) Quantity of natural rubber used in Tire sector in France.000) WO US$/barrel) Deflated VPFR (mill) Chapter 5 Page 122 .

31 France’s Passenger Car and Commercial Vehicle Production (VPFR) (1.29 France’s Quantity of Natural Rubber Used in Tire Sector (xrFR) (1.16. Estimation Results for (5:5FR) are shown in Table 5.31 .These data are represented graphically in Figures 5.000s) Figure 5.5586 to 0. The figures for WO and WO (deflated) are found in figures 5.6343 with a range from 0. XRFR = xrFR.0 with fourth order autocorrelation correction.000s) Figure 5. VPFR = VPFR.25 and 5.28 Tire Production for France (qFR) (1. XSFR = xsFR.30 France’s Quantity of Synthetic Rubber Used in Tire Sector (xsFR) (1.28 to 5.6583.000s) 39 Figure 5. Figure 5. xrFR 39 Note some figures include a notation change however QFR = qFR. The marginal product for natural rubber in France was estimated as FR= q FR = 0. Chapter 5 Page 123 .000s) The estimation was performed using the non-linear algorithm in SHAZAM V9.26 above.

818)*** 0.9816 0.426)*** 1.3 Japan’s Tire Production Function Estimation When the tire production function (5.971)*** 0.6583 *** denotes rejection of null hypothesis at less than 1% level of significance.5. it estimates Japan‟s tire output (qJA) as a function of natural rubber input (xrJA).0422 (-21.16 Equation (5:5FR) France’s Tire Production Estimation Results q 1/ 2 1/ 2  δ0  δ1  xrFR  δ2  xs  2  δ3  xr  xs  WO  δ  VP  δ5  T FR FR FR 4 FR Coefficient (t-value) Constant 0FR 1 FR 2 FR 3 FR 4 FR 4 FR -0.563)*** 0. Japan‟s vehicle production (VPJA) and Japan‟s vehicle in-use (VIJA) did not provide significant estimates.5) is applied to Japan (5:5JA).6343 0.0071 (5.6795 (9. ** denotes rejection of null hypothesis at 5% level of significance.1100 (3.2985 (16. synthetic rubber inputs (xsJA).9932 FR Natural rubber inputs . The interaction terms: synthetic rubber (xsJA) and the time trend T.5586 to 0. 5. world crude oil price (WO) and a time trend (T). * denotes rejection of null hypothesis at 10 % level of significance.Table 5.069)*** 0. the term T2.249)*** -0.France (xrFR) Synthetic rubber inputs – France (xsFR) 1/2 2(xrFR) (xsFR) WO ½ France’s vehicle production (VPFR) Time trend (T) Durbin-Watson R 2 Natural rubber marginal product q 1/ 2 1/ 2 MPxrFR   FR  FR  δ1  δ3  xr  xs  WO FR FR xrFR Mean Min to Max 0. The tire production function for Japan is: (5:5JA) 1/ 2 1/ 2 q JA  δ0  δ1  xrJA  δ2  xs JA  2  δ3  xrJA  xs JA  WO  δ4  xrJA  T  δ5  T Chapter 5 Page 124 .1378 (-5.

49 197. Chapter 5 Page 125 . Summarized statistics for the Japan‟s tire production function are displayed in Table 5.56 76.From (5:5JA) Japan‟s marginal product for natural rubber is derived as: MPxrJA   JA  q JA 1/ 2 1/ 2  δ1  δ3  xrJA  xs JA  WO  δ4  T .42 649.49 Standard Deviation 52. The figures for WO and WO (deflated) are found in figures 5.32 to 5.33 336. Quantity of synthetic rubber used in tire sector in Japan. World crude oil price. Time trend T Table 5. Deflated by US consumer price index.97 Maximum 164.66 14.47 15.000 WO (US$/barrel) deflated 40 Note some fires include a notation change however QJA = qJA. Figures 5.17 Variable Description for Japan’s Tire Production Function Variable qJA xrJA xsJA WO Description Tire production (Japanese passenger car tires and truck tires) Quantity of natural rubber used in Tire sector in Japan.25 and 5.18. 40 Table 5.00 527.26 above.75 350.18 Data Summary for Japan Tire Production Function Variable Mean 95.18 Minimum 5. XRJA = xrJA. 1995=100. XSJ = xsJA.38 69.90 22.17.29 163.10 2. xrJA The variables employed to estimate the Japan‟s tire production function are summarized in Table 5.14 qJA mill xrJA 1.00 37. Spot Oil Price (West Texas Intermediate).34 display Japan‟s Tire Production Variables .000 xsJA 1.92 12.73 10.18 25.

q JA = 0.Figure 5.33 Japan’s Quantity of Natural Rubber Used in Tire Sector (xrJA) (1.000s) Figure 5.5673 with a range from xrJA Chapter 5 Page 126 .19. Estimation was undertaken using the non-linear estimation algorithim in SHAZAM V9.000s) Figure 5.32 Japan’s Quantity of Tire Production (qJA) (1.7341.0 with first order autocorrelation correction.4097 to 0.34 Japan’s Quantity of Synthetic Rubber Used in Tire Sector (xsJA) (1. The marginal product for natural rubber in Japan‟s tire industry was estimated to be JA= 0.000s) Estimation Results for the Japan‟s tire production function are depicted in Table 5.

Table 5.19 Equation (5:5JA) Japan’s Tire Production Function Estimation Results
1/ 2 1/ 2 q JA  δ0  δ1  xrJA  δ2  xs JA  2  δ3  xrJA  xs JA  WO  δ4  xrJA  T  δ5  T
Coefficient (t-value) Constant Natural rubber inputs – Japan (xrJA) 0JA 1JA 2JA 3JA
.

-0.1671 (-5.159)*** 0.7948 (8.060)*** 0.3685 (6.284) *** -0.0112 (-1.852) * -0.0091 (-4.080)*** 0.0134 (3.100) *** 1.8738 0.9979

Synthetic rubber inputs - Japan (xsJA)
1/2

2(XRJA)

(XSJ)

1/2

WO

Natural rubber inputs time trend (xrJA T) Time trend (T)

4JA 4JA

Durbin-Watson R
2

Japan’s Natural rubber marginal product
MPxrJA   JA  q JA 1/ 2 1/ 2  δ  δ  xrJA  xsJA  WO  δ4  T xrJA 1 3

Mean Min to Max

0.5673 0.4097 to 0.7341

*** denotes rejection of null hypothesis at less than 1% level of significance, ** denotes rejection of null hypothesis at 5% level of significance, * denotes rejection of null hypothesis at 10 % level of significance.

5.5.4 Germany’s Tire Production Function Estimation The tire production function (5:5) applied to Germany (5:5GR) models Germany‟s tire output (qGR) as a function of natural rubber inputs used in its tire sector (xrGR), synthetic rubber inputs used in its tire sector (xsGR), world crude oil price (WO), Germany‟s vehicles in-use (VIGR) and a dummy variable to address data deficiency resulting from the re-unification (1991-2000). The vehicles in-use variable did not yield a significant result when measured as the sum of passenger cars and commercial vehicles. Removal of commercial vehicles from the measure provided a significant result. The interaction terms: natural rubber (xrGR) and the time trend T, synthetic rubber (xsGR) and the time trend T, the time trend (T) and Germany‟s vehicle production did not provide significant estimates. Chapter 5 Page 127

The tire production function for Germany was estimated as: (5:5GR)
1/ 2 1/ 2 qGR  δ0  δ1  xrGR  δ2  xsGR  2  δ3  xrGR  xsGR  WO  δ  (VI GR )  D  δ  D 4 91 5 91

From (5:5GR) Germany‟s tire industry marginal product for natural rubber is derived as: MPxrGR   GR 

qGR 1/ 2 1/ 2  δ1  δ3  xrGR  xsGR  WO . xrGR

The variables employed to estimate Germany‟s tire production function are summarized in Table 5.20.

Table 5.20 Variable Description for Germany’s Tire Production Function
Variable qGR XrGR XsGR WO VIGR T Description Tire production (Germany’s passenger car tires and truck tires). Quantity of natural rubber used in tire sector in Germany. Quantity of synthetic rubber used in tire sector in Germany. World crude oil price, Spot Oil Price (West Texas Intermediate). Deflated by US consumer price index. 1995=100. Vehicle in-use in Germany (only Passenger cars). A time trend.

Summarized statistics for the variables are list in Table 5.21. Table 5.21 Summary Statistics for Germany’s Tire Production Function
Variable qGR (mill) XrGR (1,000) XsGR (1,000) WO ($US/barrel) deflated Mean 43.05 120.58 143.23 15.18 25.49 VIGR (mill) T 23.68 Standard Deviation 11.76 31.20 29.01 10.66 14.18 11.82 Minimum 16.35 70.70 62.90 2.92 12.97 4.86 Maximum 63.14 173.00 182.00 37.38 69.14 43.77

Chapter 5

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Figures 5.35 to 5.38: display these variables graphically .
Figure 5.35 Tire Production for Germany (qGR) (1,000s) Figure 5.36 Germany’s Quantity of Natural Rubber Used in Tire Sector (xrGR) (1,000s)

41

Figure 5.37 Germany’s Quantity of Synthetic Rubber Used in Tire Sector (xsGR) (1,000s)

Figure 5.38 Germany’s Quantity of Passenger Car In-use (VIGR) (1,000s)

The estimation was undertaken using the non-linear estimation algorithim in SHAZAM V9.0 with first order autocorrelation correction. Results are provided in Table 5.22. The marginal product for natural rubber in Germany‟s tire industry was estimated as: GR=

qGR = 0.3654 with a range from 0.3191 to 0.3793. xrGR

41

Note some figures include a notation change however QGR = qGR, XRGR = xrGR, XSGR = xsGR. The figures for WO and WO (deflated) are found in figures 5.25 and 5.26 above.

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Table 5.22 Equation (5:5GR) Germany’s Tire Production Function Estimation Results
1/ 2 1/ 2 qGR  δ0  δ1  xrGR  δ2  xsGR  2  δ3  xrGR  xsGR  WO  δ  (VI GR )  D  δ  D 4 91 5 91
Coefficient (t-value) Constant Natural rubber input – Germany (xrGR) Synthetic rubber input –Germany (xsGR)
1/2

0GR 1GR 2GR 3GR 4GR 5GR

0.3658 (1.890)** 0.3917 (2.805)** 0.4089 (3.452)*** -0.0257 (-2.143)** 0.6992 (1.947)* -1.2131 (-2.113)** 1.8709 0.9748

2(xrGR)

(xsGR) WO
1/2

Germany’s passenger car in-use  dummy variable D91 (VIGRD91) dummy variable (D91)

Durbin-Watson R
2

Natural rubber marginal product

MPxrGR   GR 
Mean Min to Max

qGR 1/ 2 1/ 2  δ1  δ3  xrGR  xsGR  WO xrGR

0.3654 0.3191 to 0.3793

*** denotes rejection of null hypothesis at less than 1% level of significance, ** denotes rejection of null hypothesis at 5% level of significance, * denotes rejection of null hypothesis at 10 % level of significance.

5.6 Estimation of the Optimality Condition Function
As outlined in Chapter 4, derivation of the market power index (MPI) for each manufacturing country can be derived via 4 different models. Models 1 and 2 use the optimality condition (4:8a) and (4:8b) developed in Chapter 4 to derive estimates for the two conjectural elasticities (αi and βi). Models 3 and 4 apply the direct estimation approach developed in Chapter 4 to obtain estimates of the two conjectural elasticities.

Chapter 5

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5.6.1 US MPI Estimation Using Model 1 The MPI Model 1 is derived using inverse tire demand and natural rubber supply functions with conjectural elasticities estimated via the optimality condition derived in Chapter 4 as (5:6.1). This condition is estimated using the variables defined in (5:7.1, 5:8.1 and 5:9.1) for US data. (5:6.1US)
WR  11  P   21  qUS   31  xrUS US
  

From (5:6.1US) estimates of the slope of inverse tire demand (´= inverse natural rubber supply (´= in the US tire industry (US=

dP ), the slope of dQ

dWR ) and the natural rubber marginal productivity dXR

qUS ) are used to obtain the following terms. xr US
qUS  P   US  P xr US
dP qUS   qUS     US  qUS dQ xrUS

(5:7.1US)

PUS 

(5:8.1US)

q US 

(5:9.1US)

xrUS 

dWR  xrUS     xrUS dXR

The three terms are used to estimate the optimality function (5:6.1US) to derive values for coefficients 11, 21 and 31. These three coefficients provide the means for hypothesis testing for the presence of market power plus estimations of the two conjectural elasticities required to calculate our market power index (MPI) for each manufacturing country. The estimation results for (5:6.1US) are provided in Table 5.23. Two estimation results are reported (A and B). As outlined in Chapter 4, the null hypothesis of input market efficiency (no market power) can be stated in terms of the three coefficients in 5:6.1 as H0: 11 = 1, 21 = 31 = 0. If H0 is not rejected then: WR 

qi  P and hence the input xri is being paid the xr i

value of its marginal product. Further, if 21 = 31 = 0, then i1 = i1 = 0 and MPIXRi1 = 0, thus indicating a perfectly competitive input market. Rejection of Ho indicates the presence of non competitive markets. In particular, significant positive values of 21 Chapter 5 Page 131

indicate the presence of oligopoly in the output market and significant positive values of

31 indicate the presence of oligopsony in the input market.
Results from estimation A in Table 5.23 (11US = 1.1867, 21US = 0.0739, and 31US = 0.1881) can be used to test the null hypotheses that: 11US = 1, 21US = 0.00, and 31US = 0.00.

Table 5.23 Equation (5:6.1US) Optimality Function for US Tire Manufacturing (Model 1) Estimation Results
WR  11  PUS   21  qUS   31  xrUS
Estimation A Coefficient (t-value) Constant Estimation B Coefficient (t-value) 0.2344 (4.427)***   

P US

11US 21US 31US

1.1867 (6.047)*** 0.0739 (2.817)*** -0.1881 (-10.050)*** 1.9861 0.9123

q US

-

xrUS
Durbin-Watson R
2

-0.2119 (-13.450)*** 1.9331 0.8954

*** denotes rejection of null hypothesis at less than 1% level of significance, ** denotes rejection of null hypothesis at 5% level of significance, * denotes rejection of null hypothesis at 10 % level of significance.

If the null hypotheses are not rejected then it implies the natural rubber market, as a specific factor market to tire production in the US, is competitive. If the hypotheses are rejected it implies that world natural rubber price is less than its value of marginal product and that there is US oligopoly power in the world tire market and oligopsony power in the world rubber market. Table 5.24 provides these hypothesis tests. The hypothesis tests confirm: 11US = 1 cannot be rejected; hence H1:11US = 1 is accepted; 21US = 0 is rejected (< 0.02%) hence H1:21US  0 is accepted; 31US = 0 is rejected (< 0.01%) hence H1: 31US  0; is accepted. The joint test: 11US = 1 and 21US =

31US = 0 is rejected (< 0.01%) hence either 11US  1, 21US  0 or 31US  0.
Chapter 5 Page 132

In conclusion, although the hypothesis that 11US = 1 cannot be rejected, the hypotheses that 21US= 0 and 31US= 0 are rejected. Hence there is evidence of oligopoly and oligopsony market power from the US tire industry on world tire market and world natural rubber market.

Table 5.24 Hypothesis Tests for 11US, 21US, 31US (Estimation A)
Estimation A H0:11US = 1 H1:11US  1 0.1867 0.9512 31 0.3488 0.9048 1,31 0.3488 Not reject H0 11US = 1 H0:21US = 0 H1:21US  0 0.0738 2.8170 31 0.0083 7.9356 1,31 0.0084 Reject H0 (< 0.02%) 21US  0 H0:31US = 0 H1:31US  0 -0.1881 -10.0525 31 0.0000 101.0533 1,31 0.0000 Reject H0 (< 0.01%) 31US  0 369.6176 3,31 0.0000 Reject H0 (< 0.01%) 11US 1or 21US  0or 31US 0 H0:11US =1,21US =31US =0 H1:11US 1 or 21US 0 or 31US 0

Test value T statistic Df P-value F statistic Df P-value Conclusion

The next step is to derive the conjectural elasticities in order to obtain the MPI measure of market power. The estimates for 21US and 31US are used to derive the two conjectural elasticities according to the approach outlined in (5:10.1) and (5:11.1). Accordingly the US conjectural elasticity on world tire markets is: (5:10.1US)

US 1 

q Q qUS    21US  US qUS Q Q

This generates a mean value of αUS1 = 0.0732 with a range from 0.0587 to 0.1062. The US conjectural elasticity on world natural rubber market is: (5:11.1US)

US1 

xr XR xrUS    31US US xrUS XR XR

This generates a mean value of βUS1 = 0.1884 with a range from 0.1615 to 0.2415. Having obtained estimates for all key variables it is now possible to estimate the market power index for natural rubber as an input into US tire manufacturing. We substitute the values for: , , US1 and US1 in the MPIXRUS1 expression to obtain:

Chapter 5

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MPI XRUS1 

ε  US1  η  US1 = 0.5243 with a range from 0.3787 to 0.7527. 1  ε  US1

However, the initial estimation (A) found an estimate for11US > 1 which implies WR > VMPxr (assuming that concurrently: 21US = 31US = 0). This implies the input XR is being paid more than the value of its marginal product ( WR 

qi  P  MPxr  P ) xr i

whereas theory predicts 1US ≤ 1 (that is: WR ≤ VMPxr). Despite non-rejection of H0:

11US = 1, supplementary estimations were conducted. Inclusion of a constant to test for
other factors yielded insignificant coefficients for 11US and 21US so estimation version B is applied with11US and 21US forced to zero and a constant to test for the oligopsony coefficient 31US. Results are found in Table 5.23. Hypothesis tests reject the null hypothesis that 31US = 0 (<0.01%) for this estimation as displayed in Table 5.25.

Table 5.25 Hypothesis Tests for 31US (Estimation B)
H0: 31US = 0 H1: 31US  0 Test value T statistic Df P-value F statistic Df P-value Conclusion -0.2119 -13.4125 32 0.0000 179.8962 1,32 0.0000 Reject H0 (< 0.01%)

31US  0

The corresponding conjectural elasticity in (US1) is zero from estimation B due to 21US being forced to be zero. The conjectural elasticity in natural rubber market (US1) is derived from the estimate for 31US from B to yield a mean value of:

US1 

xr XR xrUS    31US US = 0.2124 with a range from 0.1820 to 0.2721. xrUS XR XR

The market power index using the conjectural elasticities from estimation B is: Chapter 5 Page 134

xr US (5:8.4133 with a range from 0. 5.2 and 5:9.6. the slope of direct dP dXR ) and the natural rubber marginal productivity in the US dWR qUS ) are used to obtain the following terms.01%. the null hypothesis that 22US = 0 and the null hypothesis that 32US = 0 are rejected at less than 0.MPI XRUS1  ε  US1  η  US1 =0.01%.2US) xrUS 2   Applying the estimates for natural rubber marginal productivity.2US) gives the results displayed in Table 5. The null hypothesis that 12US = 1 is rejected at less than 0. (5:6. Chapter 5 Page 135 .2) for US data.2US) WR  12  PUS   22  qUS   32  xrUS    From (5:6. 1  ε  US1 The MPIXRUS1 results from both estimations (A & B) are very similar.2US) estimates of the slope of direct tire demand ( natural rubber supply ( tire industry (US=  dQ ).27.2). Both find oligopsony market power in the natural rubber industry. to estimate the optimality function (5:6.26.2US) qUS 2   q US 1   qUS  dQ  xrUS    dP  1  xrUS  dXR     dWR  (5:9.2 US MPI Estimation Using Model 2 The MPI Model 2 is derived using direct tire demand and direct natural rubber supply functions with conjectural elasticities estimated via the optimality condition derived in Chapter 4 as (5:6. Hypothesis tests on Estimation A results are listed in Table 5. to the slope of the direct tire demand and the slope of the direct natural rubber supply.3523 to 0.5008. This condition is estimated using the variables defined in (5:8.

0197 34 0.638)*** 0.9229 *** denotes rejection of null hypothesis at less than 1% level of significance. * denotes rejection of null hypothesis at 10 % level of significance. Table 5. 32US (Estimation A) H0:12US = 1 H1:12US 1 Test value T statistic Df P-value F statistic Df P-value 1.772)*** -0.5971 6.1224 (-14.34 0.5580 (2.1072 (-10.9582 q US  xrUS Durbin-Watson R 2 -0.34 0.01%) Conclusion H0:22US = 0 H1:22US  0 0.0001 Reject H0 (< 0. ** denotes rejection of null hypothesis at 5% level of significance.2US) Optimality Function for US Tire Manufacturing (Model 2) Estimation Results WR  12  PUS   22  qUS   32  xrUS Estimation A Coefficient (t-value) Constant     Estimation B Coefficient (t-value) 0.0000 196.6983 1. 22US =32US = 0 H1:12US 1or22US 0 or32US 0 12US  1 22US  0 32US  0 12US 1 or 22US  0 or 32US  0 The corresponding conjectural elasticities obtained from the coefficient values in Estimation A are: Chapter 5 Page 136 .01%) 385.Table 5.26 Equation (5:6.5513 1. 22US.1224 -14.0001 20.0000 Reject H0 (< 0.7719 34 0.470)*** 1.7968 3 0.0000 Reject H0 (< 0.8585 1.01%) H0:32US = 0 H1:32US  0 -0.7696 0.34 0.0000 Reject H0 (< 0.192)** - - P US  12US 22US 32US 2.020)*** 1.9934 0.1128 4.1128 (8.01%) H0:12US =1.27 Hypothesis Tests for 12US.0000 45.5495 34 0.5971 (6.

xrUS XR XR The market power index using the conjectural elasticities from estimation B is: MPI XRUS 2 US 2   US 2 ε* η*  US 2 1  ε* = 0. It is the formula that captures the approach adopted by Chang & Tremblay (1991). The hypothesis tests conclude: 12US  1(< 0.4744 to 0.5198.1377.4180 at the mean with a range from 0.26 and the hypothesis tests on these coefficients are listed in Table 5.1086.7329.1572. The conjectural elasticity in natural rubber market (US2) is derived from the estimate for 32US from B to yield a mean value of: US 2  xr XR xrUS    32US US  0.US 2  and. a supplementary estimation (B) is undertaken.1163 to 1. The MPIXRUS2 formula is that derived in Chapter 4 as (4:8b). this may be the factor generating MPIUS2 > 1.01%). Therefore.6171 with a range from 0. 22US = 0 and 32US = .0921 to 0. The corresponding conjectural elasticity in (US2) is zero from estimation B due to 22US being forced to be zero.1239: with a range from 0. as the estimated value for 12US > 1 is also not supported by theory. However.11 as listed in Table 5.3297 to 0. xr XR XR US The corresponding market power index (MPIUS2) is: MPI XR US 2 US 2   US 2 ε* η*   1  US 2 ε* =1.3517 at the mean with a range from 1.10%) and 32US  0(< 0.1051 to 0. It has a range of 0.28.9337 qUS Q Q US 2  xr XR xr  US   32US US  0. Estimation B is undertaken as a contrast to the initial model. The MPIXRUS2 result is not supported by the underlying theory which requires 0 ≤ MPI ≤ 1. Chapter 5 Page 137 .56. q Q qUS    22US  US = 0. Coefficient values from estimation B are 12US = 0.0. This estimation forces the oligopoly power variable coefficient (22US) to zero but retains the critical oligopsony variable coefficient (32US).

01%) 32US  0 111.0000 109.4672 35 0. 22US. The MPI Model 1 is derived using inverse tire demand and natural rubber supply functions with conjectural elasticities estimated via the optimality condition.0000 Reject H0 (< 0.35 0. this finding is only obtained at the expense of imposing an assumed competitive US tire industry (i.6.01%) 12US 1 or 32US 0 H0:12US =1.Table 5.0913 3.7365 35 0.4420 -1. 32US (Estimation B) H0:12US = 1 H1:12US 1 Test value T statistic Df P-value F statistic Df P-value Conclusion -0.5633 1.1) for France‟s data as follows.4320 2.1FR) estimates of the slope of inverse tire demand (    the inverse natural rubber ( = P ).28 Hypothesis Tests for 12US.France’s MPI Estimation Using Model 1 The approaches adopted for the US are applied to France‟s data. The equation (5:6. 5:8.0000 Reject H0 (< 0.3.e.1FR) WR  11  PFR   21  q FR   31  xr FR    From (5:6. no oligopoly power). 32US =0 H1:12US 1 or 32US  0 The MPI values for Model 2 that is derived from estimation B are consistent with those provided by Model 1 above.1072 -10.0156 1.35 0.36 0. This supports the finding of oligopsony market power from the US tire manufacturers over their natural rubber input. However. 5.1. xrFR Chapter 5 Page 138 .1) representing the optimality condition is estimated using the variables defined in (5:7.10%) 12US  1 H0:22US = 0 H1:22US  0 H0:32US = 0 H1:32US  0 -0.1 and 5:9. (5:6.0912 Reject H0 (< 0. the slope of Q dWR ) and the natural rubber marginal productivity in dXR the France‟s tire industry ( FR  qFR ) are used to obtain the following terms.

29.1FR) to derive values for coefficients 11. Results from Table 5. * denotes rejection of null hypothesis at 10 % level of significance.1FR) (5:9. 21FR = 0.724)* -0. Table 5.0.2601 (-15. ** denotes rejection of null hypothesis at 5% level of significance.730)*** 1.3126.0599 (1. If the null hypotheses are rejected it implies that world natural rubber price is less than its value of marginal product and that Chapter 5 Page 139 . The estimated results for (5:6:1FR) are provided in Table 5. 21FR = 0.2601) can be used to test the null hypotheses that: 11FR = 1. as a specific factor market to tire production in France. is competitive.1FR) P FR    q FR  P   FR  P xrFR q FR  xr FR    dP  q FR   qFR     FR  qFR dQ xrFR dWR  xrFR     xrFR dXR The three terms are use to estimate the optimality function (5:6.995)** 0.1FR) Optimality Function for France’s Tire Manufacturing (Model 1) Estimation Results WR  11  P FR   21  q FR   31  xr FR Coefficient (t-value) Constant     - P FR  11FR 21 FR 3 1FR 0.29 Equation (5:6.29 (11FR = 0. These three coefficients provide the means for hypothesis testing for the presence of market power plus estimation of the two conjectural elasticities required to calculate our market power index (MPI) for France. If the null hypotheses are not rejected then it implies the natural rubber market.9620 q FR  xr FR Durbin-Watson R 2 *** denotes rejection of null hypothesis at less than 1% level of significance.0599.(5:7. and 31FR = 0.1FR) (5:8.9950 0. and 31FR = .00.00. 21 and 31.3126 (1.

0606 with a range from 0.6875 0. The conjectural elasticity on world natural rubber market for France is: (5:11.30 Hypotheses Tests for 11FR.31 0.0001 Reject H0 (< 0.31 0. The joint test 11FR = 1 and 21FR = 31FR = 0 is rejected (<0.7298 31 0.0000 Reject H0 (< 0. hence H1:11FR  1 is accepted. 21FR. The next step is to derive the conjectural elasticities in order to obtain the MPI measure of market power.7243 31 0.01%) 31FR0 99.9732 1.0696.01%) 11FR1 1.01%) 0 The hypothesis tests reject 11FR = 1 (less than 0.4275 1.21FR =31FR=0 H1:11FR  1 or 21FR 0 or 31FR 0 Test Value = T statistic Df P-value F statistic Df P-value Conclusion -0.31 0.10%).2572 1.2601 -4.there is France‟s oligopoly power in the world tire market and oligopsony power in the world rubber market.0598 -0.30.10%) 21FR0 -15.1).1FR)  FR1  dXR xrFR xr   31FR FR dxrFR XR XR Page 140 Chapter 5 . The hypothesis tests are provided in Table 5. or 21FR 0 or 31FR 0. Accordingly the conjectural elasticity on world tire market for France is: (5:10.0946 2.1FR)  FR1  q dQ q FR    21FR  FR dqFR Q Q This generates a mean value of 0.01%) hence H1: 31FR  0 is accepted.01 %) thus either 11FR 1. 21FR = 0 is rejected (< 0. 31FR (Estimation A) H0:11FR = 1 H1:11FR 1 H0:21FR = 0 H1:21FR 0 H0:31FR = 0 H1:31FR  0 H0:11FR =1.1) and (5:11.0000 247. 31FR = 0 is rejected (< 0.31 0.3883 31 0.0000 11FR  1 or 21FR 0 or 31FR Reject H0(< 0. The estimates for 21FR and 31FR are used to derive the two conjectural elasticities according to the approaches outlined in (5:10.0001 19.0946 Reject H0 (< 0.01%). Table 5.0522 to 0. hence H1:21FR  0 is accepted.8907 3.

2FR) estimates of the slope of the direct tire demand function ( slope of direct natural rubber supply ( dQ ).6720. 1  ε   FR1 5.5608 with a range from 0. the dP dXR ) and the natural rubber marginal dWR productivity in France‟s tire industry (FR= terms.2 and 5:9.31. As revealed in Table 5:31. Therefore. We substitute the values.6.4541 to 0.2FR) q FR ) are used to obtain the following xr FR q FR 2    q FR 1   q FR  dQ  xrFR    dP  (5:9.This generates a mean value of 0.FR1 and FR1 for the MPI XR FR1 to obtain: MPI XRFR1  ε   FR1  η   FR1 = 0. Having obtained estimates for all key variables it is now possible to estimate the market power index for natural rubber as an input into tire manufacturing.2) for France‟s data as follows.2FR) xr FR 2   1  xrFR  dXR     dWR  Applying the estimates of natural rubber marginal productivity to the slope of the direct tire demand and the slope of direct natural rubber supply to estimate the optimality function (5:6. (5:6.2). Thus the conjectural variation in the tire market (2FR) and France‟s market power index (MPI) cannot be derived. (5:8.2180 to 0.2FR) WR  12  P FR   22  q FR   32  xr FR    From (5:6.2640 with a range from 0.4 France’s MPI Estimation Using Model 2 The MPI model 2 is obtained using direct tire demand and direct natural rubber supply functions with conjectural elasticities estimated via the optimality condition derived in Chapter 4 as (4. a supplementary model (Estimation B) is tested by Chapter 5 Page 141 .2FR) gives the results displayed in table 5.. coefficients for Estimation A are significant for 32FR only.3326.10. This condition is estimated using the variables defined in (5:8.

50 and 32FR = -0.2FR) France’s Optimality Function (Model 2) Estimation Results Estimation A Coefficient (t-value) Constant  Estimation B Coefficient (t-value) 0.31 Equation (5:6.9001 0.0930 (-7.01%). it does not have oligopoly neither on world tire market nor oligpopsony power on world natural rubber market. i.8958 0.8989 *** denotes rejection of null hypothesis at less than 1% level of significance.forcing zero the 22FR value given that the initial model yields insignificant estimates for 22FR but retains the coefficient 32FR.169)*** 1. * denotes rejection of null hypothesis at 10 % level of significance.8990 P FR  12FR 22FR 32FR q FR  xr FR Durbin-Watson R 2 -0.e.09.8005 (1. Table 5. In contrast to Estimation A.579) -0. If the null hypotheses cannot be rejected.32. then it can be concluded that the France‟s tire industry was operating in a perfectly competitive markets.1129 (0.730)*** 1.01%).568) 0. The hypothesis tests on these two coefficients are listed in Table 5.5202 (3.0900 (-8.01%)..895)*** - 0. The hypothesis tests conclude 12FR  1 (< 0. 32FR  0 (< 0. Estimation B provides results of 12FR = 0. Chapter 5 Page 142 . The joint hypotheses test indicates that either 12FR  1 or 32FR  0 (< 0. ** denotes rejection of null hypothesis at 5% level of significance.

32 Hypotheses Tests for 12FR. However.1690 33 0. 5:8.3740 with a range of 0.33 0.1151.4798 -3.5 Japan’s MPI Estimation Using Model 1 The MPI Model 1 for Japan is derived using inverse tire demand and natural rubber supply functions with conjectural elasticities estimated via the optimality condition derived in (5:6.01%) 32FR  0 64. the corresponding conjectural elasticity on world tire markets (  FR 2 ) is zero.1) for Japan‟s data. 5.0000 Reject H0 (< 0.01%) 12FR 1 H0:22FR = 0 H1:22FR  0 H0: 32FR = 0 H1:32FR  0 -0.2711 to 0.01%) 12FR  1. or 32FR  0 H0:12FR = 1 or 32FR = 0 H1: 12FR  1 or 32FR  0 - Since the 22FR estimate is forced to zero.1). 22FR.0900 -8.5924 33 0.0011 12. 32FR (Estimation B) H0: 12FR = 1 H1:12FR  1 Test Value T statistic Df P-value F statistic Df P-value Conclusion -0. The outcome is obtained by imposing an assumed competitive state for France‟s tire industry (no oligopoly market).Table 5.4693.9368 2.1 and 5:9. MPI results from Model 1 and 2 are consistent and support the finding of oligopsony market power from the France‟s tire manufacturers over the world natural rubber input market.7332 1.0914 with a range of 0.0000 66.0000 Reject H0 (< 0.6.1.0754 to 0.0011 Reject H0 (< 0.33 0. Chapter 5 Page 143 . The corresponding market power index is derived as MPI XR FR 2  FR 2   FR 2 ε* η*   FR 2 1  ε* This generates a mean MPIXRFR2 value of 0. This condition is estimated using the variables defined in (5:7. The conjectural elasticity in world natural rubber market is  FR 2   32 FR  xrFR XR This generates a mean value of 0.33 0.9056 1.

1JA) estimates of the slope of inverse tire demand (´= inverse natural rubber supply (´= in the Japan‟s tire industry (JA=  dP ). and 31JA = . the slope of dQ dWR ) and the natural rubber marginal productivity dXR q JA ) are used to obtain the following terms.00. If the hypotheses are rejected then it implies that world natural rubber price is less than its value of marginal product and that there is Japan‟s oligopoly power in the world tire market and oligopsony power in the world rubber market. 21JA = -0. The estimation results for (5:6. and 31JA = 0.1JA) xrJA  dWR  xrJA     xrJA dXR These three terms are used to estimate the optimality function (5:6. 21 and 31. If the null hypotheses are not rejected then it implies the natural rubber market. is competitive. Results from Estimation A can be used to test the null hypotheses that: 11JA = 1.1JA) q JA   (5:9. 21JA = 0. Chapter 5 Page 144 . From Table 5.33.(5:6.0937.33 11JA = 0. Two estimation results are reported (A and B).2795 but 11JA and 21JA are not significant and hence cannot provide the above described hypothesis test for 11JA.1JA) WR  11  PJA   21  q JA   31  xr JA    From (5:6. as a specific factor market to tire production in Japan. These three coefficients provide the means for hypothesis testing for the presence of market power plus estimations of the two conjectural elasticities required to calculate our market power index (MPI) for Japan.1JA) are provided in Table 5.1JA) PJA   q JA  P   JA  P xrJA dP q JA   q JA     JA  q JA dQ xrJA (5:8.0. xrJA (5:7.1710.1JA) so as to derive values for the coefficients 11.00.

1  ε   JA1 Chapter 5 Page 145 . ** denotes rejection of null hypothesis at 5% level of significance. reject that 31JA=0 (<0.34.2784 (-13.5584. Hypothesis tests for Estimation B are listed in Table 5.9963 0.3384 to 0.01%).33 Equation (5:6.590) -0. Therefore.01%) hence accept that 11JA 0 or 31JA  0.0937 (-0. hence accept that31JA 0. hence accept that 11JA 1. xrJA XR XR The market power index using the conjectural elasticities from Estimation B is: MPI XR JA1  ε   JA1  η   JA1 = 0. A significant model estimate is obtained but at the expense of imposing an assumed competitive tire market for Japan. The conjectural elasticity in natural rubber market (JA1) is derived from the estimate for 31JA from B to yield a mean value of:  JA1  xr XR xrJA    31JA JA = 0.2795 (-13.311) -0.9488 - 0.5090 (4. * denotes rejection of null hypothesis at 10 % level of significance.9485 *** denotes rejection of null hypothesis at less than 1% level of significance.050)*** 1. The corresponding conjectural elasticity in (JA1) is zero from estimation B due to 21JAbeing forced to be zero.2816 with a range from 0.200)*** 2. Results reject the null hypothesis that 11JA = 1 (<0.1567 to 0.3720. we conduct a supplementary Estimation B that forces 21JA to zero.Table 5. reject that 11JA=0 and 31JA =0 (< 0.1JA) Optimality Function for Japan’s Tire Manufacturing (Model 1) Estimation Results WR  11  PJA   21  q JA   31  xr JA Estimation A Coefficient (t-value) Constant     Estimation B Coefficient (t-value) - - P JA  11JA 21JA 31JA 0.4754 with a range from 0.01%).921)*** q JA  xr JA Durbin-Watson R 2 -0.1710 (0.0055 0.

5376 1.Table 5. xr JA (5:8.6.31 0.2JA) q JA 2   q JA 1   q JA  dQ  xrJA    dP  1  xrJA  dXR     dWR  (5:9.0000 174.01%) 31JA  0 89.0000 Reject H0 (< 0. 21JA. (5:6.31 0.4910 -4.01%) 11JA 1 H0:21JA = 0 H1:21JA  0 H0:31JA = 0 H1:31JA  0 -0.2784 -13.7474 31 0.1812 1.0000 Reject H0 (< 0.2) for Japan‟s data.2JA) xr JA 2   Chapter 5 Page 146 .0000 22.2 and 5:9. This condition is estimated using the variables defined in (5:8.31 0. 31JA (Estimation B) Estimation A H0:11JA = 1 H1:11JA  1 -0.31JA = 0 H1:11JA  1 or 3JA  0 Test value T statistic Df P-value F statistic Df P-VALUE Conclusion 5. the slope of direct dP dXR ) and the natural rubber marginal productivity in the dWR Japan‟s tire industry (JA=  q JA ) are used to obtain the following terms. Japan’s MPI Estimation Using Model 2 The MPI Model 2 is derived using direct tire demand and direct natural rubber supply functions with conjectural elasticities estimated via the optimality condition derived in (5:6.0066 2.2).2JA) WR  12  PJA   22  q JA   32  xr JA    From (5:6.01%) 11JA  1 or 31JA  0 H0:11JA=1.6.0000 Reject H0 (< 0.2JA) estimates of the slope of direct tire demand ( natural rubber supply ( dQ ).34 Hypothesis Tests for 11JA.1978 31 0.

36.3087 with a range of 0.1).3111 (3.35 Equation (5:6.029)*** 0.1243 and 0. The joint test concludes that 12JA 1 or 22JA 0 or 32JA  0(<0.946)*** 1.092)*** 1.2JA) Optimality Function for Japan’s Tire Manufacturing (Model 2) Estimation Results WR  12  PJA   22  q JA   32  xr JA Estimation A Coefficient (t-value) Estimation B Coefficient (t-value) 0. ** denotes rejection of null hypothesis at 5% level of significance.Applying the estimates for natural rubber marginal productivity.01%).9229 0.1060 (-7.01%). Table 5.000)*** -0. The null hypothesis cannot be reject hence the concluding results are 12JA = 1.35. 22JA  0 (< 0.1246 (-7. Accordingly Japan‟s conjectural elasticities on world tire markets are:  JA 2  q Q qJA    22 JA  JA q JA Q Q This generates a mean value of αJA2 = 0. The estimates for 21JA and 31JA are used to derive the two conjectural elasticities according to the approach outlined in (5:10.9065 q JA  xr JA DW R 2 32JA -0. Hypothesis tests on estimation A results are listed in Table 5.7381 (4. The next step is to derive the conjectural elasticities in order to obtain the MPI measure of market power. * denotes rejection of null hypothesis at 10 % level of significance.02%) and 32JA  0 (< 0.817)***    Constant  P JA  12JA 22JA 1. to the slope of the direct tire demand and the slope of the direct natural rubber supply.9196 0.1) and (5:11.1472 (6.3966 and Chapter 5 Page 147 .2JA) gives the results displayed in Table 5.8870 *** denotes rejection of null hypothesis at less than 1% level of significance. to estimate the optimality function (5:6.

35 (12JA= 0.9991 1.1472 0. Coefficient values from Estimation B are listed in Table 5.9999 33 0. 32JA = -0.00 Reject H0 (< 0. The hypothesis tests conclude: 12JA  1(< 0.5984 1.1246 -7.4447 0. Accordingly.1060) The hypothesis tests on these coefficients are listed in Table 5. the hypothesis tests cannot reject that 12JA =1 implying that the Japan‟s tire market is competitive. Table 5.01%) 32JA  0 35.0051 Reject H0 (< 0.4447 Cannot reject H0 12JA =1 H0:22JA = 0 H1:22JA  0 0.0051 8.33 0.01%) 12JA  1 or22JA  0 or 32JA  0 H0:12JA = 1.3111 2. based on the data available.5593 to 1. 22JA is forced to zero.7381. Therefore.37.01%).33 0. The conjectural elasticity in natural rubber market (JA2) is derived from the estimate for 32JA in Estimation B: Chapter 5 Page 148 . 22JA =32JA = 0 H1:12JA 1 or22JA 0 or32JA  0 From the above result. the tests reject the null hypothesis that 22JA and 32JA = 0 implying that Japan has market power in the tire market and natural rubber market.10%) and 32JA  0(< 0.8937 at the mean with a range of 0.0.02%) 22JA  0 H0:32JA = 0 H1:32JA  0 -0.1209 with a range of 0.33 0.0607 to 0. the results are conflicting and we present a supplementary model (Estimation B) to contrast with the initial model (Estimation A).1346 1.36 Hypothesis Tests for 12JA.00 Reject H0 (< 0. xrJA XR XR The corresponding market power index (MPIJA2) is 0.0331.9457 33 0. JA2  xr XR xrJA    32 JA JA  0. The corresponding conjectural elasticity (JA2) is zero from Estimation B due to 22JA being forced to be zero.7735 33 0.2103 3 0. However.00 63.1664. 22JA and 32JA (Estimation A) H0:12JA = 1 H1:12JA 1 Test value T statistic Df P-value F statistic Df P-value Conclusion 0. significant results for Estimation B are derived when restricting the oligopoly power variable coefficient (22JA) to zero but retains the critical oligopsony variable coefficient (32JA).

4754).34 0.0000 Reject H0 <0.0965 2.10%) 12JA 1.1).0870 2. Table 5.3019 to 0.0965 Reject H0 (<0.34 0. (5:6.0000 Reject H0 (<0.0918 34 0.3950 with a range of 0.1) for Germany‟s data.34 0. JA 2  32 JA  0.1.4908  JA 2 1  ε* The estimated MPI from Model 2 is consistent with Model 1 (0.1 and 5:9.7091 34 0.which yields a mean value of 0. H0:32JA = 0 H1:32JA  0 -0.37 Hypothesis Tests: 12JA. 22JA.1GR) WR  11 P GR  21  q GR   31  xr GR    Chapter 5 Page 149 .1060 -7. Both models support the presence of market power from Japan‟s tire manufactures over their natural rubber inputs (oligopsony) in the world market.2619 -1.32JA = 0 H1: 12JA 1 or 32JA  0 5.0000 50. xrJA .01%) 32JA  0 36. This condition is estimated using the variables defined in (5:7. 32JA (Estimation B) H0: 12JA = 1 H1:12JA1 Test value T statistic Df P-value F statistic Df P-value Conclusion -0.6.7 Germany’s MPI Estimation Using Model 1 The MPI Model 1 for Germany is derived using inverse tire demand and natural rubber supply functions with conjectural elasticities estimated via the optimality condition derived in (5:6. 5:8.0517 to XR The market power values for Model 2 that are derived from Estimation B are: MPI XR JA 2  JA 2   JA 2 ε* η*  = 0.1029 with a range of 0.2937 1.1416.01%) 12JA  1 or 32JA  0 H0:12JA = 1.9212 1.

0709.00. 21GR = 0 is rejected (< 0.2608) can be used to test the null hypotheses that: 11GR = 1. If the null hypotheses are not rejected then it implies the natural rubber market.1GR) xrGR  dWR  xrGR     xrGR dXR The three terms are used to estimate the optimality function (5:6.4894.38. The hypothesis tests in Table 5. as a specific factor market to tire production in Germany.1GR) are provided in Table 5.1GR) to derive values for coefficients 11. Therefore.From (5:6.1GR) q GR   (5:9.1GR) estimates of the slope of inverse tire demand (´= inverse natural rubber supply (´= in the German tire industry (GR=  dP ). and 31GR = 0. 21GR  0 or 31GR  0. xrGR (5:7. is competitive.08 %). The joint test: 11GR = 1 and 21GR = 31GR = 0 is rejected (< 0.03%). 21GR = 0. 31GR = 0 is rejected (< 0.39 confirm: 11GR = 1 is rejected(<0. and 31GR = 0. the evidence supports the presence of oligopoly and oligopsony market power in the German tire industry on world tire market and world natural rubber market. If the hypotheses are rejected it implies that world natural rubber price is less than its value of marginal product and that there is Germany‟s oligopoly power in the world tire market and oligopsony power in the world rubber market.38 (11GR = 0.1GR) P GR   qGR  P   GR  P xrGR dP qGR   qGR     GR  qGR dQ xrGR (5:8. Chapter 5 Page 150 . the slope of dQ dWR ) and the natural rubber marginal productivity dXR qGR ) are used to obtain the following terms. Results from Estimation A in Table 5. These three coefficients provide the means for hypothesis testing for the presence of market power plus estimations of the two conjectural elasticities required to calculate our market power index (MPI) for Germany. 21GR = 0.00.01%) and hence it can be concluded that 11GR  1. 21 and 31. The estimation results for (5:6.01%).

1).4894 (2.2608 (-14.3024 1.3035 31 0.1557 3.0789 Reject H0 (<0.31 0. * denotes rejection of null hypothesis at 10 % level of significance.0000 Reject H0 (<0.5106 -2. 31GR (Estimation A) Estimation A H0:11GR =1 H1:11GR 1 -0. Table 5.0789 3.0281 5.0281 Reject H0 (<0.Table 5.2608 -14.208)* 0.08%) 21GR  0 H0:31GR = 0 H1:31GR  0 -0.3059 1.1) and (5:11.8172 31 0.1GR) Optimality Function for German Tire Manufacturing (Model 1) Estimation Results WR  11 P GR  21  q GR   31  xr GR Estimation A Coefficient (t-value) Constant     - P GR  11GR 21GR 31GR 0. 21GR.9597 q GR  xr GR Durbin-Watson R 2 *** denotes rejection of null hypothesis at less than 1% level of significance.39 Hypothesis Tests for 11GR.8265 31 0.0709 1.01%) 11GR  1or 21GR  0 or 31GR  0 H0:11GR =1.31 0.01%) 31GR  0 249.31 0.38 Equation (5:6.817)* -0.8253 1.21GR =31GR =0 H1:11GR 1 or 21GR 0 or 31GR 0 Test value T statistic Df P-value F statistic Df P-value Conclusion The next step is to derive the conjectural elasticities in order to obtain the MPI measure of market power.31 0.0709 (1.9737 0. ** denotes rejection of null hypothesis at 5% level of significance.0000 Reject H0 (<0. The estimates for 21GR and 31GR are used to derive the two conjectural elasticities according to the approach outlined in (5:10.0000 219. Chapter 5 Page 151 .830)*** 1.03%) 11GR 1 H0:21GR= 0 H1:21GR 0 0.

0537 to 0.2) for Germany‟s data.08% significant level.3010. 1  ε   GR1 The MPIXRGR1 results from both estimations find that Germany has both oligopoly market power in the world tire market and oligopsony market power in the natural rubber industry. (5:6.2GR) estimates of the slope of direct tire demand ( natural rubber supply ( dQ ). xrGR Page 152 .5805 with a range from 0.Accordingly the German conjectural elasticity on the world tire markets is: (5:10.2).2GR) WR  12 P GR  22  q GR   32  xr GR    From (5:6. However.2 and 5:9.6.8 Germany’s MPI Estimation Using Model 2 The MPI Model 2 is derived using direct tire demand and direct natural rubber supply functions with conjectural elasticities estimated via the optimality condition derived in (5:6. GR1 and GR1 in the MPIXRGR1 expression to obtain: MPI XR GR1  ε   GR1  η   GR1 = = 0. We substitute the values for . This condition is estimated using the variables defined in (5:8. The German conjectural elasticity on the world natural rubber market is: (5:11. the slope of direct dP dXR ) and the natural rubber marginal productivity in the dWR Germany‟s tire industry (GR= Chapter 5 qGR ) are used to obtain the following terms.4442 to 0.0916.1GR)  GR1  Q qGR q    21GR  GR qGR Q Q This generates a mean value of αGR1 = 0. a weak point in these results is that the estimate for Germany‟s oligopoly conjectural elasticity in the world tire market (21GR) has only a 0. . Having obtained estimates for all key variables it is now possible to estimate the market power index for natural rubber as an input into German tire manufacturing.7220.0721 with a range from 0. 5.2153 to 0.2616 with a range from 0.1GR)  GR1  xr XR xrGR    31GR GR xr GR XR XR This generates a mean value of βGR1 = 0.

This approach sacrifices estimates for 12GR and 22GR but retains the critical oligopsony variable Chapter 5 Page 153 . Therefore.2GR) xr GR 2   Applying the estimates for natural rubber marginal productivity.01%). we conclude that 12GR 1. or 32GR  0 (< 0.0909 to 0.5796 to 0.41.40.6314 with a range of 1. The MPIXRGR2 result is not supported by the underlying theory which requires 0 ≤ MPI ≤ 1.01%).8596. Hypothesis tests on Estimation A results are listed in Table 5. The joint test confirms that 12GR  1. or 22GR 0.1108 with a range of 0. to the slope of the direct tire demand and the slope of the direct natural rubber supply. Thus to confirm the results. The corresponding conjectural elasticities obtained from the coefficient values in Estimation A are: q Q qGR    22GR  GR = 0.2GR) gives the results displayed in Table 5. the null hypothesis that 32GR = 0 is rejected (<0.3692 to 1. xrGR XR XR  GR 2   GR 2  The corresponding market power index (MPIGR2) is:  GR 2 MPI XR GR 2  ε* 1    GR 2  GR 2 ε* η* = 1. the null hypothesis that 22GR = 0 is rejected (< 0. one of which produces significant estimates (Estimation B) combines the coefficient values for 12GR and 22GR with effects from unidentified factors embodied in a constant term. 22GR  0.2GR) q GR 2    q GR 1   qGR  dQ  xrGR    dP  1  xrGR  dXR     dWR  (5:9.7819 with a range of 0. The null hypothesis that 12GR = 1 is rejected (< 0.9883 and qGR Q Q xr XR xrGR    32GR GR  0. a supplementary estimation is tried. to estimate the optimality function (5:6.03%).1271.02%). This also conflicts with theory which requires that 12GR  1 (less than one when there is market power in the output market and equal to one when the output market is competitive). In addition Estimation A gives the value for 12GR that is greater than 1. 32GR  0.(5:8.

2739 1.2GR) Optimality Function for German Tire Manufacturing (Model 2) Estimation Results WR  12 P GR  22  q GR   32  xr GR Estimation A Coefficient (t-value) Constant Estimation B Coefficient (t-value) 0.03%) 12GR 1 H0: 22GR = 0 H1: 22GR  0 0.7636 32 0.7466 2.3238 3 0.0201 5.0984 (-10. 22GR.650) *** 1.0081 Reject H0 (< 0.9326 0.01%) 12GR 1or22GR 0 or 32GR 0 H0: 12GR = 1.01%) 32GR  0 114.0081 7.2675 (3.9620 1.822)** -0.4470 32 0.9878 1.2675 and 32GR = .02%) 22GR  0 H0: 32GR= 0 H1:32GR  0 -0. ** denotes rejection of null hypothesis at 5% level of significance.0000 Reject H0 (< 0. Table 5. * denotes rejection of null hypothesis at 10 % level of significance.0201 Reject H0 (< 0.41 Hypothesis Tests for 12GR.0.coefficient (32GR).32 0.0000 60.1101 (-7.848)*** 0.32 0. 32GR (Estimation A) H0: 12GR = 1 H1:12GR 1 Test value T statistic Df P-value F statistic Df P-value Conclusion 1.8524 0.40 and the hypothesis tests on these coefficients are listed in Table 5.7657 (2.0000 Reject H0 (< 0. Estimation B is used to contrast with the initial model.764)*** 1.9071 *** denotes rejection of null hypothesis at less than 1% level of significance.22GR =32GR =0 H1:or 12GR 1or 22GR =0or 32GR 0 Chapter 5 Page 154 .8217 32 0.40 Equation (5:6. Table 5.0984 as listed in Table 5.762)***     P GR  12GR 2.9148 q GR  22GR 32GR - xr GR Durbin-Watson R2 -0.42.7657 2.32 0.1101 -7.747 (3. Coefficient values from Estimation B are constant = 0.

Table 5. 5. this finding is only obtained at the expense of imposing an assumed competitive German tire industry (i.1136. However.e.42 Hypothesis Tests for 32GR (Estimation B) H0: 32GR = 0 H1: 32GR  0 Test value T statistic Df P-value F statistic Df P-value Conclusion -0. The conjectural elasticity in the natural rubber market (GR2) is derived from the estimate for 32GR and is used to yield a mean value of:  GR 2  xr XR xrGR    32GR GR  0. This supports the finding of oligopsony market power from the German tire manufacturers over their natural rubber input. As explained in Chapter 5 Page 155 .0000 113.01%) 3GR  0 The hypothesis test concludes that 32GR  0(< 0. no oligopoly power). xrGR XR XR The market power index using the conjectural elasticities from estimation B is: MPI XR GR 2  GR 2   GR 2 ε* η*   GR 2 1  ε* = 0.2704 to 0.4738 1.33 0. The corresponding conjectural elasticity in (GR2) is zero due to 22GR being forced to be zero.4778.3934 with a range from 0. These models employ an alternative approach for estimation of the two conjectural elasticities.00 Reject H0 (< 0. This section describes MPI estimations for the same four countries using Models 3 and 4.6524 33 0.0984 -10. The range of the MPI values for Model 2 that is derived from Estimation B are consistent with those provided by Model 1 above.0812 to 0.7 Market Power Index Estimation Using Models 3 and Model 4 The previous section derived MPI estimates for four countries using the optimality condition approach contained in Models 1 and 2.0991 with a range from 0.01%).

then the term dQ qi  can be directly derived mathematically. The direct estimation approach to the estimation of the conjectural elasticities (αi and βi) first requires estimation of equations (5:12) and (5:13) followed by calculation of the two conjectural elasticities as per (5:14) and (5:15). France. dqi Q If dQ is found to be 1 then it implies that the market is the specific case of collusive dqi Cournot market behaviour and the conjectural elasticity then reduces to market share. More general market structure interpretations were shown in Table 3. It can be interpreted as the conjectural variation dqi Q dQ q weighted by the country‟s own market share i . dxri XR On the output side. If estimated by a linear model dqi Q 5:12 gives the coefficient estimates dQ and we obtain the conjectural elasticity by dqi multiplying each estimate with that country‟s market share. If the estimation is in the double-log form. the individual country‟s conjectural elasticity in the global tire market is defined as: αi 3  dQ qi  . in each individual firm‟s (or country‟s) market share of the global industry which is then used to calculate the conjectural elasticities (αi and βi).Chapter 4. Chapter 5 Page 156 . Japan and Germany. Fundamentally this approach simply measures the average response. over the studied time period. (5:12) Q  f 2(qi ) (5:13) XR  f 3 ( xri ) For i = US. The values: (5:14) α i 3  dQ qi  dqi Q and. (5:15) β i 3  dXR xri  can then be derived.4. this approach involves direct estimation of the i‟th country‟s observed response to industry changes which is then used to derive a proxy measure of the individual country (firm‟s) conjecture as to the global industry‟s response to its behaviour.

This implies that ex ante conjectured behaviour of the firm is always correct. not just be estimated from a static model. the estimated dQ qi here is derived from a post-event measurement of  dqi Q dQ qi as a  dqi Q the quantity of tire produced (qi).world tire production as a function of tire production outputs in US. the derivation of each country‟s conjectural elasticity on its input market. On the input market side.al (2002) who assigned the conjectural elasticity as a constant but also tested it as a function of the concentration variable. Examples of other estimations of conjectural elasticity are found in Appelbaum (1982) who approximated the conjectural elasticity using a linear function of input prices such as interest rate.43. supply elasticity and number of firms and Zhang & Sexton (2002) who simply adopted conjectural elasticity values from previous studies. other studies provide a variety of estimation methods. to obtain the conjectural elasticity. based on each specific study context. wage rate and intermediate input prices. β i 3  obtained in analogous to the derivation of αi 3  dXR xri  could be dxri XR dQ qi  described above. Germany and a time trend is reported in Table 5. specifically the global natural rubber market. Japan. France. dqi Q Results for estimation of (5:12) . Thus. demand elasticity. Hence to interpret the estimated term conjectural elasticity requires the assumption that the prevailing observed response is the same as the firm conjectured pre-event. there is criticism that conjectural behaviour should incorporate a sequence of actions in reaction to rivals‟ quantity changes. Murray (1994) who estimated a function of transportation costs and border rival spatial competition ratio. the term dQ in the literature dqi is sometime reduced to be a market conduct parameter instead of a conjectural elasticity (Sexton. In comparison to this approach. Lopez et. it helps provide a frame of possible outcomes to be used as robust testing with outcomes from Model 1 and Model 2. 2000) and experimental analysis (Engle-Warnick & Ruffle 2005).However. In contrast. 2000). Wilcox & Abott (2003) who estimated the conjectural elasticity as a function of product price. However. there are alternative approaches to study market power based on games theory (Sexton. Although this is not the case for every behaviour. Chapter 5 Page 157 .

00 0.Table 5. * denotes rejection of null hypothesis at 10 % level of significance.9996 Time trend (T) Durbin-Watson R 2 t *** denotes rejection of null hypothesis at less than 1% level of significance.1168 (8.200)*** 0. Japan and Germany respectively. ** denotes rejection of null hypothesis at 5% level of significance.1427 (5. The time trend representing technological development is found to be statistically significant in the global tire market.001) *** 0.43 were generated in a log-log form with first order correction for autocorrelation.S.1705 qFR Q Q qJA  qJA Q = 0.134) *** 0.2807 (-21.200)*** 0.730) *** 2.0124 (23. The estimation results in Table 5. France. Given the log-log specification for (5:12) the conjectural elasticities (5:14) for each country are derived as: US 3  Q qUS  = 0.894) *** 0.1705 (7.1168  FR 3   JA3   GR 3  Chapter 5 Q qGR  = 0.1427 for US.3385 qUS Q Q qFR  = 0. qGR Q Page 158 .43 Estimation Results for (5:12): Countries’ Conjectural Elasticities in Global Tire Industry Q  0  US qUS  FR qFR   JA qJA  GR qGR  tT Coefficient (t-value) Constant U.3385 (18. ‘s tire production (qUS) France’s tire production (qFR) Japan’s tire production (qJA) Germany’s tire production (qGR) 0 US FR JA GR -0.

Table 5.44 reports estimates for (5:13) - world natural rubber production as a function of quantities of natural rubber that are used in tire sectors in US, France, Japan and Germany.

Table 5.44 Estimation Results for (5:13): Countries’ Conjectural Elasticities in Global Natural Rubber Supply Market.
XR  0  US xrUS   FR xrFR   JA xrJA  GR xrGR  GRD xrGR  D91  WOWO
Coefficient (t-value) Constant Natural rubber input – US (xrUS) 0 US FR JA GR GRD WO 0.0018 (0.1869) 0.1709 (3.641)*** 0.2957 (3.471)*** 0.2898 (8.459)*** 0.0484 (0.525) 0.1891 (2.591)** -0.0665 (-4.073)*** 1.9563 0.9951

Natural rubber input - France (xrFR) Natural rubber input – Japan (xrJA)

Natural rubber input - Germany (xrGR) Natural rubber input - Germany (xrGR)D91

World oil price (WO) Durbin-Watson R
2

*** denotes rejection of null hypothesis at less than 1% level of significance, ** denotes rejection of null hypothesis at 5% level of significance, * denotes rejection of null hypothesis at 10 % level of significance.

The estimation results in Table 5.44 were generated from a log-log form with first order correction for autocorrelation. The time trend repressing the technological development is not found statistically significant as in the global tire market in 5:12. However, the world oil price (WO) is found statistically significant in the world natural rubber market as synthetic rubber produced from crude oil is, to some extent, a substitutable input to natural rubber. In addition the data for Germany‟s use of natural rubber input is not readily available for the period before the country reunification hence a dummy variable is assigned to incorporate the effect of data structural break caused by the reunification Chapter 5 Page 159

in 1991. Estimation results for Germany data reflect that its estimates (GR) are not statistically significant except for the years after 1991 (GRD). Given the log-log specification for (5:13), the derived average conjectural elasticities for each country are:

US 3 
 FR 3 

XR xrUS  = 0.1709 xrUS XR XR xrFR  = 0.2957 xrFR XR XR xrJA  = 0.2898 xrJA XR XR xrGR  = 0.1046 (1962-1990 =0.0484, 1991-2000 = 0.2375) xrGR XR

 JA3 

GR 3 

for US, France, Japan and Germany respectively. The two directly estimated conjectural elasticities (I and i) for each country i can be used to derive new estimates for MPI for each country. The results for Model 3 (market power index derived from inverse tire demand elasticity (), inverse natural rubber supply elasticity (), and directly estimated conjectural elasticities for the world tire industry (i3) and the world natural rubber industry (i3) for each country, is reported in Table 5.45. MPI results using Model 4 (market power index derived from direct tire demand elasticity (*), direct natural rubber supply elasticity (*), and directly estimated conjectural elasticities for the world tire market (i3) and the world natural rubber market (i3) for each country, is reported in Table 5.46.

Table 5.45 MPI Estimations Using Model 3

ε  US 3  η  US 3 1    US 3 ε   FR 3  η   FR 3 MPI XR FR 3  1     FR3 ε   JA3  η   JA3 MPI XR JA3  1     JA3 ε   GR 3  η   GR 3 MPI XR GR 3  1     GR 3 MPI XRUS 3 
Chapter 5

Mean 1.0442 Min to Max 0.6266 - 1.6500 Mean 0.7672 Min to Max 0.5830 – 1.0211 Mean 0.6787 Min to Max 0.5407– 0.8649 Mean 0.5907 Min to Max 0.3916 – 0.8949

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Table 5.46 MPI Estimations Using Model 4

US 3
MPI XRUS 4  ε* 1 

US 3 US 3
ε*
Mean 0.8190 Min to Max 0.7647 – 0.8518

η*

Mean 0.9598 Min to Max 0.9506 – 0.9658

MPI XR FR 4

 FR 3   FR 3 ε* η*   FR 3 1  ε*
 JA3   JA 3 ε* η*   JA3 1  ε*
 GR 3   GR 3 ε* η*   GR 3 1  ε*

MPI XR JA 4

Mean 0.7673 Min to Max 0.6981 – 0.8092

MPI XR GR 4

Mean 0.5935 Min to Max 0.5131 – 0.7509

5.8 Summary
This chapter has derived four different estimations of the market power index for four individual countries: the US, France, Japan and Germany. The estimates are derived from the four estimation models developed in Chapter 4. A summary of the estimation methods involved for each of the 4 models are summarised in Chapter 4 in Figures 4.2a and 4.2b. Model 1 and Model 2 use indirectly estimated conjectural elasticities for tire and natural rubber industries market. Model 1 differs from Model 2 in that Model 1 uses an inverse tire demand elasticity and an inverse natural rubber supply elasticity whereas Model 2 uses a direct tire demand elasticity and a direct natural rubber supply elasticity. In contrast, Model 3 and Model 4 use directly estimated conjectural elasticities. Analogous to Models 1 and 2, Model 3 uses the inverse tire demand elasticity and inverse natural rubber supply elasticity whereas Model 4 uses the direct tire demand elasticity and the direct natural rubber supply elasticity. For Models 1 and 2, a two-step procedure for market power analysis is used. This allows for the estimation of the optimality equation (equation 5:6i), which gives the Chapter 5 Page 161

estimates of 1, 2, 3. In the first step hypothesis tests are applied to the estimates of

1, 2 & 3. The null hypotheses for a competitive market are: 1 = 1 and 2 = 3 = 0.
This implies that the natural rubber price is equal to the value of the marginal product of natural rubber in tire manufacturing. If 1 <1 and 2 0, 3 0, then the implication is that the natural rubber market is not competitive and oligopoly market power could be present in the tire output industry and oligopsony market power could be present in the tire input natural rubber industry. Step 2 is then called for and it involves measurement of the degree of market power via the market power index (MPI). This requires two more components in addition to the tire demand elasticity and the natural rubber elasticity. They are the conjectural elasticity in tire market (i1), which is derived from 2 and the conjectural elasticity in the natural rubber market (i1), which is derived from 3. The MPI will have values of 0 to 1 and is general in its application to a range of market power cases including both oligopoly in the output market (tires) and oligopsony in its input market (natural rubber). The range of test values is detailed in Chapter 4 in Table 4.1. The critical test for oligopsony is based on the conjectural elasticity βi. A competitive input market is implied by βi = 0. Oligopsony is implied by 0<i<1 and monopsony is implied by i=1. The degree of oligopsony market power is then given by MPI. The tests for market power in this study thus depend on the values of: world tire demand elasticity, world natural rubber supply elasticity, natural rubber marginal productivity in each country‟s tire production function and output and input conjectural elasticities. The elasticity estimates are derived from both inverse and direct demand and supply functions. The conjectural elasticity estimates are derived from two approaches. The demand and supply elasticity estimates are summarised in Table 5.47. Estimates of natural rubber marginal productivity for tire production for each country are summarised in Table 5.48.

Chapter 5

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3192 to 0.S. In the first estimation (A) 1 >1 but H0:1 =1cannot be rejected. Hypothesis test results for the US are summarised in Table 5.6583) 0.3441 1/ = 6.48 Natural Rubber Marginal Product Estimates( i:  US.6989 *  = -3.1091 to 0. USA Estimated models and hypothesis tests (for the null of competitive conditions) for the US for Models 1 and 2 were reported in Tables 5.3705 World inverse natural rubber supply elasticity  = 3. However. the null hypothesis for 2 and 3 and the joint hypothesis are all rejected.47 Demand and Supply Elasticity Estimates (.3793) Estimates of these critical variables are applied to generate market power tests for each country.1641) World direct natural rubber supply elasticity * = 0. Results are as follows.3005 0.3804 (-0.49 and Table 5.3439 (-6.9063 to 3. These results provide qualified support for the presence of oligopsony behaviour based primarily on Chapter 5 Page 163 .2285) Table 5.3763 – 9. The alternative estimation (B) forces 1 = 2 = 0 and rejects the null hypothesis for 3.6343 (0. ( US ) France (FR ) Japan (JA ) Germany (GR ) 0.2606-0.  FR.2152) World direct tire demand elasticity 1/ = -0.8368) 1/ = 0.3654 (0.5673 (0.  JA.4097 to 0.7341) 0.3405 (2.50.8229) * * = -0.3646) 0.1518 to -0.Table 5.8768 (4.3556 (0. *) Inverse Function World inverse tire demand elasticity Direct Function 1/ = -2.. Two estimation results are reported following some difficulties in generating significant and theoretically consistent estimates for all coefficients in the optimality function.23 to 5. *.28.3254 to 0.5875 to -1.1494 (0.  GR) U.5586 to 0.

2 = 0.S. The average market power index is 1. the mean MPIUS of value of 0. This outcome was corrected by forcing 2 = 0 in Estimation B. However. These values imply near maximum levels of oligopsony behaviour and market power.4180 from Estimation B is consistent with both Model 1 results and the hypothesis test conclusions. the null for 2 and 3 as well as the joint null is rejected. The mean MPIUS value of 1.3517 is > 1.5243 from estimation A and 0. The theoretically inconsistent size of 1 is assumed responsible for a theoretically incorrect value for the resulting market power index. 1 > 1 whereas theory predicts 1  1. Table 5. The MPI values from Models 3 and 4 are consistent but significantly higher than those derived from Models 1 and 2.the results for 3. Hence Model 2 tests also provide qualified support for oligosony behaviour. Overall it is considered that the results values support the presence of oligopsony market power for the U.4133 from B. Chapter 5 Page 164 . This is supported by the derived market power index results with average MPIUS values of 0.0442 for Model 3 and 0. tire industry for its world natural rubber market input. However. Test results for Model 2 also reflect difficulties in generating a significant and theoretically consistent value for 1. The first estimation (A) could not reject the theoretically inconsistent finding of: 1 >1.9598 for Model 4.49 Hypothesis Test Summary for US (Models 1 and 2)#1 H0:1 = 1 Model 1 Estimate A Estimate B Model 2 Estimate A Estimate B #1 #2 H0:2 = 0 H0:3 = 0 H0:1 =1. as for Model 1. 3 = 0 Not reject - #2 Reject - Reject Reject Reject Reject #2 Reject - Reject Reject Reject Reject Reject All i estimates are significant unless otherwise stated.

3385 0.3787 to 0. values involve 1 > 1 whereas theory predicts 1  1.52.#3 MPIXRUS (Estimate A) (0.2415) (0.5198) #3 (0.3523 to 0. In the first estimation (A) for Model 1. Corresponding results allow for the rejection of the null hypothesis tests for competitive market condition.29 . Specifically.5243 #2 1.0921 to 0.4744 to 0.3297 to 0. France Results for France are summarised in Table 5.3517 #2.1051 to 0.5608. The results for Model 2 involve difficulties in generating significant values for 1 and 2.1572)  i (Estimate B) i 0.6171 #2 Model 3 Model 4  I (Estimate A)  I (Estimate B) I  i (Estimate A) (0. Estimated models and hypothesis tests (for the null of competitive conditions) for the France for Models 1 and 2 were reported in Tables 5.7527) (1. The MPIFR of 0.4133 MPIXRUS (Estimate B) MPIXRUS #1 #2 0. Chapter 5 Page 165 .7329) 0.5.2721) 0.1086 (0. #3 Theory predicts MPI  1.0587 to 0.2124 (0.1377) 0.9598 Values in parentheses are minimum and maximum values.3740 supports the test results and is consistent with Model 1 results.0732 #2 Model 2 0. Hence an alternative estimation (B) which forces 2 = 0 is provided. thus all tests support the evidence of France‟s tire manufacture‟s market power both in tire market and the natural rubber market.32.1820 to 0.1615 to 0.1062) (0. the null hypotheses that 1 =1.4180 (0. This is consistent with the derived market power index results with average MPIFR values of 0.1239 #2 (0.51 and Table 5.1163 to 1.Table 5.1884 #2 0.5008) 1.1709 0. 2 =0 and 3 = 0 as well as the joint hypothesis test are all rejected.9337 ) 0.0442 0. the null that 3 = 0 is rejected.50 Conjectural Elasticities for US and MPIUS Summary#1 Variable Model 1 0.

Chapter 5 Page 166 .2957 0. 2 = 0.4541 to 0. the average MPI values for France from Models 3 and 4 are consistent but higher.1705 0.7672 0.3326) #2  i (Estimate B) i MPIXRFR (Estimation A) MPIXRFR (Estimation B) MPIXRFR #1 #2 0. Table 5.0754 to 0. Table 5.0696) #2 Model 2 Model 3 Model 4  i (Estimate A)  i (Estimate B) i  i (Estimate A) 0. Values in parentheses are minimum and maximum values.6720) #2 0.8190 for Model 4.0606 (0.51 Hypothesis Test Summary for France (Models 1 and 2)#1 H0:1 = 1 Model 1 Estimate A Model 2 Estimate A Estimate B #1 #2 H0:2 = 0 H0:3 = 0 H0:1 =1.4693) 0.1151) 0.2711 to 0. The average market power index is 0.As in the US case. 3 = 0 Reject Reject Reject Reject Not reject Reject #2 Not reject - #2 Reject Reject Reject Reject All i estimates are significant unless otherwise stated.0522 to 0.7672 for Model 3 and 0.5608 (0. 1 and 2 are not significant. exceeding the upper bound of those derived from Models 1 and 2.3740 (0.8190 1 and 2 are not significant.2640 (0.0914 (0.52 Conjectural Elasticities for France and MPIFR Summary#1 Variable Model 1 0.2180 to 0.

5. higher than those derived from Models 1 and 2.8937. specifically oligopsony power in the world natural rubber input market for tire industry in Japan. The MPI values from Models 3 and 4 are 0.3950 confirms support of the presence of market power. Two estimation results are reported following some difficulties in generating significant and theoretically consistent estimates for all coefficients in the optimality function.37. This test tries forcing 2 = 0. A supplementary estimation (B) is thus given. Although test results for Model 2 do not reflect difficulties in generating significant estimates and provide the MPIJA= 0. This is confirmed by the derived market power index results with average MPIJA values of 0.6787 and 0. The consistent results from each model qualifies the inference for the presence of market power of Japan‟s tire manufacturing industry in the world market. its results find the null hypotheses that 1 = 1 and 3 = 0 are rejected. specifically the oligopsony power as found by Model 1.53 and Table 5. 1 and 2 estimates are statistically insignificant. Chapter 5 Page 167 .4754. Japan Results for Japan are summarised in Table 5. the first estimation (A) could not reject the theoretically inconsistent finding of: 1 >1.54. These results provide qualified support for the presence of oligopsony behaviour based primarily on the results for 3. The resulting value of MPIJA = 0.Overall it is considered that the results values support the presence of oligopsony market power for the France‟s tire industry for its world natural rubber market input. The conjectural elasticity in the input market (natural rubber) is consistent with results from Model 1 and 2. This outcome is corrected by forcing 2 = 0 in estimation B and the null that 1 = 1 and 3 = 0 as well as the joint null are rejected. In Model 1 initial estimation (A). Estimated models and hypothesis tests for Models 1 and 2 were reported in Tables 5.7673.33.

Table 5.5584) (0.0000 #3 Model 3 Model 4  i (Estimation A)  i (Estimation B ) i (0.3950 #3 (0.2816 (0. Chapter 5 Page 168 .4754 (0. 1 & 2 are not significant.Table 5. 2 = 0.8937 0.7673 Values in parentheses are minimum and maximum values. 1 and 2 are not significant #3 Value involves estimated 1 >1 whereas theory predicts 1  1.0517 to 0.3966) 0.1243 to 0.53 Hypothesis Test Summary for Japan (Models 1 and 2)#1 H0:1 = 1 Model 1 Estimate A Not reject #2 H0:2 = 0 H0:3 = 0 H0:1 =1.0000 0.3384 to 0.1416) 0.2898 #2 0.1209 #3 (0.1168 #2  i (Estimation A )  i (Estimation B ) i MPIXRJA (Estimation A) MPIXRJA (Estimation B) 0.1664) 0.3087 0.3720) 0.6787 0.1029 (0.0607 to . 3 = 0 Not reject #2 Reject Reject Estimate B Model 2 Estimate A Reject - Reject Reject Not reject #3 Reject Reject Reject Estimate B #1 #2 Reject - Reject Reject All i estimates are significant unless otherwise stated.54 Conjectural Elasticities for Japan and MPIJA Summary#1 Variable Model 1 #2 Model 2 0.0331) 0.3019 to 0.1567to 0.5593 to 1. #3 Value involves estimated 1 >1 whereas theory predicts 1  1.4908) MPIXRJA #1 #2 0.

However.Germany Summary results for Germany are presented in Table 5. Overall they do not have statistical significant problems in any model. Table 5. Overall it is considered that the results support the presence of oligopsony market power for the German tire industry upon its world natural rubber market input. However. Model 1 results reject all hypotheses for the competitive markets (reject the null that 1 = 1. a supplementary estimation (B) forced all effects other than input market into a constant term. The average MPI values from Models 3 and 4 is 0. Value involves estimated 1 >1 whereas theory predicts 1  1.55 and 5.38 .5907 for Model 3 and 0 5935 for Model 4. 3 = 0 Reject Reject Reject Reject Reject Reject Reject Estimate B # 1 # 2 - - Reject - All i estimates are significant unless otherwise stated.6314. To correct for the 1‟s estimation result. Estimation and hypothesis tests were detailed in Tables 5.3934.55 Hypothesis Test Summary for Germany (Models 1 and 2)#1 H0:1 = 1 Model 1 Estimate A Model 2 Estimate A Reject # 2 H0:2 = 0 H0:3 = 0 H0:1 =1. The MPIGR result is 0. These values are consistent with those derived from Models 1 and 2. Model 2 involves difficulty in that estimated 1 > 1 which is not consistent with its theoretical prediction. the MPIGR is 1. being in the range of Model 1‟s results and thus indicating consistency of results from both models that qualifies estimation A‟s finding of the evidence for oligopsony market power.5. The average MPIGR is 0. Results found 3 strongly significant hence rejected the null hypothesis that 3 = 0.42. Chapter 5 Page 169 .56.5805. the hypothesis tests reject the null hypotheses that 2 = 0 and 3 = 0 implying that output market (tire) as well as the input market (natural rubber) is not competitive. 2 = 0. 2 = 0 and 3 = 0).

5805 (0.6027 1991-2000 = 0.3010) 0.9883) 0.2704 to 0.4778) 0.1136) 0.#3 (1.0537 to 0. Value involves estimated 1 >1 whereas theory predicts 1  1.0916) Model 2 0.0909-0.2153 to 0. thus supporting the presence of oligopsony power in the natural input markets by the tire manufacturing countries. the estimates for France‟s Model 2 and Japan‟s Model 1 are insignificant hence the hypothesis test for the null that 1 = 1 cannot be applied to these estimations without caution.0812 to 0.5582 0.4442 to 0. the estimates for 1 in some of these estimations provide conflicting interpretations that call for some further consideration.6314 #2.0.1271)) 0.5796-0.Table 5.2375) MPIXRGR (Estimation A) MPIXRGR (Estimation B) MPIXRGR 0.5907 1964-1990 = 0.8596) 0. 2) The findings for 2 in the initial estimations for Model 1 & 2. To summarize the evaluation for the empirical estimation can be concluded that: 1) The findings for 3 in the initial estimations (A) for Model 1 & 2 are all significant hence reject the null that 3 =0.2616 (0.3934 (0. 3) However.7819 #2 Model 3 Model 4  i (Estimation A )  i (Estimation B ) i  i (Estimation A )  i (Estimation B ) i (0.0408 1991-2000 = 0. #3 MPI > 1 whereas theory predicts MPI  1. excluding France‟s Model 2 and Japan‟s Model 1.56 Conjectural Elasticities for Germany and MPIGR Summary#1 Variable Model 1 0.1109 #2 (0.7220) 1. The two problems are: a) Although most of the findings for 1 in the initial estimations for Model 1 & 2 are significant.5935 1962-1990 = 0.1046 (1962-1990 = 0.0721 (0.1427 0.7393 #1 #2 Values in parentheses are minimum and maximum values.0991 (0.3692-1. Chapter 5 Page 170 .5432 1991-2000 = 0. indicate rejection of the null that 2 = 0 indicating the presence of oligopoly for tire manufacturers in the tire output markets.

Germany has the least market power. The MPI values reported are selected from preferred models.57. although most of the estimated values for 1 are less than 1. Results that involve statistically insignificant estimates (Estimation A for France‟ Model 2 and Japan‟s Model 1) as well as theoretically conflicting estimates (Estimation A for US‟s Model 1 &2. 4) Thus only Model 1 for France and Germany can produce significant and theoretically consistent evaluation for market power existence. and 4. 3. 5) The outcomes from Model 3 & 4 are consistent with Model 1 & 2 with higher levels of the MPI index for each country. appropriate supplementary estimations are undertaken to qualify each of these particular estimations involving interpretation problems. judged by Model 1. Finally Table 5. Other estimations involving problems are resolved by supplementary estimations (B) restricting 2 =0. estimations from US‟s Model 1& 2. From Table 5. with some lower resulting MPIXRi results . In addition. France has the second highest level of market power. and 4. estimated results imply that the tire industry in US. this helps to confirm the evidence of oligopsony market power potential in the natural rubber input markets. judged by Model 2. All outcomes in the supplementary estimations confirm the rejection of the null that 3 = 0 as found in their corresponding initial estimations (A). Japan‟s Model 2 and Germany‟s Model 2) are provided in the corresponding remarks. Japan and Germany have market power (oligopsony) on the world natural rubber market. judged by Model 3 and Model 4. and 4.57 compares the market power index for each country. 3. in each approach outcomes are confirmed between the derived and directly estimated conjectural elasticities in tire and natural rubber 42 42 This might imply an industry wide level of inefficiency which could also increase the price-cost margin Chapter 5 Page 171 . market power evidence still exists. Japan‟s Model 2 and Germany' Model 2 are greater than 1 whereas theory predicts 1  1. judged by Model 1. they are hence theoretically inconsistent and call for further investigations. Japan has the third highest level of market power. France. Hence. Results are reconciled between inverse and direct function approaches for tire demand and natural rubber supply.b) Secondly. Model 3 and Model 4 give similar ranking results. Thus even if it is assumed that output market is competitive. In conclusion. Therefore. US has the top market power index. 3.

#3 Other estimates from Model 1 estimation A gave statistically insignificant estimates for 1 and 2 hence are not reported.8937 from Model 2 estimation A is derived from 1 >1 whereas theory predicts 1  1. policy responses to be considered will be discussed in Chapter 6.5907 MPIXRi4 0. but they are derived from 1 >1 whereas theory predicts 1  1.7673 0.5805 Other estimates for MPIUS are 0.i2) MPIXRi2 0. #2 Other estimates from Model 2 estimation A for MPIFR gave statistically insignificant estimates for 1 and 2 hence are not reported. #1 Indirectly estimated conjectural elasticities (i2.5243 from Model 1 estimation A and 1.3740 0.4133 #2 France Japan 0.5935 0.3934 Directly estimated conjectural elasticities (i3.3950 0.9598 0.57 Market Power Index (Preferred Model Estimates) Country Model 1 Inverse Elasticity (. Thus.7672 0. It is derived from 1 >1 whereas theory predicts 1  1. #4 Other estimates from Models 2 estimation A for MPIGR is 1.markets.4754 #4 #3 Germany #1 0.i1) MPIXRi1 U.  ) Model 3 Inverse Elasticity (.8190 0.i3) MPIXRi3 1.0442 0. The other outcome of 0. Results from empirical estimations are reconciled between initial and supplementary estimations.5608 0. Chapter 5 Page 172 .6314. ) Model 4 Direct Elasticity * * ( .  ) Indirectly estimated conjectural elasticities (i1. Table 5. ) MPIXRi Model 2 Direct Elasticity * * ( .3517 from Model 2 estimation A.4180 0.6787 0.S.

predominantly the developing economies of Thailand. is restricted to certain countries. Consequently the market for natural rubber. which is an important input to the production of tires. Chapter 6 Page 173 . If market power was found to exist then this indicated the potential for its associated welfare implications of an inefficient and inequitable income distribution between the lesser developed countries producing the natural rubber input and developed country producers and consumers of tires. as an input for tire manufacture has both economic efficiency and welfare issues of interest. As natural rubber production is concentrated in a small number of less wealthy producing countries and the production of tires is concentrated in multinational companies with developed country ownership and the sale of tires is concentrated in these same developed countries. In contrast tire production is dominated by large multinational companies in a relatively concentrated industry with production and sales concentrated in wealthy developed countries. Indonesia and Malaysia of which Thailand is the top producing country.1 Introduction This thesis has examined the research question: Does oligopsony market power exist in the natural rubber input market for the global tire industry? The research question is of specific importance to countries such as Thailand as the production of natural rubber. a welfare issue of income distribution translates to a country level. The welfare issue of concern is the possible distortion in income distribution between natural rubber producers and consumers of natural rubber products. this thesis has focused on the assessment of market power in a global industry of producers of natural rubber inputs to the global tire industry. Therefore.Chapter 6 Conclusions and Policy Recommendations 6. such that natural rubber prices paid to its producers are less than the marginal revenue product earned by the tire producers from this input. Much of the natural rubber production is conducted on relatively small and low income farms. The economic efficiency issue of concern is the possibility that tire manufacturers may be able to exert market power in the market for natural rubber inputs.

based on the fact that market is dominated by three supplier countries.2 Thesis Process and Outcomes The background of the natural rubber industry was surveyed in Chapter 2 from the beginning stage of the natural rubber tree plantation through to latex tapping. processing.6. As such there are several stages in the natural rubber industry that have potential for market power from the buyer side. This concentration is also reflected in country level data with the major developed countries dominating the consumption of natural rubber for tire manufacture and the consumption of the manufactured tires. It could be analysed using country level data but based on an analysis of the natural rubber industry supply chain in Thailand. intermediate product manufacturing of smoked-sheet and block rubber and the manufacture of tires. The natural rubber export industry is dominated by particular buyer countries for each seller country namely: Japan for Thailand. As such there is potential also for market power to be exercised by the supplier countries of natural rubber (oligopoly). The potential for oligopoly market power (by seller countries). Chapter 6 Page 174 . Hence there is potential for market power to be exercised in the natural rubber markets from the buyer side (oligopsony) and that potential can be analysed via company level or country level data. Hence this thesis tests for the presence of market power by the tire industry in its tire output market (oligopoly)and market power in its natural rubber input market (oligopsony). exporting and tire manufacturing. Industries that possess oligopsony market power in their input markets may or may not also possess oligopoly market power in their output markets. US for Indonesia and EU for Malaysia. there is not the same strong level of concentration in a company – country relationship as found for the tire industry. The natural rubber consumer industry such as vehicle tire manufacture is concentrated in the hands of a small group of conglomerate enterprises that cross national borders. In this case the tire industry has structural features consistent with potential oligopsony market power in its natural rubber input market and oligopoly market power in its tire output market. The industry structure of the downstream product cycle of natural rubber was found to be increasingly concentrated through the various stages of tapping. is more problematic. The importance of synthetic rubber as a substitute input for natural rubber in tire manufacturing was also identified.

The analysis was first framed for a perfectly competitive market that was then used as a benchmark to evaluate production and employment in imperfectly competitive markets. The outcome was the derivation of a market power index that could be used to assess oligopsony/oligopoly market power. Natural rubber studies generally support the claim that the industry is competitive and that supply is price sensitive as farmers can vary tapping intensity and tree uprooting rates in responses to price changes. A review of the literature on measuring market power identified three approaches: buyer concentration. the literature supports an analysis of both output and input market competitor behaviour. This chapter also provided a review of the literature on tire production. effects from structural changes and the conjectural variation approach. tire demand and natural rubber supply. Given the potential for mixed oligopsony/oligopoly market power to exist in the markets considered in this study. it did not operate as a supplier cartel to impose market power in the manner of The Organization of the Petroleum Exporting Countries (OPEC) in the oil market. Conjectural elasticities in output and input markets are needed as well as the elasticities of demand for inputs and supply of outputs. However.The theoretical background for the analysis of oligopoly and oligopsony power was examined in Chapter 3 by means of a review of the theory of production and price in output markets and employment and price in input markets. It was found that tire demand has two components namely: new vehicle production demand that is not price sensitive and replacement tire demand that is price sensitive. to obtain a valid measurement of market power. The conjectural variation approach was considered to be of most relevance for the approach adopted in this thesis. It is also widely concluded that The International Natural Rubber Organization (INRO) did achieve a degree of price stabilization in the natural rubber market during its existence. Deviations from the competitive standard are considered potential evidence of market power. Typically studies using this approach adopt a duality theory approach namely the application of Shephard's Lemma and Hotelling's Lemma to derive demand functions for inputs and supply functions for outputs respectively. The degree of oligopsony/oligopoly power is then defined as the deviation of actual input prices from the value of their marginal products (shadow price) with the shadow price being derived from the profit maximization conditions. A general model for the application of an oligopsony/oligopoly model using the conjectural variation approach was developed in Chapter 4. The approach was based on the model developed by Chang and Tremblay (1991) that was extended to Chapter 6 Page 175 .

tire demand elasticity. The MPI requires values for four key elasticities. Model 1 differs from Model 2 in that Model 1 uses an inverse tire demand elasticity plus an inverse natural rubber supply elasticity whereas Model 2 uses a direct tire demand elasticity and a direct natural rubber supply elasticity. The general model thus provided four contrasting market power indexes to evaluate if oligopsony/oligopoly market power is present. Further testing for the presence of cointegrating relationships was undertaken and the results confirmed almost all series to be I(1) and the relationships of interest to be cointegrated. production and optimality functions. In contrast. These elasticities in turn require estimation of a number of market. The general model with its four variants was converted into empirical models and estimated in Chapter 5. Model 1 and Model 2 used indirectly estimated conjectural elasticities for tire and natural rubber industries market. Model 3 and Model 4 use directly estimated conjectural elasticities. The data were found to be non-stationary. Prior to estimation all data series were examined for possible non-stationarity using standard Dickey-Fuller and Phillips-Perron tests. input supply elasticity and conjectural elasticities for the tire output market in each country and conjectural elasticities for the natural rubber input market. Given the long Chapter 6 Page 176 . Model 3 uses the inverse tire demand elasticity and inverse natural rubber supply elasticity whereas Model 4 uses the direct tire demand elasticity and the direct natural rubber supply elasticity. The outcome was the derivation of market power indexes (MPI) for each of the four major tire producing countries. The MPI were then used to test for the presence of oligopoly market power in the tire output market for each of these countries and the presence of market power exerted by each tire producing country over the natural rubber input producing industry that is dominated by the three major natural rubber producing countries in South East Asia. An important adaptation of this general model was its transformation from the conventional industry/firm level to a global/country industry level so that it could be applied to test for the presence of oligopsony market power deriving from the global tire industry comprising tire producing countries (as proxies for multinational companies headquartered in these countries) on the global natural rubber industry comprising natural rubber input producing countries. Analogous to Models 1 and 2. Error correction model estimations supported this finding.incorporate 4 different interpretations which were identified as models 1 to 4.

The conjectural elasticities were derived from estimation of an optimality function and the tire production function. 3. and 4. judged by Models 2. Japan and Germany over the global natural rubber market. is the consistent finding of oligopsony market power in the natural rubber market across four different model variants and for each of the major tire producing countries. Germany had the third highest market power index. This effectively reduced the empirical model from a joint oligopsony/oligopoly model to an oligopsony model only in those cases. Important for this thesis however. 3. The general theoretical model has the flexibility to accommodate this separation and as the key research question for this thesis relates to the oligopsony component. significant estimates for the input market conjectural elasticities could only be obtained in some cases by forcing an assumed competitive tire market into the optimality function estimation. the Models 1 and 2 were duplicated using an alternative procedure to directly estimate ex-post proxies for the conjectural elasticities (Model 3 and 4). 3. France had the second highest market power index. Given certain difficulties associated with the conjectural elasticity estimations. Results from the four contrasting approaches supported the hypothesis that oligopsony market power was present in the tire industry of the USA. judged by Model 3 and Model 4. in such cases the oligopoly testing component of the model was sacrificed. and 4. The elasticity values for tire demand and natural rubber supply were first estimated from inverse tire demand and natural rubber supply functions. and 4. judged by Models 2. Market power indexes were obtained for the USA. Japan had the fourth highest market power index. judged by Models 1.term focus of the study model conventional OLS estimations were therefore used to obtain the long term functional relationships required for MPI derivations. Chapter 6 Page 177 . The process was repeated using direct tire demand and natural rubber supply functions (Model 2). The results for joint oligopsony/oligopoly in the tire and natural rubber industry relationship were somewhat compromised by conflicting estimation results for the two conjectural elasticities from the optimality functions used in Models 1 and 2. The USA had the highest market power index. France. Japan and Germany (Model 1). Although there was support for oligopoly market power in the tire industries‟ tire output markets in each of the four countries. France.

However. as reflected by our findings of an inelastic tire demand (0.2993 from inverse supply function and 0. the lower is the i. Alternatively no market power is indicated when  * and * are perfectly elastic (approaching infinity) as this will also result in a zero value for the market power index. the lower is the MPIXRi and the lower is the i. the lower is the MPIXRi.1494 from direct supply function).3705 from direct tire demand function) and an inelastic natural rubber supply (0.54 for Japan and Table 5. However. the lower is the MPIXRi.3804 from inverse tire demand function and 0. Non-zero values are also found for tire output market conjectural elasticity (i) and the tire input natural rubber market (i) (Table 5. the higher is the *. The MPI used for the measurement of market power comprises four components: the world tire demand elasticity (  *  1  ). these conditions are rarely found in reality. Table 5.52 for France. Hence it is useful to explore the industry and or market policy options for each of these elasticities. Tire demand has a large derived demand component that is price insensitive. This derives from the fact that new vehicle production demands at least five tires per unit with the tire cost a minor component of Chapter 6 Page 178 . the tire producing country‟s conjectural elasticity on the world tire industry (i). Table 5.50 for US.1 the smallest market power index (MPIXRi) is derived when both the markets for tires and natural rubber are competitive.56 for Germany). any policies that could raise the values of  * and * and/or reduce the values of i and i would reduce the level of market power because the higher is the *. From Table 4. the lower is the MPIXRi. The tire demand elasticity (*) has a strong theoretical propensity to be inelastic based on the review of earlier studies as well as this thesis.3 Interpretation of Results and Implications for Policy Options Interpretation of these results and the implications for policy can be approached by examining the underlying components of the market power measure that have been used to conclude the presence of oligopsony market power. This can occur if zero values are found for i and i as then a zero value will be generated for the market power index (MPIXRi) indicating no oligopoly or oligopsony market power. the world natural rubber supply elasticity (  *  1  ) and the tire producing country conjectural elasticity in the world natural rubber market (i).6.

However. Chapter 6 Page 179 . other tire producing countries with producer companies independent of the current dominant US. It would be in Thailand‟s interest to support an expanded independent domestic tire manufacturing industry in such countries as a force to dilute the existing oligopsony market power of the dominant western country manufacturers. it is only part of the overall tire market. The risk is that the same market forces that lead to industry concentration within these countries will also impact on the China and Russia industries to produce domestic industry concentration which together with strong state control in these two countries could result in merely an 43 43 The Russian tire producer group Sibur -Russian Tires started expanding its production from 2002. Within the existing dominant countries. In this respect the potential for independent tire production in countries such as China and Russia is of considerable importance. In 2008 the Pirelli Group reached agreement with the Russian Federation government to manufacture tires in Russia and the Commonwealth of Independent States. it has a relatively rigid total market size based on vehicle numbers and average use and there is likely a degree of brand loyalty.(Sources: Tire Review Online (2009)).in 2005. Demand from the vehicle in-use sector.the other vehicle cost. The data available for this study excluded these two rapidly industrialising countries. The AMTEL Group acquired the Dutch tire producer Vredestein Banden B. However. Other options include the growth of other tire producers and within the country context of this thesis. 2008). A similar experience is evident in Russia with rapid expansion since 2002 and active involvement by European tire manufacturers in particular . it is clear that tire demand has grown strongly in these two countries and China‟s expansion has been particularly rapid since 2000 to the extent that it was reported to be the largest producer country in 2008 with approximately 300 tire manufacturing firms (Business Wire. The potential to alter tire demand elasticity via policy is thus considered very limited. Hence Russia appears a promising market for natural rubber as a tire input. France. In the same year Continental of Germany acquired a Finnish tire firm which has operations in Russia. three large Chinese manufacturers are emerging and the dominant western country manufacturers are actively engaged in the industry. The tire producing country‟s conjectural elasticity in the global tire market (i) is a direct function of the industry structure. The industry is not yet as highly concentrated as in the traditional manufacturing companies of the USA. is potentially competitive and price sensitive. But such policies are beyond the legislative powers of the natural rubber producing countries such as Thailand. When Sibur –Russian joined The AMTEL Group they became the largest tire producer in Europe and one of the top ten producers in the global market. Japan and Germany however. competition policies could be employed.V. Japanese. French and German multinationals would be called for.

Prices in local currency (Thai baht) for domestic natural rubber increased steadily since 2001. Natural rubber prices were examined in Chapter 2 (Figure 2. and providing risk management (Jones. it was only a short term trend as natural rubber prices suddenly dropped in late 2008 as the US financial crisis extended into the world economic slump. It may be more difficult due to the political factors involved but the major western multinationals are actively pursuing involvement in China and Russia. In general agricultural policies are aimed at: increasing demand. providing direct income supplementation. Export prices fluctuated over the studied period and in recent times experienced a significant slump post 1996 followed by a recovery. Chapter 6 Page 180 . Whether the previously dominant western country multinationals could extend their existing levels of control into China and Russia via a process of multinational merger and acquisition is yet to be revealed.extension of the same form of oligopsony market power identified in this thesis for the dominant western country tire producers. The potential for a country such as Thailand to influence these two factors is much greater. The presence of an inelastic supply curve coupled with an inelastic tire demand curve means demand shocks feeding through to the natural rubber supply market are likely to impact mainly on price. 5.7.2) and Chapter 5 (Figure 5. 1994). stabilising price and/or income. Policies to increase supply elasticity are effectively aimed at reducing the price impact of market shocks by increasing supply flexibility and a number of agricultural policies can be targeted at achieving this outcome.9) and a decreasing real price trend was evident. This has social as well as economic impacts on the industry as income fluctuations will likely be greatest in the less concentrated upstream section of the industry. Although current as well as real prices in Thai baht were raised by the impact of the oil price surge in commodity market hedging transactions ahead of the financial crisis. the finding of oligopsony market power predicts the price would be driven to a competitive market price for the suppliers regardless as to whether that price is rising or falling over time. However. However.8 and 5. Supporters for agricultural policy support argue that technology developments over time tend to reduce supply costs but natural rubber prices fall further thus keeping incomes low. decreasing supply. The natural rubber supply elasticity (  * ) and the global tire industry natural rubber input conjectural elasticity (i) are the two elasticities from the natural rubber market side that impact on the market power index. by 2004 US dollar exports prices had still not recovered to their 1996 levels.

However. Monoculture reinforces supply inelasticity. In both cases the government could leave the stabilization fund to manage the price and ignore the need to equalise income or Chapter 6 Page 181 . They are self funding schemes that transfer income between periods. Policies that are more likely to impact on supply elasticity would include policies that would provide for better access to information on future market trends to better plan for plantation production. Arguments for industry support can also be based on social and political grounds in that natural rubber planting provides income. Policies designed to expand product diversity in small plantation farms could increase supply elasticity by enabling farmers to vary production levels without adversely impacting on their incomes. Price and/or income stabilisation policies can have different forms. The Board buys quantities of the product when supply is high and price is low and then resell when the price has risen. Buffer stock schemes typically operate with a market board that targets a certain price level (maybe government set). Equalization funds require farmers to pay money into the fund in boom periods and receive price supplementation in recession. home and lifestyle benefits in country regions that discourage population drift to overcrowded cities. It transfers quantities of supply between periods. Such policies will only benefit the natural rubber industry if they are directed to increasing demand from substitute markets with competitive structures.An industry dominated by small plantation operators will find it difficult to finance research and development projects and hence government support for industry level research and development can be justified for natural rubber. the risk remains that the benefits of cost reduction policies will be expropriated by the oligopsony tire buyers if they do not target supply elasticity. Policies directed towards increasing demand for products are not likely to be effective if the increased demand is from an industry such as the tire industry that exercises oligopsony market power in the market for natural rubber inputs. Risk management supported through initiatives such as farm insurance either private or government supplied would also help introduce greater supply flexibility (higher elasticity). Direct supplementation grants or payments to farmers based on output quantity or applied to producers of relevant factors of production such as fertilizers also risk expropriation by consumers (tire industry) in markets with inelastic demand and supply functions.

2008). In Thailand many policies have been implemented to assist the industry. export subsidies and government funded trade missions (The United States Department of Agriculture. natural rubber supply is still inelastic. However. direct income support. At the world market level the most notable example is found in the operation of the International Rubber Organization (INRO) which provided price stabilisation through the holding of buffer stocks of natural rubber. Indonesia and Malaysia (International Rubber Consortium Limited. domestic supply control. as discussed in Chapter 2 A2. Price support was provided during 1992-2002. Since 2002 supply restriction schemes have been introduced for natural rubber production and exports as the result of an agreement among the producing countries via the International Rubber Consortium Limited (IRCO) comprising Thailand. However. insurance support for natural disasters and a number of trade support policies for US producers: import quotas and tariffs. The estimated results for the indirect natural rubber supply function give an average supply elasticity of 0. Such measures are highly discriminatory against poorer competing economies as they are not only anti-trade but also can only be afforded by the richer countries of the world.299 with the impact of INRO and rainfall having negative effects on supply elasticity. However. there have been a number of initiatives applied to the natural rubber industry.2.supply over time. However. 2008). price support. Diversification of country natural rubber processing into block rubber in addition to sheet rubber has been encouraged. A number of central markets have been opened for auction trading to guide market prices. loan schemes. for a number of agricultural products. The United States Department of Agriculture (USDA) has policies that include. Examples of such agricultural policies can be found in the USA and European Union. The direct Chapter 6 Page 182 . inherent conflicts between consumer and producer members eventually lead to its demise in 1999. in practice this can lead to extensive subsidisation costs for the government and problems with managing excess stocks of the product as typically the government will be pressured to maintain prices above market levels. Establishment of farmer organizations has been supported and encouraged to process latex output into sheet and block rubber. These include demand increasing policies via encouragement of the diversification of natural rubber consumption into sectors other than the tire industry such as the irrigation and construction sectors.

The introduction of supply restriction via IRCO to stabilise natural rubber prices coincides with other emerging conditions such as the economic growth in emerging economies such as China and India (International Rubber Consortium Limited. Approaches could focus on more effective forward contract markets with weather linked forward contract derivative products (Sharma & Vashishtha. 2001). Estimation results from cointegration models for the inverse and direct natural rubber supply functions found that the natural rubber prices and quantities supplied adjusted towards equilibrium by 67% and 87% respectively in the first year. price falls and seasonal fluctuation as many USA agricultural producers do. However. Past attempts with INRO focused on price stabilisation without regulating the buyer countries‟ oligopsony power over the producing countries‟ natural rubber markets.eu/fr/node/289) Chapter 6 Page 183 . This adds to the potential for a successful implementation of an equalization fund. October 2008 was sponsored by the World Bank and other institutions ( http://www. The surge in commodity prices in the early part of 2008 assisted in raising natural rubber prices but this was followed by an even faster collapse in oil prices in the second half of 2008 as the global financial crisis took hold. However.149 with INRO and Japan‟s currency exchange rates having negative effects on supply elasticity. The United Nations also has assigned the International Task Force to work on providing knowledge of risk managements to commodity supplying countries but it still requires funding support . the world natural rubber industry may require more than agricultural policies to tackle its concentrated market structure that contributes to its oligopsony market power potential as reflected in the fourth component of the market power index: the conjectural elasticity (i) for the global tire industry input of natural rubber. 2008). The discussion on these various agricultural policies has focused mainly on their potential to improve the natural rubber supply elasticity component of the market power index. One important policy area that has not yet been generally considered is that of risk management. An equalization fund is another risk management alternative. 2007) or through market-based price floor insurance (Gilbert et al.natural rubber supply function‟s average elasticity is even lower at 0. Risk management is another measure to improve supply elasticity.euacpcommodities. Natural rubber supply could be more elastic if farmers had risk management support against crop failure.. Results confirm the adjustment back to equilibrium price and quantity is stabilising and relatively rapid. supply restriction policies alone do not 44 44 The International Taskforce on Commodity Risk Management Conference.

That is where MRP = MRC at point T where it pays Chapter 6 Page 184 . However. It faces a supply curve (S) from the natural rubber monopolist supplier (the monopsonist‟s MC curve). The risk is that. A bilateral monopoly for this market would see only one natural rubber buyer (say a tire industry cartel) and one natural rubber supplier (say a supplier country cartel). Figure 6. If IRCO were to be successful in controlling natural rubber supply then the natural rubber market would move closer to an oligopsony/oligopoly (or even monopoly model).seem sufficient as they ignore the structural problems on the demand side. for profit maximisation it needs to match its marginal revenue (MRP) with its marginal cost. The tire industry monopsonist will thus maximise profit by equating its MR and MC.1 Bilateral Monopoly Model Natural Rubber Price MRC of Tire Industry Supply (S) of Natural Rubber wt* wn* wc VMP wj wn wt T C S N MMRP xt xn xj xc MRP of Tire Industry (D for Natural Rubber) Natural Rubber Quantity (X) A competitive outcome would see an output of xc at a price of wc. Figure 6. But its marginal cost curve will be its marginal resource cost (MRC) curve (that is the marginal curve for S). Further insight as to the possible outcomes of such a market structure might therefore be gained by reference to the theory of bilateral monopoly behaviour. The tire industry buyer of natural rubber buyer will provide a demand curve that reflects the marginal revenue product (MRP) that it earns from purchasing natural rubber inputs.1 is adapted from Scherer & Ross (1991) and Salvatore (1997) to describe such a market model. the higher prices stimulated by supply restriction policies will stimulate efforts to break the supply restrictions: either by existing producer regions contravening restrictions or by encouraging plantations in new regions. if successful.

the history of INRO suggests that the relative bargaining power in that organisation was biased towards the buyer countries.1 also provides a diagrammatic illustration of the potential distortion that market power can impose on a market outcome. even this outcome involves a price for natural rubber that will be less than the value of its marginal product given by the VMP curve. The quantity supplied will vary between xt and xn. Its marginal revenue curve is MMRP (the marginal curve for MRP) and it will attempt to maximise profit by equating marginal revenue with marginal cost which is where MMRP = S at point N where it sells natural rubber to the tire industry at a price of wn* and makes a profit per unit of wn* . In theory a joint buyer and seller country market organisation such as INRO was should have been expected to achieve something approximating the joint profit outcome illustrated in Figure 6.1. Relative bargaining interaction would also have political dimensions as IRCO is an organisation composed of three developing countries and the oligopsonist market power is based in four major developed countries. This is a lower price and quantity supplied than that suggested for a joint profit outcome (wj and xj) and a competitive outcome (wc and xc). Both outcomes produce an inefficient restriction of output below competitive market outcomes. Given the evidence provided in this thesis of oligopsony market power imposed by the tire producing countries over the natural rubber producing countries the natural rubber input market price would be closer to that produced by the bilateral monopoly model where bargaining power resides with the monopsonist buyer. This would likely approximate a bargaining outcome where the two parties had equal bargaining power. As such Chapter 6 Page 185 .wn. However.wt. A joint profit sharing outcome would occur where MRP = S at a quantity of xj and a price range from wj to the intersection of xj with VMP (not shown but between wt* and wn* on this diagram). The monopolist seller of natural rubber however. Two other outcomes are possible. The outcome is indeterminate. The price paid to natural rubber producers will vary between wn* demanded by the producers and wt offered by the tire buyers. that is wt. Given that the empirical estimates support an inelastic natural rubber supply curve the possible price range could be wide.a price of wt for its natural rubber input quantity of xt and earns a profit on each unit purchased of wt*. faces a demand curve for natural rubber that is MRP and a marginal cost curve that is S. Figure 6. The eventual outcome will depend on the relative bargaining power of each party. However. A competitive outcome would require an output of xc at a price of wc.

Transposing this model from a bilateral monopoly to our oligopsony/oligopoly market for natural rubber and tires adds even more indeterminacy. However. Then the outcome would likely be closer to the joint profit outcome of the bilateral monopoly model but still with an indeterminate price range. based on the model results in Chapter 5 from this thesis the predicted outcome in this scenario would see prices driven down to the supply curve (marginal cost) level with the excess value (VMP – S) being expropriated by the tire industry. IRCO has a stronger focus on market power rebalance and as such may achieve a different outcome. However. individual countries‟ macroeconomics policies can influence currency exchange rates which in turn can affect commodity prices. This was an area of difficulty faced by INRO during its operation and will be a problem for any other international marketing organisation such as IRCO in the future. This can be seen from a comparison of the US dollar cycle and the commodity price cycle during 1970 to 2001. Commodity prices in US dollars were low when US monetary policy was tight and US dollar was appreciating. During this period commodity prices in US dollars were high when the US dollar was depreciating during US recessions and low interest rate US monetary policies. As this industry is global the data are impacted upon by multiple currencies. If the tire producer is not a monopoly seller but an oligopolist seller in its tire output market then it may or may not operate in a price competitive manner. If pricing behaviour is near competitive its decisions to increase output may not affect market price and as such its demand curve would be MRP and not MMRP. Evidence of the impact of currency fluctuations on natural rubber is found with the estimates of the natural rubber supply Chapter 6 Page 186 . INRO was primarily aimed at price stabilisation rather than market cartelisation and sellers‟ joint profit maximization as its members comprised both the producing and consuming countries of natural rubber.the bilateral monopoly model predicts the outcome would have been closer to the wt and xt outcome illustrated in Figure 6. However. Mundell (2002) argued that commodity prices are mostly quoted in US Dollars but the US dollar has its own cycle based on home country monetary policy. Mundell argues that commodity prices should be quoted in a medium that is more stable for example the SDR (Special Drawing Right). Hence US dollars are not stable and their instability is transferred to commodity prices that are quoted in US dollars.1 and supported by the MPI results provided by this thesis.

As is more commonly found. A composite reference price is critical for determining supply and demand management. The Agricultural Future Exchange of Thailand (AFET) has commenced commodity futures trading and this should assist such a move. Malaysia and Indonesia depreciate against the US dollar.1 identifies the potential for monopoly market power to override and change market prices whereas both insurance and income equalization funds are not aimed at altering market prices. Programs for price support (minimum prices) and supply restriction Chapter 6 Page 187 . Perhaps the natural rubber producing countries should consider reducing their reliance on TOCOM and SICOM market prices and consider setting prices in their home country‟s currency in order to avoid exchange rate risks. prices set in local currencies can also affect the natural rubber prices. As well a moving average of currency exchange rates over time should be used instead of the spot currency values.function. For instance. it did not accommodate price falls in the US dollar. changes in exchange rates were factors that obstructed its operation. This is not so for other assistance programs outlined above. involve a weighted basket of producing consuming countries‟ currencies. Mundell‟s comment that commodities should be quoted in a stable currency could. agricultural commodity assistance policies usually are administered using complex regulations with a heavy administrative and market distortion cost. any new policy for a natural rubber price stabilization fund should recognise the role of macro-economic variables such as currency exchange rates. Since reference prices were set as a Malaysia/Singapore composite price. The market model illustrated in Figure 6. Tire industry buyers with US dollars received a windfall price reduction. In the INRO case. This was strongest for Japan‟s currency and for Thailand as Japan is the biggest purchaser of Thai natural rubber. reference prices for natural rubber were required in the various price stabilising programs that have operated in the past. in this case. In contrast to Mundell‟s argument. The US dollar value of natural rubber prices fell sharply but INRO did not intervene because the prices measured in Malaysia/Singapore did not fall to their reference levels. In the 1997 the Asian currency crisis saw the currencies of Thailand. Hence such schemes are potentially not distorting of resource allocation and income distribution and do not have tax payers or consumer burden impacts. merely dampening income fluctuations caused by market price volatility. Japan yen exchange rates impact not only via spot purchases by the Japanese tire industry but also by trading in TOCOM Futures market. Therefore.

Both countries. such as rubber sheet and block rubber. Chapter 6 Page 188 . a significant gap in the country level data is the absence of long term data on China and Russia. Similarly if natural rubber products used in the tire industry were able to be classified into specific rubber types.(production quotas. import tariffs. The existing country data could also have been distorted by the re-exporting of natural rubber from Singapore that might have been consumed in tire producing countries but is not included in the data for natural rubber consumed in these countries. a justification for adoption of conventional OLS estimation techniques for long term functional relationships is based on testing that supported the presence of cointegrated relationships in nonstationary data series. If more detailed tire price data were available. have rapidly expanded their tire industries in recent years and as such must be considered an influence on future market outcomes. the models could have been extended to accommodate different tire types. It would have impacted on world tire market prices. export subsidies). With respect to estimation techniques adopted.4 Limitations The extensive model estimations conducted in Chapter 5 are heavily dependent on data availability and quality. However. Incomplete data on the distribution of tire producers across companies and countries means the adoption of a country level model is not underpinned by fully reconcilable data. but especially China. The results are therefore qualified by certain data limitations. It was also considered to be unnecessary for the objectives of this thesis. as such policies also have social and political dimensions they cannot be evaluated solely on economic grounds. Adoption of a full error correction modelling for all functional forms required to generate the required market power indexes was ruled out on the grounds of excessive complexity. 6. usually alter the market prices and hence generate economic inefficiencies in resource allocation and income distribution. As mentioned previously. then the model could have been modified to test for market power at different stages of the natural rubber supply chain index which was identified in Chapter 2 as composed of increasingly concentrated stages from the upstream raw material plantation stage to the downstream export stage.

As such. the coefficients obtained certainly contain errors from the first round estimation. However. The standard errors subsequently found for the optimality equation estimates are thus compromised. Kartz (2000) and Hole (2006). 6.5 Summary of Conclusions This thesis has examined the research question: Does oligopsony market power exist in the natural rubber input market for the global tire industry? It concludes that the world natural rubber market does display oligopsony market power. Consideration of tire industry policies are reserved for further studies. this thesis: reviewed the theoretical literature on the assessment of the market power. this thesis has focused on the natural rubber industry and as such has restricted discussion on possible policy responses to addressing the oligopsony market power in that industry. To obtain this conclusion.Finally. Instead an alternate approach to obtain proxy values for the conjectural variables was adopted as a means of cross checking for estimation consistency. Chang & Tremblay (1991) referred to methods advanced by Murphy & Topel (1985) and examples for deriving asymptotically correct standard errors in two-step econometric models can be found in Greene (1998). such methods were not adopted in this case. Estimation results suggest the presence of oligopoly market power in the global tire industry on the output side and the presence of oligopsony in the global natural rubber industry on the input side. Methods exist to obtain asymptotically correct standard errors. such estimations were made on predicted variables. natural rubber supply and each specific country‟s tire production function. Whereas the oligopoly and oligopsony conditions both require appropriate policy responses. The focus has further been directed to the implications of this oligopsony market power for Thailand which is the major world producer of natural rubber. the estimations of the optimality equation were based on estimated coefficients from tire demand. Hence. Policy options to address the oligopsony market power have been discussed in the context of the critical factors in the general model that indicate the presence of Chapter 6 Page 189 . developed a general model capable of measuring oligopsony/oligopoly in linked output and input markets and generated empirical estimations of the model for the global tire industry and its natural rubber inputs.

The global nature of the industry poses challenging regulation issues. agricultural policies that focus on altering supply characteristics are called for. Addressing the impact of the conjectural elasticity factor requires a focus on competition policies. 6. These are the elasticity of the natural rubber supply function in the market and the conjectural elasticity for the natural rubber input market for tires. However. The oligopoly market power that was identified in the global level tire market calls for further study of this market and appropriate regulation policies. Income equalization schemes (in which farmers make payments into the fund in boom times and receive the income back in depressed times) are an attractive option as are risk management insurance policies Both income equalization and insurance policies are potentially non market distorting and hence not distorting economic efficiency.6 Claims for the Thesis This thesis has tested for the existence of market power in the global market for natural rubber as an input for the tire industry. This issue is of significant importance for natural rubber producing countries as it has the potential to lower the value of vital export income for natural rubber producing countries such as Thailand. Here the options are limited if. As previously mentioned the natural rubber supply chain displays increasing levels of concentration from upstream plantation farming to downstream export and end product manufacturing. The finding of an inelastic supply function for this market suggests policies that might increase the elasticity of this function would reduce the degree of oligopsony in this market.oligopsony market power. the prime source of oligopsony power comes from competition deficiencies in major tire producer countries. Indonesia and Malaysia as well as some newly emerging producer countries of less developed status than these Chapter 6 Page 190 . In this regard. Consideration of intervention policies to promote countervailing power in the natural rubber market then becomes an alternative option to pursue. as is indicated by the estimation results. The global nature of the natural rubber industry requires policies of a macroeconomic focus to manage exchange rate risk including that induced by currency cycle and arbitrage effects on natural rubber prices. In this regard further study into the market conditions at each stage of the natural rubber supply chain could be pursued. for this study the primary focus is on the implications for the natural rubber industry and Thailand as the major producer of this product.

at the time of writing was not known to have been empirically applied. The industry to firm level implications for a market policy response. The basic assumption applied in this translation being that country level tire production data can be used as proxies for company level production data for the assessment of market power exerted by tire producing countries against natural rubber supplier countries. from different estimation approaches. Deficiencies inherent in the model (and elsewhere in the literature) associated with assumed equivalence between direct and inverse demand and supply functions and estimation problems considered to be due to data deficiencies are addressed by a number of alternative estimation approaches to that recommended in the literature. it is considered valid to conclude that the evidence of oligopsony market power generated from this country level producer – supplier model is applicable to a producer industry –supplier firm model. Given the close correlation between firm concentration and country location data examined in Chapter 2. that support the hypothesis of oligopsony market power being exerted by tire producing countries over natural rubber supplier countries. These estimates were obtained by econometrical modelling and the estimates were used to generate a market power index.three major supplier countries. Chapter 6 Page 191 . are given added welfare and international political significance by the country producer – country supplier results from this research. Several models exist but the particular model chosen was one that provided for a general model of oligopsony/oligopoly market power but which. A theoretical model was developed based on using models of market power from the literature. The research methodology adopted an innovative approach in its application of economic theory from an industry – supplier firm framework to a global industry – supplier country framework. The results reveal a consistent set of market power index estimates. Fundamental to the application of the selected model was the estimation of output demand (tire) and input supply (natural rubber) elasticities as well as output and input conjectural elasticities. Issues of potential market distortion and market regulation policies have long been a matter of interest to the three countries who dominate the natural rubber production industry.

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Appendix Appendix 2.1: Ownership Structures in Tire Manufacturing Table A2.1 Ownership in Tire Manufacturers Type 1 Company Bridgestone Owning in Other Company Bridgestone (Tianjin) Tire Co Ltd (95%) Bridgestone (Shenyang) Tire Co Ltd (74%) Thai Bridgestone (67%) Bridgestone Australia Ltd (60%) PT Bridgestone Tire Indonesia (51%) Continental Barum Continental (85%) Continental-Matador SRO (76%) Moscow Tire (76%) Continental Tyre S.bica (60%) South Pacific Tyres (50/50 JV w/ Pacific Dunlop) Hankook Michelin Jiangsu Hankook Tire Co Ltd (91%) Icollantas (99%) Stomil Olsztyn (99%) Taurus Rubber Co Ltd (99%) Michelin-Shen Yang (90%) Appendix Page 202 . Africa (60%) Continental Sime Tyre (51%) Co Ecuatoriana del Caucho (40%) GT E Africa (26%) Mabor Moçambique (11%) GT Pakistan (10%) Cooper-Avon Tyre Goodyear -Goodyear Dalian Tire Co Ltd (75/25% JV w/ Dalian) (75/25 JV w/ Sumitomo Rubber Industries) Goodyear Dunlop Tires North America LLC Goodyear Dunlop Tires Europe BV(75/25 JV w/ Sumitomo Rubber Industries) Sava Tires (80%) T C De.

9%) Gajah Tunggal (10%) (Option to buy up to 10%) Pirelli Alexandria Tire (83%) Turk Pirelli Lastikleri (61%) Sumitomo Yokohama PT Sumi Rubber(80%) Yokohama Tire Philippines (80%) Yokohama Tyre Vietnam (56%) Hangzhou Yokohama Tire Co Ltd (80%) Toyo Cheng Shin Toyo (22%) Type 2 MC Projects BV Joint venture Nippon Giant GTY Tire Continental Goodyear Michelin Yokohama Toyo 50% 65% 50% 51% 33. (14.Shanghai Michelin Warrior Tire Co Ltd (70/30 JV w/ Shanghai Tyre) Michelin Siam Group (60%) Michelin Russian Tyres (51%) Tigar MH (25%) Apollo Tyres Ltd.4% 30% Source: European Rubber Journal Appendix Page 203 .

45 price basket. each member sends payment to support the maintenance of the buffer stock.000 tons plus a contingency quantity of 150.000 tons. It comprises reference price. upper trigger action price. Appendix Page 204 . The agreement was continued in 1987 as INRA II and 1995 as INRA III. the International Natural Rubber Organization (INRO) was set up. which was arranged by UNCTAD since 1979. upper indicative price and lower indicative price. when the United Nations Conference on Trade and Development (UNCTAD) agreed to set up some organizations to resolve for the problem of commodity price fluctuation. the only tool is a buffer stock of 550. There are 22 member countries. The Operation Feature of INRO INRO operated through:  Buffer stock.2: International Natural Rubber Organization (INRO) The INRO Establishment Major attempts to address issues of price fluctuation date back to 1976. Bangkok RSS3 and New York TSR20 are items in the DMIP Malaysia/Singapore cents per kilogram. o Its quantity was 400.000 tons of rubber.  Reference price. o The buying and selling of the stock was operated with a set of benchmarked prices. lower trigger action price. 2004). upper intervention price. The aim is to maintain balancing between rubber demand and supply. lower intervention price. INRO is the operating body for the International Natural Rubber Agreement (INRA).Appendix 2. The prices are based on a price basket (Kuala Lumpur RSS1. Consequently.) in 45 Malaysian/Singapore cent is defined as the average of the Malaysian sen and the Singapore cent at the prevailing rates of exchange (South Centre.

If DMIP is higher (or lower) than upper triggering price.1 INRO Prices Setting Upper Indicative Price = 270 Malaysia/Singapore cents per kilogram. Malaysia and Singapore markets. Appendix Page 205 . RSS3 and TSR20 by the ratio 2:3:5. the buffer stock manager must sell (buy) the stocks.  Upper Trigger Action Price = Reference Price + 20% (must sell)  Upper Intervention Price = Reference Price +15% (may sell)  Reference Price  Lower Intervention Price = Reference Price -15% (may buy)  Lower Trigger Action Price = Reference Price .20% (must buy)  Lower Indicative Price When adjusting reference price. The three prices are coded from four markets namely USA. Operation Criteria If DMIP is higher (or lower) than upper intervention price. Daily Market Indicative Prices (DMIP) This is a composite price based on 5 days average of prices of RSS1. the buffer stock manager may sell (buy) the stocks. the corresponding trigger price cannot exceed the limit =157 Malaysia/Singapore cents per kilogram. UK.Figure A2.

27 $US/ton due to inability to operate effectively. and generated some rubber R&D.    Member countries were slow in submitting the payments.16 $US/tons respectively.000 tons or over 300. the results were far from adequate. INRO did not buy equally from each country The types of rubber that were bought by INRO did not match the types that were produced  Most of the stocks were kept in some specific countries and did not provide storage income to other countries Appendix Page 206 .  Upper and lower indicative prices will be revised every 24 When buffer stocks were less than 100. INRA II had more than 89% producers and 75% consumer country. It was argued that:  Natural rubber supply outgrew demand so much that the buffer stock was not effective.Adjustment of the Reference Price   Every 12 months When the DMIP was different from intervention prices for over 6 months.77 and 136. INRA III had more than 94% producer but only 48% consumer countries. Although INRO managed to achieve a degree of price stabilization.000 months (INRA III). INRO Operation Results Operation outcomes: INRA I and INRA II gained 144.  tons. INRA III lost 103. INRA I had more than 65% from each side of countries. helped generate capital from member country to hold the buffer stock.

Table A2.0 1680. Appendix Page 207 .6 170.0 1855. stocks and INRO‟s daily market indicative prices (DMIP) .5 225.0 160. Figure A2. The bargaining power of the remaining supplying members also decreased. When Malaysia quit INRO the remaining five members from the supplying countries were left to bear the expenses.6 113.0 DMIP 46 Source: International Rubber Study Group 46 WRS1 is natural rubber price (RSS1).0 1825.3 191.0 1840.296 tons of rubber stocks to be sold before 30 June 2001.0 1790.0 168. The changes in world stocks and INRO DMIP display some association.0 176. From 1998. member counties refused to pay their fees.2 depicts INRO‟s DMIP and world stocks level during its operation.5 % greater than the fees paid by consuming countries.6 184.000 tons) 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1755.0 1875.2 205. However.2 World Natural Stocks and INRO Daily Market Indicator Prices (DMIP) Year Stocks (1.8 207. The exchange rate crisis significantly increased foreign exchange rates thus increasing the weight of fees for Asian currency suppliers to keep the buffer stock.1 compares the changes in natural rubber prices.0 2550.0 224.1 217.2 229. This made it difficult for INRO to manage the buffer stock and as a result rubber prices decreased tremendously.1 181. appropriate empirical evaluation is required to identify this relation. Table A2.4 254.0 1860.0 209.000 tons) 1600.9 267.0 1640.6 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 DMIP Year Stocks (1. all the producing countries quit the INRO which was then abolished in October 1999 leaving 138.0 2080. Consequently.0 1730.0 1800.1 307. Graphics are revealed in standardized values.2 174.0 2010.0 2140. The fees that producer member countries had to submit were about 31. stocks is natural rubber stock.0 2040.0 1790.1 176.0 1700.0 1530.

Changes in Stocks and INRO’s Daily Market Indicative Prices Appendix Page 208 .2 where DMPI was above WRS1 from 1981 to 1989. and it is below WRS1 from mid 1997 to 2000. Figure A2.The relationship among the three variables can be seen in figure A2. from 1989 to mid 1997 it was close to WRS1.2 RSS1 Natural Rubber Price. demonstrating a sharp fall coincident with the rising stock level.

70 -5. The PP test uses a non-parametric correction for serial correlation.68 1% 6.33 -6.02 2.47 -1.43 Test A(0)=A(1)=0 10%3.84 -4.27 PP I(1) Test Variable Critical Values Variables in Equations (5:1). no trend Test A(1)=0 10% -2.29 17.03 5% 4.05 9.13 5% -3. (5:4) Natural Rubber Supply Function Test Variable Critical Values Test A(1)=0 10% -2.1 Variable Tests for Stationarity With constant A(0).12 43.43 -5.03 5% 4.32 Test A(0)=A(1)=A(2)=0 10%4.23 10.88 -4.57 5% -2.06 -4.49 -5.86 1% -3.31 Test A(1)=0 10% -2.32 11.59 1% 6.09 9.43 -5. 166-167).02 -9.74 10.25 1% 8.49 7.43 14.56 11.96 With constant A(0).57 5% -2.82 Test A(1)=A(2)=0 10% 5.78 5% 4.39 -6.34 5% 6.57 5% -2.17 15.59 6.43 Test A(1)=0 10% -3. (5:2): Tire Demand Function P Q VP VI GDPPUS -4.12 15.72 11.34 5% 6.1: Variable Tests for Stationary Variables are tested using the Phillips-Perron unit root tests (PP). It uses the same critical value as the Dickey-Fuller tests (SHAZAM.57 18.Appendix 5. Table A5. Variables in Equations (5:3).45 8.43 Test A(0)=A(1)=0 10%3. lagged term coefficient A(1).86 1% -3.41 1% -3.98 -4. trend coefficient A(2) Test A(0)=A(1)=A(2)=0 10%4.36 44.27 14.50 12.25 18.08 28. If tests on the first differences of variables reject the null hypothesis of unit root then the series are stationary at I(1).09 Test A(1)=A(2)=0 10% 5.23 WR XR RAIN Appendix Page 209 .57 -4.25 All variables reject the null hypothesis of unit root at 1% significant level except for vehicle in-use (VI) which rejects only the model with a trend (5%).71 5.39 -5.25 1% 8.26 9.86 1% -3.06 -9.68 1% 6.59 1% 6.78 5% 4. lagged term coefficient A(1). 1997 pp.

34 30.96 -5.03 5% 4.75 -5.10 10.26 Test A(0)=A(1)=A(2)=0 10%4.74 -5.59 1% 6.50 -6.56 17.09 -5.11 13.59 1% 6.83 -5.50 Test A(0)=A(1)=A(2)=0 10%4.04 -5.44 Test A(0)=A(1)=0 10%3.09 7.50 -6.59 -6.25 1% 8.14 14.74 8.03 5% 4.88 -6.78 Test A(1)=A(2)=0 10% 5.61 qFR xrFR xsFR VPFR All variables reject the null hypothesis of unit root at 1% significant level Appendix Page 210 .25 1% 8.67 18.41 -4.78 5% 4.94 18.65 -4.63 15.96 -6.41 1% -3.68 1% 6.66 9.02 8.52 -7.99 -5.43 -5.43 16.86 1% -3.14 qUS xrUS xsUS WO VIUS All variables reject the null hypothesis of unit root at 1% significant level Variables in Equation (5:5FR) France Tire Production Function Test Variable Critical Values Test A(1)=0 10% -2.22 9.88 -5. Variables in Equation (5:5US) US Tire Production Function Test Variable Critical Values Test A(1)=0 10% -2.34 5% 6.17 19.72 23.16 -4.22 -4.66 10.68 1% 6.57 5% -2.12 -5.74 4.87 Test A(1)=0 10% -3.10 -3.87 -4.89 12.55 20.31 -6.WSt-3 ERJA ERTH ERSP RQM -5.08 Test A(1)=A(2)=0 10% 5.49 All variables reject the null hypothesis of unit root at 1% significant level except for Thai exchange rate (ERTH) and Singapore currency exchange rate (ERSP) (with trend.92 6.97 10.59 7.01 13.41 15.50 -4.13 5% -3.00 Test A(1)=0 10% -3.09 11.43 -6.27 16.13 -3.09 19.58 13.09 14.90 -5.43 21.77 5.12 23.52 13.35 10.78 5% 4.41 1% -3.34 5% 6. rejected at 5% significant level).00 15.13 5% -3.86 1% -3.25 13.08 15.17 Test A(0)=A(1)=0 10%3.27 21.15 8.09 6.57 5% -2.20 8.

78 5% 4.77 12.96 -5.63 -4.51 -4.27 13.60 Test A(1)=0 10% -3.57 5% -2.13 5% -3.88 9.90 Test A(0)=A(1)=A(2)=0 10%4.36 Q qUS qFR qJA qGR All variables reject the null hypothesis of unit root at 1% significant level Appendix Page 211 .03 5% 4.12 16.87 -4.50 -5.26 6.41 1% -3.81 -4.02 21.88 11.59 1% 6.41 1% -3.85 8.74 -5.43 9.86 11.34 5% 6.25 1% 8.31 Test A(0)=A(1)=A(2)=0 10%4.52 16.09 11.03 Test A(0)=A(1)=A(2)=0 10%4.59 1% 6.78 5% 4.43 10.58 15.78 5% 4.81 Test A(0)=A(1)=0 10%3.59 11.68 1% 6.43 15.59 -5.25 1% 8.72 qJA xrJA xsJA All variables reject the null hypothesis of unit root at 1% significant level Variables in Equation 5:5 GR Germany’s Tire Production Function Test Variable Critical Values Test A(1)=0 10% -2.91 Test A(1)=A(2)=0 10% 5.43 -4.86 1% -3.91 11.49 Test A(1)=0 10% -3.43 -4.98 Test A(0)=A(1)=0 10%3.59 1% 6.25 1% 8.72 16.86 9.69 -6.84 -5.36 20.86 1% -3.Variables in Equation (5:5JA) Japan’s Tire Production Function Test Variable Critical Values Test A(1)=0 10% -2.86 qGR XrGR XsGR VIGR All variables reject the null hypothesis of unit root at 1% significant level Variables in Equation (5:12) Conjectural Elasticity in Output (Tire) Market Test Variable Critical Values Test A(1)=0 10% -2.41 1% -3.31 -6.68 1% 6.34 5% 6.63 -4.09 6.73 7.35 Test A(0)=A(1)=0 10%3.75 -5.24 13.13 5% -3.26 7.42 -4.34 5% 6.19 11.35 -6.02 11.09 -6.34 Test A(1)=0 10% -3.68 1% 6.96 -4.27 16.48 -6.09 8.86 1% -3.01 24.69 -6.03 5% 4.03 5% 4.08 11.57 5% -2.96 -5.27 9.24 Test A(1)=A(2)=0 10% 5.13 5% -3.81 -4.57 5% -2.36 15.49 21.08 21.48 Test A(1)=A(2)=0 10% 5.04 23.68 14.43 -5.

89 8.66 7.87 -6.51 Test A(0)=A(1)=0 10%3.43 18.90 -5.14 11.42 Test A(0)=A(1)=A(2)=0 10%4.91 21.94 13.13 5% -3.27 18.59 XR xrUS xrFR xrJA XrGR All variables reject the null hypothesis of unit root at 1% significant level Appendix Page 212 .85 13.77 20.57 5% -2.19 Test A(1)=0 10% -3.09 12.96 -6.12 23.73 Test A(1)=A(2)=0 10% 5.78 5% 4.25 1% 8.09 -4.41 1% -3.43 -6.59 1% 6.36 23.86 1% -3.Variables in Equation (5:13) Conjectural Elasticity in Input (Natural Rubber) Market Test Variable Critical Values Test A(1)=0 10% -2.00 11.84 -6.03 5% 4.88 -5.67 13.12 -4.68 1% 6.02 -6.06 -6.08 15.34 5% 6.

9049 ( -3.8833 (0.733 (0.15) CRDW = 1.2 Cointegration Tests (Phillips-Perron Method on Residuals)# Equation t-value (critical value) CRDW (critical value) t = -4.141 (0.81) CR DW = 0. implying the linear combination of time series in each regression equation is stationary.511) t = -4.15) CRDW = 0.8472 (-4.511) t = -4.511) (5:1) Inverse Tire Demand Function (5:2) Direct Tire Demand Function (5:3) Inverse Natural Rubber Supply (5:4) Direct Natural Rubber Supply (5:5US) US Tire Production Function (5:5 FR) France Tire Production Function (5:5JA) Japan Tire Production Function (5:5GR) Germany Tire Production Function (5:12) Conjectural Elasticity In Output (Tire) Market (5:13) Conjectural Elasticity In Input (Natural Rubber) Market # Tests are undertaken using SHAZAM Version 9.8424 (-3. If tests reject the null hypothesis of unit root then the residuals are stationary.3506 ( -4.8450 (0.5345 ( -4.4551 ( -4.404(0.7994 (0.70) CRDW = 1.4143 (-4. The DW statistic for the tests on residuals is the Cointegrating Regression Durbin-Watson statistic (CRDW).511) t = -4.84) CRDW = 1.13) CRDW = 0.399 (0.Appendix 5. The critical CRDW value is for a 1% confidence level Appendix Page 213 .42) CRDW = 1.511) t = -5.511) t = -5.3287( -4.13) CRDW = 1.70) CRDW= 1.2: Tests for Cointegrating Relationships The residuals from each cointegrating regression are tested for stationarity. Table A5.105(0.511) t = -3.511) t = -3.978 (0.3800 (-4.13) CRDW= 1.1739 (-4. The critical values applied by SHAZAM are taken from Davidson and MacKinnon (1993).808 (0.511) t = -4.511) t = -4.

3.1 Changes in World Natural Rubber Price RSS1 (WR) Figure A.3: Error Correction Models for Natural Rubber Price and Quantity Figure A.Appendix 5.3 Changes in Residual Terms (Inverse Natural Rubber Supply) Figure A.4 Changes in Residual Terms (Direct Natural Rubber Supply) Table A5.2 Changes in World Natural Rubber Quantity Production Figure A.1 Variable Description for Error Correction Models WR WRt 1 Changes in Natural rubber price One year lag of Changes in Natural rubber price Changes in world natural rubber production One year lag of Changes in world natural rubber production two years lag of Changes in world natural rubber production XR XRt 1 XRt 2 ( INRO  XR) ERJA ERSP ( RAIN  XR ) t 2 Changes in (INRO  XR) Changes in Japan’s currency exchange rates Changes in Singapore’s currency exchange rates Two years lag of changes in (RAIN  XR) Page 214 Appendix .

Table A5.169)*** -1.2 Error Correction Model for the Inverse Natural Rubber Supply WR  a1WRt 1  a2 XR  a3 ( INRO  XR)  a4 ERJA  a5 ERSP  ˆ a6 XRt 1  a7 XRt  2  a8 ( RAIN  XR) t  2  a9 ERTH t 1  a10 WR t 1 Coefficient (t-value) ( WR ) t 1 a1 0.846)*** -0. Appendix Page 215 .4151 (-3.011) 3.057)*** 0.43462*** (4.3.6693 (-1.4076 (7.6397 (-5.8966 XR a2 a3 ( INRO  XR) ERJA a4 a5 a6 ERSP (XR ) t 1 (XR )t 2 (  ( RAIN  XR ))t 2 a7 a8 a9 a10 ( ERTH ) t 1 ˆ  WR t 1 DURBIN-WATSON R 2 Price adjusted 67% in the consecutive year.7793 (-4.241)*** 0.3.4505 (3.7107 (-3.839)* 2.1 (cont.006)*** -0.624)*** -0.413) -0.) ERTH t 1 One year lag of changes in Thailand’s currency exchange rates Estimated natural rubber price residuals ˆ  WR ˆ  XR t 1 Estimated natural rubber production residual t 1 Table A5.1576 0.286)*** -2.3971** (-2.7030 (3.

Appendix Page 216 .Table A5.321)*** -0.302)*** 2.1082 (4.8713 (-3.3 Error Correction Model for the Direct Natural Rubber Supply Function ˆ XR  b1XRt 1  b2 WR b3 WRt 1  b4 XR t 1 Coefficient (t-value) (XR ) t 1 b1 b2 b3 0.671)*** -0.523)*** 0.0691 0.8099 (6.1053 (-4.3.4538 WR ( WR ) t 1 ˆ  XR t 1 b4 DURBIN-WATSON R 2 Quantity adjusted by 87 % in the consecutive year.

Tire production (Japanese passenger car tires and truck tires) US Bureau of Labor Statistics International Rubber Study Group International Rubber Study Group qGR International Rubber Study Group qJA International Rubber Study Group Appendix Page 217 .4 1 Variables and Data Variable CPIJA Japan’s consumer price index CPISP Singapore’s consumer price index CPITH Thailand’s consumer price index CPIUS1 US consumer price index Structural change dummy variable for a change in the mix of natural rubber and synthetic rubber following introduction of the radial tire .(1970 -2000 = 1) Japan’s currency exchange rates (100Yen/$US) Malaysia’s currency exchange rates (ringgit/$US) Singapore’s currency exchange rates(S$/ $US) Thailand’s currency exchange rates (Baht/$US) The International Natural Rubber Organization US per capita income The Bank of Thailand (Dummy variable) Description Source United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) Us Bureau of Labor Statistics DRXSM ERJA The Bank of Thailand ERML ERSP ERTH The Bank of Thailand INRO GDPPUS (Dummy variable) The World Bank P Q qFR Tire prices: US tire price index World tire production Tire production (France’s passenger car tires and truck tires) Tire production (Germany’s passenger car tires and truck tires).Appendix 5.4 Variables and Data Table A5.

Total vehicle in-use in the US. International Rubber Study Group WR WSt-3 XR xrFR International Rubber Study Group International Rubber Study Group International Rubber Study Group xrGR International Rubber Study Group xrJA International Rubber Study Group Appendix Page 218 . fob Malaysia ringgit/ton Synthetic rubber price lagged by 3 years World Natural Rubber Production Quantity of natural rubber used in Tire sector in France. UK and India. Economic Research.1 Variables (cont. Quantity of natural rubber used in Tire sector in Japan. Top seven tire producing countries are US. Italy. Vehicle in-use in Germany (only Passenger cars). Spot Oil Price (West Texas Intermediate) Natural Rubber Price: RSS1 natural rubber prices.Table A5. Germany.) Variable qUS Description Tire production (US passenger car tires and truck tires) Rainfall quantity Top seven countries’ quantity / total quantity ratio. Source International Rubber Study Group RAIN The Royal Irrigation Department. France. Japan. A time trend.(passenger car and commercial vehicle) World passenger car and commercial vehicle production Total vehicle production in France (passenger car and commercial vehicle) World crude oil price. Quantity of natural rubber used in tire sector in Germany.4. Louis. World passenger car and commercial vehicles in-use. Thailand Compiled from International Rubber Study Group RQM T VI International Rubber Study Group VIGR International Rubber Study Group VIUS International Rubber Study Group VP International Rubber Study Group VPFR International Rubber Study Group WO Federal Reserve Bank of St.

) Variable xrUS Description Quantity of natural rubber used in tire sector in the US.2 Variables (cont.Table A5. Quantity of synthetic rubber used in tire sector in the US. Quantity of synthetic rubber used in Tire sector in France. Source International Rubber Study Group xsFR International Rubber Study Group xsGR International Rubber Study Group xsJA International Rubber Study Group xsUS International Rubber Study Group Appendix Page 219 . Quantity of synthetic rubber used in tire sector in Japan.4. Quantity of synthetic rubber used in tire sector in Germany.

25 92.58 79.88 20.44 107.70 25.00 456.30 371.64 128.20 1986 104.04 80.80 488.Table A5.10 322.40 2.00 104.17 2.50 469.38 20.26 76.48 21.80 2.90 1988 105.41 1.36 41.94 80.20 2.82 22.00 515.14 2.64 133.06 3.29 64.90 3.00 349.74 220.50 2.20 109.10 1992 117.16 88.99 130.20 170.40 1979 84.52 144.80 20.80 1961 23.13 2.32 25.