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L IE R A R Y ‘ Michigan State : ‘ University i - WWHTllllllllllWillNHllllllllllHIWIHTHI 3 1293 10400 8044 This is to certify that the - thesis entitled INDUSTRIAL STRUCTURE OF THE PULP AND PAPER INDUSTRY IN MICHIGAN presented by Catherine Jean 80995 has been accepted towards fulfillment of the requirements for Master of Science . Resource Development degree 1n MaiOI prof 1' 0-7 639 . 414?ka 069 ' .. W *«1 x“, p.210 s . \ Angfifigfifi?" 9 g??? ‘ yr. 1 jfilbaq‘ ‘Cuswi‘ LT" INDUSTRIAL STRUCTURE OF THE PULP AND PAPER INDUSTRY IN MICHIGAN By Catherine Jean 30995 A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of MASTER OF SCIENCE Department of Resource Development 1977 ABSTRACT INDUSTRIAL STRUCTURE OF THE PULP AND PAPER INDUSTRY IN MICHIGAN By Catherine Jean 80995 This research consisted of an investigation and evaluation of the structure of the pulp and paper industry in the State of Michigan. This was done by examining the elements that determine structure, and then applying them to a sample of twenty-three active pulp and paper companies in the state. The study primarily used secondary data. It began with an exami- nation of spatial competition in supply and demand markets for pulp and paper products. The study also examined ownership patterns, con- centration, integration, diversification, differentiation, and barriers to entry. The twenty—three companies examined are primarily owned by large diversified corporations. There are eight integrated mills, although the majority of mills are corporately integrated. Products are dif— ferentiated by brand name, watermarks, and service. Absolute cost advantages provide the highest barrier to entry. The industry can be considered an oligopoly with a competitive fringe. ACKNOWLEDGMENTS This research was supported by McIntire-Stennis Cooperative Forestry Research Funds under Michigan Agricultural Experiment Station project 1075. There are numerous people whom I wish to thank, for my associa— tion with them has greatly expanded my horizons, as well as enriched my experience. I am grateful to Dr. Daniel Chappelle, my major advisor. Not only was he particularly helpful in guiding my academic studies and research, but his personal friendship was of tremendous support. I deeply appreciate the advice and suggestions provided by my other committee members, Dr. Bruce Allen and Dr. Daniel Bronstein, in their critical review of my paper. A word of thanks must go to Dr. Doris Drury who originally inspired my interest in economics, and Dr. Peter Niehoff, without whose suggestion I never would have ventured into the frozen north. My warmest thanks are extended to Ms. Brenda McBride, Ms. Paulette Pitrak, Ms. Debbie Cutchin, Mr.'Tom Butynski, and Mr. Chris Risbrudt. Their interest and support was sincerely appreciated. Their friendship has taught me much. Finally, if a dedication were in order, it would go to my parents, Alyene and Robert Boggs. Their unfailing support and encour- agement kept me going. While I shall take credit for my failings, the positive aspects of my character must be attributable to them. ii ."i-C‘T but-int} .. ' ' -. , .. _ _. ..._-.r_| "'\-..l'_l"“._= '."" i." . -- l" - I. ' - _=u:-' fig , .. .- . 6”" LIST OF TABLES .......................... LIST OF FIGURES .......................... Chapter I. INTRODUCTION ............. TABLE OF CONTENTS Problem Statement .................... Objectives of the Study ................. Primary Objective ................... Specific Objectives .................. Past and Current Work Relevant to Study ......... Research Hypothesis and Model .............. Model ......................... Research Methods .................... II. INDUSTRIAL ORGANIZATION THEORY ............ III. SPATIAL ANALYSIS OF SUPPLY AND DEMAND MARKETS ........ IV. THE STRUCTURE OF THE PULP AND PAPER INDUSTRY IN MICHIGAN . . Market Structures. . .................. Competition and Monopoly . ...... . ........ Ownership ........................ Concentration ...................... Integration ................ Diversification .................. Differentiation ..................... Barriers to Entry .................... Supply and Demand Regions .............. Optimal Location . . . . . . . . . . . . . . . . . . . : Location . ................... Ownership ....... . . . . . . . . ......... Concentration. ..... . . . ............ . Integration. . . ...... . . . . . . ........ Diversification ....... . .......... Differentiation. . . . . . . .......... . . . . . Barriers to Entry ............. . . . . . . . .......... Page v vi Chapter Page V. LINKAGES BETWEEN STRUCTURE AND CONDUCT ........... 78 Analysis of the Data ................... 78 VI. SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS .......... 88 Summary .......................... 88 Conclusions ........................ 88 Further Research ..................... 89 APPENDIX l--Company Summaries ................... 92 APPENDIX 2—-Brand Name Affiliations ................ lO6 BIBLIOGRAPHY ........................... l09 . . . . . . :""1'--'.I=..' 'valar-z‘tld- l X'.D"]‘3-“.." Table 1. LIST OF TABLES WHOLESALE PRICE INDICES FOR PULP AND PAPER PRODUCTS. AVERAGE INDICES (l967=lOO) . ............... OWNERSHIP AND LEGAL DISTINCTION 0F PULP AND PAPER COMPANIES IN MICHIGAN ........................ PLACE OF INCORPORATION OF MICHIGAN PULP AND PAPER COMPANIES. NUMBER OF SHARES OF OUTSTANDING COMMON STOCK AND NUMBER OF SHAREHOLDERS ............... . AVERAGE CONCENTRATION RATIOS . . . . . ........... SHARE OF VALUE OF SHIPMENTS OF CLASSES OF PRODUCTS ACCOUNTED FOR BY THE LARGEST FIRMS, l972 ..... 24-HOUR DAILY CAPACITY OF WOODPULP MILLS (I974). FINANCIAL AND PRODUCTION CAPACITY OF LEADING U S. AND CANADIAN FIRMS, I975 . . . . ...... NUMBER OF EMPLOYEES AND PERCENTAGE OF CITY AND COUNTY CIVILIAN LABOR FORCE . . . TIMBER OWNERSHIP-~1975 . ....... . . . . . . ..... DIVERSIFICATION BASED ON NUMBER OF PRODUCT LINES, I975 . MAJORM PAPER CLASSES AND COMPANIES THAT PRINCIPALLY PRODUCT ...... DAILY RATES OF PRODUCTION-—l976 ....... POLLUTION ABATEMENT EXPENDITURE. . . . . .......... 51 53 55 56 58 60 62 65 67 7O 72 76 159116;?! '.TSfiA". ’I‘AA “Iii." ' = . . . . run-n “.m' ‘ f,- -_ la: 3"? _1..,4;i§‘.:r.g LIST OF FIGURES Figure Page I. PRICE TRENDS 0F SELECTED PAPER PRODUCTS ........... 37 2. LOCATION OF PULP AND PAPER MILLS .............. 44 3. CORPORATE STRUCTURE OF MOBIL CORPORATION .......... 49 vi - .' . .. .. . . '. . . . -. . r..:.-.':-'- were; In". '-:.l£.}'~’..’lt; WIT-tan.- .5 " -' i ‘ W” - - - . . . , _ :-'.u:‘:'.'."-..---'=' i- mar. ..l': 5...“: ':.'~:i:t:--i!!e: r. CHAPTER I INTRODUCTION Problem Statement With the realization that the earth is finite, an increasing concern with the appropriate use of natural resources has developed. Man has concerned himself with the problem of determining the “highest and best” use of his resources, because there is often competition for resources. Dr. Raleigh Barlowe describes highest and best use of land resources ”when they are used in such a manner as to provide the opti— mum return to their operators or to society.1 Optimum, however, is defined by the goal set, and the optimal solution for the operator may not be the optimal solution for society. In order to determine the ”wisest” use of resources it is necessary to understand the physical, economic, and institutional aspects of their nature. Oftentimes, how— ever, resources do not succeed to their highest and best use. Many economic and institutional factors inhibit physical succession to higher uses. Robert Haveman indicated that the inherent characteristics of natural re30urces create the potential for market failure.2 The 1Raleigh Barlowe, Landp Resources Economics, (Englewood Cliffs: Prentice- Hall, Inc. , l973i, 4. 2Robert Haveman, ”Efficiency and Equity in Natural Resource and Environmental Policy,” American Journal of Agricultural Economics 55 (December l973): 868. 2 "commons" and "public goods“ nature, and the external diseconomies produced provide the impetus for misallocation and misuse. Anthony Scott indicated that the nature and distribution of property rights, along with the character of ownership has inhibited the proper succes- sion of resource use. "...inappropriate types of property tenure... ...may cause 'owners' to exploit non-specific natural resources at a 3 John Kenneth Galbraith faster rate than social welfare would warrant.” argues that corporate ownership of resources has provided a serious interstice between the objectives of managers and owners.4 Manager motivations for resource use may differ decidedly from stockholders. Consequently, resources are often not used in the "best” manner. The pulp and paper industry is the third largest user and polluter of water in the country. It is a heavy user of one of Michigan's most valuable natural resources——timber. It is also a heavy user of chem- icals and energy. Because of the need to determine wise use of resources it is important to discover the role that pulp and paper plays in the economy of the state. To evaluate the economic impacts of resource use, one can exam- ine the performance of the industry to determine if it meets the criteria established for ”wise“ use. The criteria are various measures of “optimal returns“ provided by resource use. The final analysis and conclusions as to whether an industry's performance is good or bad, lies with the subjective judgement of the policy maker who establishes 3Anthony Scott, Natural Resources: The Economics of Conservation, (Toronto: McCelland and Stewart Limited, l973), p. l58. 4John K. Galbraith, The New Industrial State, (Boston: Houghton Mifflin Co., l967). "n" 'J ' 5'1'... 3 what criteria are used. But once the impacts of the industry's performance are discerned, public policy can be adjusted accordingly to either change an industry's performance, or else solidify its existence. In order to correctly assess the policy change needed to change performance, one must first examine the structure of the industry. Thus, the problem is to establish the structure of the pulp and paper industry in the state. Objectives of the Study Primary Objective .’_,. The primary objective of this study was to delineate the struc— ture of the pulp and paper industry in Michigan. Specific Objectives The specific objectives of this study include: — to determine the ownership patterns of the pulp and paper companies in Michigan. — to determine the degree of integration of pulp and paper companies in Michigan. to determine diversification of products and firms within the industry. — to assess the degree of concentration in sales and employment within the local industry. to determine if interlocking directorships exist between firms within the industry. - to identify barriers to entry. - to determine the spatial distribution of plants. to delineate supply and demand regions. .1: n. 54? 'laH’mr—v '1: '3 def-in- ssh 23ml «hum-t 'I' 4 Past and Current Work Relevant to Study Numerous books have been written on the subject of industrial organization. F. M. Scherer's book, Industrial Market Structure and Economic Performance,5 and Joe S. Bain's book, Industrial Organization,6 provide good insight into the topics of integration, concentration, and differentiation. Likewise, numerous articles have been written that provide a sound background on industrial organization. Literally hundreds of articles and books have been written on the subject of performance criteria. Particularly helpful in basic welfare theory and resource allocation are the works done by Kenneth Boulding and Richard Leftwich.7 With regards to the manner in which welfare economics can be applied to the natural resources area, the book, Quality of the Environment by Orris C. Herfindahl and Allen V. Kneese, was a good starting point.8 Helpful in relating economics to the pulp and paper industry were John A. Guthrie's book, The Economics of Pulp and Paper, and Eggegp Resource Economics by G. Robinson Gregory.9 The Handbook of Pulp and 5F. M. Scherer, Industrial Market Structure and Economic Perfor- mance, (Chicago: Rand McNally College Publishing Company:_T§7OT:_—_—__ particularly chapters ll, l4, l5. 6Joe S. Bain, Industrial Organization, (New York: John Wiley & Sons, Inc., l968). 7Kenneth E. Boulding, "Welfare Economics," in A Surve of Contem orar Economics, edited by Bernard F. Haley, (Homewood: Richard D. Irwin, Inc., l9525, pp. l-34; Richard H. Leftwich, The Price S stem and Resource Allocation, 5th ed., (Hinsdale: The Dryden Press, l973l, pp. 382-395. 8Orris C. Herfindahl and Allen V. Kneese, Quality of the Environ- ment: An Economic Approach to Some Problems in Using Land, Water, and Air, (Baltimore: The Johns Hopkins Press, 1965), pp. 8l-96. 9John A. Guthrie, The Economics of Pulp and Paper, (Pullman: The State College of Washington Press, TQSOTT'G. Robinson Gregory, Forest Resource Economics, (New York: The Ronald Press Company, l972). 5 Paper Technology served as a helpful reference concerning the technical side of the industry.10 A number of doctoral dissertations have been written concerning the pulp and paper industry in Michigan. These include works by Robert Manthy, Robert John Englehard, Harley Hastings Thomas, and Harold Edwin Cristen.H These studies provided useful technical infor- mation, in addition to information concerning marketing and pricing behavior. Finally, the dissertation work of Joseph Diamond on impacts of the industry in Manistee County, and work by Carla Moore will provide 3 some necessary background material, as well as providing some parallel research.12 Research Hypothesis and Model The study attempts to answer the following questions concerning the pulp and paper industry: l) What is the structure of the industry? 2) Can the industry be characterized as integrated, concentrated, or diversified? 10Kenneth W. Britt, Handbook of Pulp and Paper Technology, (New York: Reinhold Publishing Corporation, l964). HRobert Manthy, ”Marketing Pulpwood in the North Central Region,” (Ph.D. dissertation, Michigan State University, l963); Robert John Englehard, “The Role of Wood Procurement in the Dynamic Paper Industry of Wisconsin and Upper Michigan,” (Ph.D. dissertation, Michigan State University, l968); Harley Hastings Thomas, “A Marketing Study of Fine Wood Residue in Southern Lower Michigan,” (Ph.D. dissertation, Michigan State University, l969); Harold Edwin Christen, “A Survey of the Capabilities of the Lake States' Forests to Support an Expanding Pulp and Paper Industry,“ (Ph.D. dissertation, Michigan State University, l96l). 12Carla A. Moore, "Economic and Institutional Factors Surrounding the Management of Small Private Nonindustrial Forest Lands in Michigan," (Masters paper, Michigan State University, l977); Joseph E. Diamond, A"- . so; '- -:... I.. ' , . . : - ' .-‘-' T'. '. _E£ l“: .' r‘:""‘ . "' _- “ - . ,_ . {gangs mes-,3“: fight-vow mm.- seam "Er-mm «M3 amin- .__. QSIDIBQ 155 Unilflfiwsm gatnwet r unil:iwulni n3 noiitbba vi ,flcii m .fip'-5dnd 6 3) Who owns the pulp and paper companies in the state? 4) What are the barriers to entry into the industry? 5) How does structure influence behavior? \// 6) Do ownership patterns influence income flows? Model A model of industrial organization was used to establish struc- ture of the industry. F. M. Scherer and Joe Bain have both developed models of industrial organization.13 Scherer's model stresses conduct in examining structure-performance links. Bain, on the other hand, emphasizes the linkage between structure and performance without much concern for the intermediate conduct of the industry. He contends that conduct is empirically difficult to measure, and linkages between struc- ture and conduct, and conduct and performance often give ambiguous results. It is difficult to separate determinants as to whether they fit into structure, conduct, or performance categories. Often these features are measures of both conduct and performance. Scherer counters Bain's objections to the use of conduct by indicating that by the inclusion of a large ”complement" of independent attributes one can discern conduct from structure and performance from conduct. He also indicates that increased research funds will make possible in—depth studies of firms‘ pricing policies, products policies, and innovation behavior. "Some Impacts on Resource Use by the Woodpulp Industry in Manistee County,” (Ph D. dissertation, Michigan State University, l977). l3 Scherer, p. 5; Bain, p. viii. 7 Bothgentlemen list a number of determinants of industrial struc- ture.14 A sample of these determinants was used including concentration, .integration, differentiation, diversification, and barriers to entry. They were chosen with data availability in mind. Traditional neo-classic theory uses a model of perfect competition to analyze industrial struc- ture. Imperfect competition theory developed in order to explain divergence from perfect competition. As a starting point, the competi- tive model was used to determine how closely the structure of the pulp and paper industry approaches or deviates from it. There are arguments on both sides of the fence as to whether these determinants are anti— competitive or not. The arguments were traced and then a conclusion was reached as to how they applied to the pulp and paper industry. Research Methods This research relied primarily on secondary data and a case study method in which a sample of the active pulp and paper companies in Michigan was examined. The difficulty in examining the pulp and paper industry is that it is, in fact, many industries, defined by several Standard Industrial Codes (SIC). The industry is also a highly integrated one and produces a varied product line. Terminology and classifications are often not used consistently. Thus, it is difficult to delineate the boundaries of the industry, and consequently what firms to include or exclude from the study. 14Scherer discusses the following determinants of structure: number of buyers and sellers, product differentiation, barriers to entry, cost structures, vertical integration, conglomerateness, econo— mies of scale, government policies, growth, and chance. Bain limits his discussion of determinants to: seller and buyer concentration, product differentiation, and condition of entry. 8 The "industry" includes pulp mills (SIC-2611), paper mills (2621), paperboard mills (2631), paper products (2647), boxes, corrugated, and so1id fiber (2653), building paper and board mills (2661). The firms are denoted with SIC's according to the products they products they produce and/or the processes used. The Standard Industrial Code Manual defines industry 2611, pulp mills as, Establishments primarily engaged in manufacturing pulp from wood or from other materials such as rags, linters, waste paper, and straw...; and pulp mills combined with paper mills or paperboard mills, and not separately reported, are classified with the latter in Industries 2621 and 2631, respectively. The Manual defines industry 2621, paper mills, except building paper 3 mills as, Establishments primarily engaged in manufacturing paper (except building paper-—Industry266l) from wood pulp and other fibers, and which may also manufacture converted paper products. Because pulp mills are primary users of wood products, many studies have been done and much information has been collected on them. There are presently eight pulp mills in the state. Paper companies, on the other hand, are not monitored as well. Because they are secondary users of wood products it is difficult to clearly define processes that different firms use. Consequently, the whole agglomeration of different industries is spoken of as the "pulp and paper industry." This study examined fifteen paper mills that were classified under SIC 2621, and the eight pulp mills in the state.15 All the pulp mills 15Paper mills classified under SIC 2621 include: Brown Company, Charmin Paper Products Company, Dunn Paper Company, Fletcher Paper Company, French Paper Company, Georgia-Pacific Corporation, Interna- tional Paper Company, Kimberly-Clark Corporation-Munising Division, Plainwell Paper Company, Pioneer Paper Company, Port Huron Paper Company, Rochester Paper Company, SCM/Allied Paper Company, Simpson Lee Paper Company, and Watervliet Paper Company. 9 are integrated; therefore the Directory of Manufacturers lists three of the firms under SIC 2621, three of them under SIC 2631, and two pulp mills under $10 2661.16 The researcher could not find any defini- tive list of paper mills in the state. The list developed herein is a collaboration of a list taken from the Directory of Michigan Manufac- turers 1976, and from Lockwood's Directory oprgper and Allied Trades. The Directory of Michigan Manufacturers is assembled from information from local Chambers of Commerce, questionnaires,and industry information, so the classifications and information were viewed with some suspicion. Other sources, letters, and telephone interviews with company personnel were used to try to substantiate a list of paper mills that would con- ceivably fall under SIC 2621.17 The structure of the industry was roughly sketched out by examin- ing a number of elements. First, ownership patterns were examined to help establish control and vertical integration. This involved a look at subsidiaries, divisions, and affiliates of the various companies. The researcher also determined where the firm's headquarters are located. Secondly, the study examined diversification of firms and products. Companies were examined to determine to what extent large diversified corporations are involved in the industry, and in what 16Pulp mills include: Escanaba Paper Company (2621), Manistique Pulp and Paper Company (2621), S.D. Warren Company (2621), Menasha Corporation (2631), Packaging Corporation of America (2631), Hoerner- Waldorf Corporation (2631), Abitibi Corporation (2661), and Celotex Corporation (2661). 17It was discovered just prior to completion of this study that the International Paper Company facility in Kalamazoo is a converting plant, rather than a paper mill. In addition, the Pioneer Paper Company is a sales and distribution office for Container Corporation of America. Nevertheless, discussion of these two companies was still included. 10 other types of activities they are involved. In addition, the researcher studied product differentiation. Next, the researcher looked briefly at concentration in sales and employment within the industry. Concentration was determined by using national statistics which may be an accurate representation of the local market if the large companies are in the same proportion nationally as regionally. The researcher also looked for any signs of interlocking directorships. Finally, barriers to entry were examined, including those that result from scale economies, absolute cost advan- tages, product differentiation, and government regulation. I In a effort to generally describe supply and demand markets for the pulp and paper industry in Michigan, the study was limited to exam- ining the supply and demand for pulp, and the supply and demand for paper products. An index, developed by Leonard Weiss, was used to describe market size based on distance—shipped data from the Census of Transportation.18 Much of the necessary data was collected from the companies' annual reports and Form lO-K Annual Reports to the Securities and Exchange Commission. Information concerning merger activity, stocks, and the Articles of Incorporation was available at the Corporation Division of the Michigan Department of Commerce. A simple questionnaire was devised and sent to fifteen of the companies. The purpose was specifically to see if an answer was received, indicating a firm was still in business. Ten responses were received, but the information was of a general nature. In some cases it revealed that companies 18Leonard N. Weiss, "The Geographic Size of Markets in Manu- facturing,” Review of Economics and Statistics 54 (August 1972): 245—57. were really subsidiaries of larger corporations. It also revealed some changes in ownership and mills that had ceased operation. Much of the necessary information was not available due to dis- closure rules. Consequently a fully integrated, comprehensive study was not possible. Since mostly secondary data were used, it was often difficult to discern regional or local trends because of the aggregation of data. Accordingly, there was extensive use of trade journals, and industrial studies by the Bureau of Census. In addition, information was provided by the Agricultural Experiment Station and Cooperative Extension Service at Michigan State University, and the Michigan Depart— ment of Natural Resources. mange-rm. edit} ‘il .fi-Eubfid' “I III" I I ._-. -?Il'!'fl:i."._ CHAPTER II INDUSTRIAL ORGANIZATION THEORY To begin an analysis of the structure of the pulp and paper industry, one should first examine the reasons why it is important to delineate structure. In addition to the effects of structure on performance, there are, however, likely to be important feedback effects of perfor— mance on structure. Thus, a complete analysis of performance should be based on a fundamental analysis of the determinants of market structure. Industrial structure influences the industry's conduct, which will, in turn, influence performance. Performance refers to the industry's assistance in achieving social goals. It is measured in an industry by a number of different criteria including allocative efficiency, income and wealth distribution, progressivity, dispersion of political power, economic growth, and macro stability. The most commonly used measures in American society are efficient allocation of resources, and income and power distribution (welfare effects). Consequently, delineation of industrial structure is indeed important; not only to the serious student of industrial economics, but also to decision makers within the industry and policy makers outside of the industry. 1S. I. Ornstein, J. F. Weston, M. D. Intriligator, and R. E. Shrieves, ”Determinants of Market Structure,” Southern Economic Journal 39 (April 1973): 612—25. Market Structures Market structure is a term used to define the organizational characteristics of the relationship between buyers and sellers, sellers to each other, buyers to each other, and sellers to potential entrants.2 There are several categories of structure, but in ”real" life, indus- tries rarely fall into clean-cut categories. Rather they tend to lie along a continuum. The extremes of the continuum are perfect competi— tion and perfect monopoly. Where an industry falls on the continuum is dependent upon the amount of competition within the industry. Competition is a broad concept with two basic components.3 The first component concerns the behavior of buyers and sellers. Competi- tion is a description of the independent rivalry for customers by sellers. The second component is more of a structural concept in which ...an industry is said to be competitive...only when the number of firms selling a homogeneous commodity is so large, and each indi- vidual firm's share of the market so small, that no individual firm finds itself able to influence the commodity's price significantly by varying the quantity of output it sells. The two components have only a subtle, but important difference. Both are empirically difficult to measure, although rivalry can often be seen. It is the second component that will be more important in terms of classifying an industry's structure. Atomistic industries lie at one end of the measuring stick, and monopolies lie at the other end. The other varieties of industrial structure fall somewhere in between depending on the number of sellers and the nature of the product. Atomistic markets exist when there are so many sellers that no one can influence the price, and they sell a homogeneous product. A monopoly, on the other hand exists when there 2Bain, p. 7. 3F. M. Scherer, pp. 8, 9. 4Ibid, p. 9. 14 is only one seller who has total control over the price. Oligopolistic competition exists when there are only a few firms and each firm takes into account the reactions of rival firms in determining its pricing and output decisions. Oligopolies can produce either homogeneous or differentiated products. Finally, the last relevant category is mono- polistic competition, in which there are many sellers that produce a differentiated product. The four basic market structures are all potential classifica- tions for use in predicting performance in the pulp and paper industry. Each market structure can produce a different conduct and performance. Therefore, it is necessary to examine the number of sellers in the market, as well as the products they sell in order to help establish structure of the industry. The following will be a brief discussion of competition and monopoly to more clearly establish performance that each may produce. Competition and Monopoly It has been argued for centuries that competition is the paragon of market structures. Evils of market power are expounded as far back as Adam Smith, who claimed that monopoly power was “a great enemy to good management,” and kept the "market constantly under-stocked.”5 Instead, he extolled the virtues of the "invisible hand” that guides the market by allocating resources in the manner that is ”most agree— able to the interest of the whole society.“6 5Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Modern Library edition, (New York: Random House, Inc., 1937), pp. 147, 61. 61bid., pp. 423, 9. The demand curve facing the competitive firm is horizontal at the market price. If a seller raises its price above the market price,it will lose its share of the market. If it attempts to sell below the market price, it will either incur losses or else buyers will bid the price back up. The proportion of the market that each seller owns is so small that each seller can dispose of its entire out- put at the prevailing market price. Competition, it is argued, is the best way to achieve efficient allocation of resources and equitable income distribution. Competition is thought to be an ”optimal“ solution, as compared with monopoly, for a number of reasons. First, the large number of buyers and sellers disperses power. It allows opportunity because without any barriers’ to entry, any producer is free to enter the market. Secondly, competi- tion is considered an efficient means of allocating resources because it satisfies society's demand for the quantity of goods it wants at the least price. If society wants more of product X than Y, they will bid the price of X up, while the price of Y will fall. As profits fall in the Y industry resources will be released and move to a more produc- tive capacity-—producing more X. Consequently, resources will be used in the manner demanded by society. In an equilibrium state the mar- ginal cost of producing a unit is equal to the price. In the long run, price is equal to average total cost for a firm, and there are no extraordinary profits. Return on investment is just sufficient to bring those necessary factors into production. In addition, in the long run equilibrium each firm will be producing at the lowest point on their average total cost curve. If a firm does not operate at the lowest possible point of their average total cost, they will incur l losses and will be forced from the market. For perfect competition to exist there must be no barriers to entry and perfect resource mobility. A monopoly exists where a single firm sells a product for which no comparable substitutes exist. The firm is, in effect, the industry, and its demand curve is also the demand curve for the industry. The market demand curve demonstrates the limits of the monopolist's market. Given a downward sloping demand curve, and assuming "rational" consumer behavior, the monopolist can increase sales only by decreasing his price. Consequently, the marginal revenue curve lies below the demand curve, and thus will be less than price at different levels of output. The profit maximizing point is where marginal revenue equals marginal cost. Marginal revenue is less than price, therefore price is greater than marginal cost. Since profits will attract new entrants, the monopolist must block entry or else other firms will enter the market. Monopoly power has often been considered, by neoclassic economists, to encourage inefficient resource allocation and foster inequitable income distribution. Allocation of resources is “inefficient“ because it satisfies consumers desires with less than maximum effectiveness. Output is restricted because the monopolist is able to maintain profits by selling less at a higher price. Because of the higher price, some consumers will be priced out of the market. Monopoly profits are con— sidered unearned because there is greater return than necessary to bring factors of production into use. Thus, there is a redistribution of income from labor and owners of other resources to the monopolist. The pros and cons of competition versus monopoly have provided the basis for centuries of debate. It is argued that competition acts as an incentive for innovation because it forces firms to constantly be seeking new cost-saving techniques of production. Conversely, some economists hold the view that it is only the monopolist who has the economic security to bear the cost and risk of innovation.7 Proponents also argue that only monopolies can be large enough to achieve economies of scale. By achieving economies of scale resources can be used more efficiently. There are two sides to each argument. In classifying market structures, industries are often a blend of competitive and monopolistic elements. Inasmuch as there are arguments concerning the performance that competitive and monopolistic market structures produce, there are also disputes as to the conduct that certain structural elements pro— duce. The following will be a brief summary of the theoretical argu- ments surrounding ownership, concentration, integration, diversifica- tion, differentiation, and barriers to entry. Ownership “The capitalistic economy,..., is based on the institution of 8 The property rights involved in ownership include private property.” 1) the right to exclusive use of the property; 2) the right to receive rent from the use of property; and 3) the right to exercise management functions. There are also limitations to property rights. Property rights are exclusive rights, but not absolute.9 They are subject to the limitations and power of the controlling government. One's rights in property are realized only as long as society recognizes them, or a 7J. A. Schumpeter, Capitalism, Socialism, and Democracy, (New York: Harper, 1942), p. 88 8Bain, p. 63. 9Barlowe, p. 376. 18 government is willing to sanction and protect them. Barlowe refers to property rights as a "bundle of rights“ in which "sticks” can be removed to reduce one's rights. Rights are subject to the government limitations of taxation, police power, and the power of eminent domain. Property rights are often apparent in individual proprietorships, but the focus of property and resource ownership is changing. Increas- ingly, small individual ownership is being discarded to make way for large corporate ownership. The corporation is a unique business phenomena that has tremendous influence over the pattern of today's manufacturing sector. Corporations are significant for the changes they have produced which include: 1) altering the character of owner- ship in business property; 2) the survival powers of business concerns; and 3) the extent to which owners have the rights of property and managerial responsibility.10 The corporation is a device for joint ownership and yet limited liability. Stockholders own only a proportion of the business, with a right to the profits of the corporation that is proportionate to that ownership. Stock may be easily and anonymously transferred. The corporation is a separate legal entity, that can perform functions such as make contracts and borrow money, apart from its shareholders. Finally, the corporation limits liability because the obligation of the stockholders for debts incurred by the corporation is limited to the amount of money invested by the stockholder. The corporation provides for separation of ownership and control. The board of directors is responsible for policy making, and management of the business. Thus, management of the company does not necessarily l0 Bain, p. 64. -l‘.'_-'-:‘."1: .:.'v.".£__.:i-j.i_'. 'i din -~—_- -' 1 . "n. ‘.'.‘ . I '- I-Z. “- 3:3“? '13 and :1: l - ‘ :- -.. - fl ._ .--- _ - . ' .. . ' r ‘.Ei'm ‘ ' l9 lie directly with stockholders. As the number of stockholders increases their proportionate share of the business decreases. Consequently, the average shareholder has a minimum amount of voting power, and thus, little opportunity to influence policies and direction of the company. Three possible control situations exist within a corporation. Often- times a small number of stockholders own a majority share of the stock, in which case owners of small holdings can not change policy even if they can overcome the transactions costs of consolidating their voting power. A second situation to exist is called “minority control." In this situation a small number of individuals controls the corporation by holding a substantial minority interest. This interest has more shares than any other voting member, and the other stockholders take a relatively passive interest in management activities. The third situa- tion is where no dominate group holds enough shares to control policy decisions. This "management control" situation exists when none of the stockholders initiate the organization of votes. As such, the existing management, being the only organized body, can easily solicit votes and perpetuate its existence. Galbraith argues that almost no control lies with the stock- holders. He claims that ”It is not to individuals but to organizations that power in the business enterprise and power in the society has passed.“11 Decisions are made by a “technostructure” or interdisci- plinary group of individuals who each have narrow, but deep knowledge concerning a certain aspect of the decision.12 Information from a group is necessary because of advanced technological requirements, the HGalbraith, The New Industrial State, p. 60. 12 Ibid.,particularly chapters 6, 7, and 8. necessity of planning, and the need for coordination. In order to anticipate future resource requirements, foresight and action are necessary. Consequently, planning requires a large amount of varied information. The corporate structure accommodates technostructures. The large size of corporations develops as a means of extending plan— ning. Planning includes control of supply, control of demand, provi- sion of capital, and minimization of risk. The corporation is able to make decisions concerning inputs and outputs far in advance, and thus, influence buyer demand. By having some control over quantity, price, and raw material purchases, large corporations reduce their own risk and uncertainty. An individual's decision can be examined by a superior and easily reversed. A decision by a group can not be as easily reversed by an individual because, in order to avoid arbitrariness, the superior would need the judgement of another group of experts. Consequently, in mak— ing group decisions, the power of the organization increases. “By taking decisions away from individuals and locating them deeply within the technostructure, technology and planning thus remove them from the influence of outsiders.”13 The significance of separation of ownership from control is not always clear, but a number of possibilities exist. There are numerous theories concerning the way in which separation of ownership affects aims, motivations, and consequently behavior of a business. It has been suggested that the objectives of managers diverge from the objec— tives of the stockholders. It is possible for managers to diverge from profit maximization in order to maximize other motivations such 13 Ibid., p. 80. 21 managerial utility. Along this line, if managers' salaries are tied to the amount of sales, managers could conceivably operate the business 14 In addi- at the point where sales are maximized rather than profits. tion, it is possible that management may try and foster their own prestige and power by encouraging growth in the company. This can be done by reinvesting earnings rather than distributing greater dividends.15 Another source of separate control is where blocks of stock are owned by mutual investment funds and banks serving as trustees for individual stockholders. These financial institutions may enjoy consid- erable voting power. A tradition of reticence and legal restrictions have limited control which banks and other financial institutions have exercised over internal corporate decision-making, but as the volume of their hol ; ings increases, their influence can not help but rise accordingly. 0 It is difficult to establish exactly what the differential is between management and owner goals. In any event there are numerous possibilities for divergent actions. This divergence raises issues of the responsibility of ownership, business motivation, and the influ- ences of corporate concerns on business behavior. Ownership patterns are further complicated by the establishment and acquisition of subsidiaries and divisions. The Handbook of the Law of Corporations and other Business Enterprises defines a subsidiary 14For a study of firm motivation see William J. Baumol, Business Behavior, Value and Growth, rev. ed., (New York: Harcourt Brace Jovanovich, 1967); Adolf A. Berle and Gardiner C. Means, The Modern Corporation and Private Pro ert , rev. ed., (New York: Harcourt, Brace and World, 1968); Armen A. Alchian, ”The Basis of Some Recent Advances in the Theory of the Management of the Firm,“ Journal of Industrial Economics 14 (November 1965): 30-41. 'SBain, p. 73. 16 Scherer, p. 31. .! __ ' “a 22 corporation as: Separate corporateness of subsidiary and other affiliated corpora- tions will be recognized, ..., where (a) their respective business transactions, accounts, and records are not intermingled, (b) the formalities of separate corporate procedures for each corporation are observed, (c) each corporation is adequately financed as a separate unit in the light of its normal obligations foreseeable in a business of rights, size, and character; and (d) the respec- tive enterprises are held out to the public as separate enterprises. Where one corporation dominates another, the acts of the latter, on principles of agency law, might be attributed to the former.17 The distinction between subsidiary and division lies in legal theory. A subsidiary exists separately from the parent corporation and conducts its operations separately.18 It has its own board of officers and directors, although these can and often are the same as those of the parent company. Divisions, on the other hand, are not separate entities. The officers of the parent company act as control— lers of the division. The significant distinction, though, lies in the ramifications for liability. Theoretically, the parent company is not liable for the debts etc. incurred by the subsidiary, but it is wholly liable for its divisions. Profits of a subsidiary may be used in three ways: 1) used for the subsidiary, 2) reinvested in the subsidi- ary, or 3) directed to the parent company to be used or distributed as they see fit. If the subsidiary is 100% whooly owned by the parent com- pany, there is total flexibility as to which manner the profits are used. Finally, intercorporate linkages are of interest in assessing market structure. Ties between seemingly independent corporations are 17Harry C. Henn, Handbook of the Law of Corporations and Other Business Enterprises, 2nd ed., (St. Paul: West Publishing Company, 1970 , p. 58. 18The following information concerning subsidiaries, divisions, affiliates and their respective liabilities was obtained in an inter- view with Professor Ronald A. Trosty, Professor of Corporate Law at Thomas M. Cooley Law School on July 19, 1977. a u .I .1. .. . F. ..I I. Tl r. f .I. u.“ .l... .. I I... l I. 1 .1 . 1....- u. . \I. «11 ..JI 1 4...... 1. ...fi . .10 .1 .JJ I j s n. . 4. .06" . i, .I .0. n . 23 increasingly found. Interlocking directorates are one means of establishing ties between corporations, and thus, provide opportuni- ties for collusion. An interlocking directorate exists when a person sits on the boards of two corporations. Although such activities were outlawed by the Clayton Act, an indirect form of this linkage can still occur. An indirect linkage exists when separate directors from the same firm sit on competing firms' boards. Although it is difficult to say what is the exact effect of these ties, the collusive potential that it presents may be significant. Concentration Concentration deals with the manner in which shares of the market are distributed to firms in an industry. It is a measure of the extent to which the actual structure of an industry approximates the theoretical classifications of monopoly and competition. The measure provides a means of labeling industries in order to help pre- dict their performance. As an empirical measure it takes into account two factors: the number of firms in the industry and the size distri- bution of the firms. In the long run, concentration is inversely related to total market size and directly related to optimum firm size.19 The higher the concentration in an industry, the greater the ability for firms to collude. With only a few firms controlling a large share of the market, policing costs are reduced, and thus it is easier for the firms to reach agreement on pricing and output decisions. Concentration is a difficult concept to measure. Various formulas have been developed, but the most common measure is the four-firm 19 Ornstein, p. 612. 24 20 It measures percentage of sales of the concentration ratio (C4). total industry held by the four largest firms. Each method of measure- ment has advantages and disadvantages, but no one is the "best.“ The measure used should be that which is most appropriate for the particu- lar situation. The basic problem is that one can not find information as to the market share (measured by percent of industry sales) of individual firms. One of the disadvantages of the C4 ratio is that it does not ...,-q. necessarily define markets accurately because of its reliance on SIC classifications. SIC groups firms according to similar products or processes, but this is not always a clear indication of the true market. The aggregation of data causes SIC classes to contain many non-sub- stitutable products. It also excludes foreign sellers and it implicitly assumes the market is a national market, when, in fact, the market may be local or regional. This results in an understatement of true concen— tration levels.21 The C4 ratio does not account for the spatial distri— bution of the population, and consequently can assess spatial competi- tion incorrectly. 200ther prominent techniques of measurement include the 1) Her- findahl ratio which is a weighted average of market shares; H = P1 m = the number of firms in the industry; H is bounded by 0 and l; for a monopoly H = l and for an atomistic industry H = O; 2) Horbath ratio is a measure of the sum of the share of the largest firm plus the Herfindahl index reinforced by a multiplier. 21Dennis C. LeMaster, ”Recent Merger Activity of the Largest Firms in the Forest Products Industries,” (Ph.D. dissertation, Washing- ton State University, 1974). I. M. Grossack noted that "Concentration measures can not indi- cate, by themselves, the power of monopoly in an industry. The ulti- mate test of power is their ability to impede entry to new, smaller 22 firms." He hypothesized that market power was dependent on those factors that affect permanent concentration rather than temporary fluctuations. Thus market shares are not necessarily a reflection of entry—barrier ability as is the relative sizes of the larger firms and, most importantly, the degree to which a firm is able to maintain or expand their share over a period of time. Market shares have "permanent" and "transitory" components, and it is necessary to derive measures of concentration based on the permanent component. Concentration is significant because when only a few firms supply the market, their output decisions affect the market price. Since competitors can view the effect that they, and other firms have on market price, they recognize their interdependence and are more likely to act together in pricing and output decisions. Thus, the fewer the number of sellers, the more likely that restrictions to price competi— tion exist. Integration Vertical integration describes the extent to which firms parti- cipate in the entire range of production and distribution stages of a product. There is no single theory concerning the effects of vertical integration. Rather, there exists a series of ideas concerning verti- cal integration and the problems and economies that it poses. 221. M. Grossack, ”The Concept and Measurement of Permanent Industrial Concentration,” Journal of Political Economy 80(4) (July- August 1972): 745-60. ., “...,... . :YIIWI-‘lfl-i- :14. t- not i 51::- 15:31.1. , ”a Im-Fc’fm’bfi'i: F "1”“ 1‘17")" -l=:- -;.--:. rarer-fir '--E-..-:'- :-:"" .;-...-..in-_-33'Jn 'I '.a. L, TTTIIIITT________________________________________________________________________—____T 26 One of the problems that arises with this concept is a problem of definition. Vertical integration involves putting together two production processes that could be separated. This requires that one be able to distinguish separable processes and who potential buyers and sellers are along the production line of a product. Often neat distinctions are not easily made. Secondly, vertical integration is an extremely difficult concept to measure. Suggested means of measure- ment include using the ratio of value added to sales. This is perhaps the best measurement devised thus far, but it still says nothing of separable technical processes, and it is biased in that the further "upstream" one is inthe process, the greater the ratio will be. Conse- quently, it is a topic area in which many hypotheses have been proposed, but quantitative data are difficult to find. Vertical integration is thought to affect behavior in a number of ways. One school of thought views vertical integration as a means of increasing monopoly power. It potentially gives firms the ability to squeeze rivals out of business. Firms can adjust their price at different stages so that nonintegrated competitors at one stage cannot make a profit. They sacrifice profits at one stage for greater profits at a higher stage of production. Vertical integration is also thought of as a means of increasing price rigidity. According to the Adams- Dirlam version of this thesis, an industry is an inverted triangle.23 At each stage of production the firm has a smaller successive part of the market than at the stage before. In order for firms to collude in their pricing decisions it is necessary to maintain a rigid vertical 23Walter Adams and Joel B. Diriam, ”Steel Imports and Vertical Oligopoly Power,” American Economic Review 54 (September 1964): 626—55. price structure. Vertical integration assists in this by positively controlling output at all levels, and limiting opportunities to hide it quietly in sales to nonintegrated firms. Vertical integration im- proves a firm's ability to discriminate in price. In order to dis- criminate the firm must be able to prevent resale from groups that receive low prices (high elasticity of demand) to groups that must pay high prices (less elastic demand). By integrating with a price group of less elastic demand, the firm can potentially discriminate more effectively. Finally, vertical integration might increase entry bar- riers in already concentrated industries. In order for new entrants to enter a vertically integrated, con- centrated industry, and compete effectively, they are obligated to enter at all stages of production. Thus, they can avoid being squeezed out by integrated firms, but at the same time capital costs are in- creased. In addition, it also means that one must obtain expertise at the different levels of production.24 Vertical integration is also a means of enhancing a firm's control over its economic environment.25 By integrating upstream, a firm can supply its own raw materials and thus protect its supply in times of shortage. 0n the opposite side of the fence are those economists who indi- cate vertical integration has little effect on monopoly power. A University of Chicago school of thought indicates that market power is a function of horizontal market share and entry barriers.26 Since, 24Oliver E. Williamson, Markets and Hierarchies, (New York: Free Press, 1975), Chapters 5-7. 25Scherer, p. 70. 26John A. McGee and Lowell R. Bassett, “Vertical Integration Revised,” Journal of Law and Economics 19(1) (April 1976). ' 45196: JH'E". 35111 -.41:1;1':} 132?.(13'1irrr'r '.‘1 :' '1'23351'5: :‘2: 311‘; "inf-<1 MOI Evin? -.‘f: :1 n .. - I:-1"' I l ‘. 'n'1"'-i'!1- .I'. I " qr, [1 u 28 they claim, vertical integration does not affect market share or entry barriers, it can not worsen industry behavior. Others see vertical integration as a means of coping with risk and uncertainty. "By con- ducting economic activities within the boundaries of its own organiza- tion for arm's-length bargaining."27 Vertical integrations is seen also as a means of achieving cost and resource savings. In multi-step production, vertically integrated firms can eliminate repetition of certain steps in the process such as re-wetting or reheating. They can also achieve time economies by having a continuous production process and eliminate certain transportation costs. Oliver E. Williamson developed a three part hypothesis that vertical integration is a response to what he calls ”bounded ration- 28 Bounded ality,” ”opportunism,“ and ”information impactedness.” rationality refers to the inability of people to be perfectly rational because of the high costs of information and transactions. He further contends that firms practise ”opportunism” by manipulating information and keeping relevant contract information private. If there are many buyers and sellers, the opportunity for "opportunism" is zero because it is to each firm's advantage to be as open as possible. Finally, ”information impactedness“ exists when the true condition is known by one party of the contract and the other party does not know, but could find out this information for a price. Because information contracting is so costly, vertical integration results. Williamson's model of vertical integration takes the transactions costs out of the market and 27Roger Sherman, The Economics of Industry, (Boston: Little, Brown and Company, 1974), p. 163 28Williamson, Chapters 5-7. - '. -1.1 ' *"-="-' i'H-i 1.. --'-:--«.1 .- 11:11:”! 1. 4:1"! . '4‘ -. I‘Ei . -'...'t':l.'.':1'. 29 internalizes them in the organization. Through vertical integration, opportunism is curbed because two parties no longer have the same moti- vation to misrepresent information since they are all part of the same firm. Likewise, information impactedness is lessened because communica- tion is improved. Convergence of expectations provides for better coordination. Obviously, there is a considerable difference of opinion as to the true reasons firms integrate, and the subsequent effect that inte— gration has on production. Whether or not vertical integration is harmful in promoting monopoly power, or improves efficiency of resource use appears to depend on the specific industry and its conduct in an integrated situation. Diversification Diversification exists when one firm produces a varied product line. Thus, a firm sells to a series of markets. As with other aspects of structure, diversification is also difficult to define and measure. The number of technologically distinct product lines is often used as a measure, but again a problem arises in defining distinct product lines. Diversification may offer economies to the consumer and producer.29 It provides a means of spreading risk over a number of areas and thus often makes funds easier and cheaper to borrow. It often offers oligo- polists who can not increase their share in one market a means of growth by expansion into another market. 29Sherman, p. 163. 3O Diversification is a relevant topic area of study because of the perspective it provides: 1) as a structural element, 2) as a condition affecting pricing behavior, and 3) as a stimulus for research and development. It is obtained by either developing an entirely new product line or else through mergers. Mergers, it can be argued, cre- 30 age and sustain market power. They are thought to be anticompeti- tive because mergers among former competitors serve to lessen competi- 31 tion. On the other hand, mergers can promote economies of scale, and facilitate efficient resource allocation. Differentigtipp The type of product produced by an industry also helps establish the type of market structure. Products are either homogeneous or dif- ferentiated. A homogeneous product is one in which competing products are considered to be perfect substitutes in the buyer's mind. Differen- tiation indicates a lack of perfect substitutability between products. There are various means of product differentiation which include: 1) difference in quality and design, 2) product imagery produced by buyer ignorance of the product's essential characteristics, 3) sales- promotion and advertising, and 4) differences in the locations of sellers. By product differentiation, a seller hopes to increase its share of the market. In an atomistic market the effect of advertising 32 In the case of a on overall demand is an externality to the seller. limited number of sellers, the incentive to differentiate a product may be greater. Advertising can produce a gain somewhat proportional to the oligopolist's market share. By advertising the oligopolist can 32 301bid., p. 171. 311m. Ibid., p. 334. 31 capture sales from rivals without immediate retaliation, as well as gain overall expansion of market demand. When the market is differentiated, two situations arise with respect to price. First, no common price is necessarily followed be- cause the seller is not faced with the total loss of his market share. Thus, he gains some control over price. Secondly, some producers may establish a superior position in the preference hierarchy of consumers. Consequently, less advantaged sellers are unable to sell any of their product unless they price below their advantaged rival. Two or more different prices may be established for essentially the same good. The ability of a few firms in the industry to obtain strong product differ- entiation advantages has been a reason for the emergence of oligopolistic market structures.33 In addition, disadvantages to those other firms that can only obtain small market shares explains the existence of a competitive fringe around an oligopolistic structure. Differentiation of products influences pricing, establishment of market share, and potential range of conduct open to sellers. It has been argued that product differentiation promotes market control through persuasion rather than product information. Promotion economies favor large sellers. Scherer notes that, “...most of the product differentia- tion effort observed in modern private enterprise economy represents little more than a natural healthy response to legitimate demands.“34 Scherer also indicated that differentiation facilitated entry into markets. If a company can find an isolated area or a demand for parti- cular product features, it is possible for them to carve out a share of 33Bain, p. 231. 34Scherer, p. 324. the market. "Innovation is probably one of the most common and success- "35 ful ways of hurdling otherwise formidable barriers to new entry. Conceivably, the more differentiated a product becomes, the producer becomes more independent, and there is less reason to act collusively. Barriers to Entry Barriers to entry determine the competitive relationship between sellers already in the market and potential entrants. The higher the barriers, the less competitive is this relationship. Bain describes the condition of entry as "the 'disadvantage' of potential entrant firms I “36 Theoretically the condition of as compared to established firms'... entry refers to the degree to which firms can raise their price above minimum average cost without attracting new entrants into the industry. There are basically four sources of entry barriers. They include: 1) advantages attributable to scale economies, 2) absolute cost advan- tages, 3) product differentiation, and 4) government regulation. Economies of large scale enable firms to market products at lower aver- age costs per unit than small producers. Additionally, large scale production provides economies in time and also ”economies of massed reserves.”37 By being able to maintain multiple machines a large company can protect itself against machine failure, etc. Large firms are also afforded pecuniary economies such as price concessions from suppliers, as well as economies in raising financial capital. But there appears to be a limit to the extent a large firm can capitalize on scale economies, i.e., scale economies may be subject to diminishing returns. As a firm gets larger, management costs increase and the 36 351bid., p. 230. Bain, p. 252. 37E. A. G. Robinson, The Structure of Competitive Industry, Rev. ed., (Chicago: University of Chicago Press, 1958)] pp. 26-27. 33 complex hierarchy may increase the difficulties of effective communica- tion. In addition, as a corporation grows it becomes more and more difficult to keep each branch of operation harmonious with the other parts. Absolute cost advantages provide a second type of barrier. These advantages accrue to established firms whose costs are lower, at any scale, than those of potential entrants. Means of obtaining these advantages include control of processes by patents, exclusive ownership of required resources, the inability of entrants to acquire necessary factors of production on the same terms as existing companies, and less favorable access to financial funds for potential entrants. The third source of barriers to entry is product differentiation. Possible sources of this type of barrier include buyer preference for established brand names, exclusive control of designs through patents, and ownership or control over advantageous distribution outlets. The final source of barriers to entry is government regulation. The manner in which patents or licenses are distributed can effectively act as a barrier to entry. Government requirements and standards can also act as barriers. The significance of entry barriers lies in the potential for market control. “The presence of entry barriers enables existing firms to behave in a cooperative way without having outsiders come in and up- set the result.“38 There are many theories concerning determinants of market struc- ture and their relevance in determining market behavior. Few quantita- tive studies have been done that show conclusive results. Consequently, K‘— 38Bain, p. 284. 34 it is often difficult to use these structural determinants to definitive- ly establish market structure. Nevertheless, they provide a structural means for examining and predicting conduct and performance. Using these elements of structure, one can examine the pulp and paper industry to determine its structural characteristics. CHAPTER III SPATIAL ANALYSIS OF SUPPLY AND DEMAND MARKETS Before one can discuss data concerning the structural character— istics of the industry, it is necessary to discuss the supply and demand markets for the industry. Sppply and Demand Regions The market for pulp and paper products has been extremely volatile in the last four years. In 1973-1974, the United States experienced a surprising shortage of paper. Then, the following year the country experienced the worst economic slump in the post-World War II era.1 Inventories were stockpiled by customers in response to shortages, consequently consumption dropped and excess capacity resulted. Oper- ating rates fell to seventy percent of capacity.2 Pulp is a commodity used worldwide. Short term price movements can be significantly affected by the equilibrium between world supply and demand. An important aspect of the world pulp market is that Nordic countries, particularly Sweden, have built up inventories of market pulp.3 This is possible because pulp inventories are subsidized by the government. In addition, there were several prolonged strikes 1The Mead Corporation, Annual Report, 1976, p. 2. 2John Evans, ”Paper Industry Successfully Weathered a Tough Year, Now Sees Brighter Outlook,” Pulp and Paper, June 1976, p. 23. 31bid. 35 in Canada that removed large supplies of pulp from the market. The combination of strikes and withheld Scandinavian pulp resulted in high rigid prices for the pulp buyer. Wholesale prices (Figure l) and price indices (Table 1) indicate changes in supply and demand over a six year period from 1969-1975. The shortage of 1973-1974 is reflected in tremendous price increases for four items selected from the pulp and paper group. This is in contrast to the relatively stable period from 1970-1973. Woodpulp showed the greatest percentage increase, followed by newsprint. Prices for sulfate pulp more than doubled in the six year period. TABLE 1.--WHOLESALE PRICE INDICES FOR PULP AND PAPER PRODUCTS. AVERAGE INDICES (1967:100). Item 1969 1970 1971 1972 1973 1974 1975* Woodpulp 100.0 109.3 111.5 111.5 128.3 217.8 283.6 Paper, except newsprint 106.3 112.0 115.2 116.3 121.0 147.7 169.4 Writing paper 106.3 111.9 116.5 116.7 127.4 147.8 162.8 Newsprint 104.4 107.6 113.0 116.7 122.2 151.2 184.0 SOURCE: Bureau of Labor Statistics, U.S. Department of Labor, Whole— sale Prices and Price Indexes. *Average calculated using quarterly figures. Demand for pulp and paper is a derived demand. In other words, demand for it derives from demand for the final product in which it is used. Because of this, demand for pulp and paper is usually assumed to be relatively inelastic. Even though pulp and paper add only a small portion of the value to the final product, other raw material substi- tutes have proven uneconomical to use in place of woodpulp for most PMces(doHars/shortton) Wflfing ’9 Paper I I ' I It — V I I .- I I I - I I I .. I I ,.o----"°'----4 - v’p"— r” ’ Book . Sulfate _ Wrapping Pqu PODBFA _ /' _ .4¥.___1k ..... 4>n_.—¢( P-.- K\Newsprini l969 1970 1971 1972 1973 1974 1975 Year FIGURE 1.——PRICE TRENDS OF SELECTED PAPER PRODUCTS. NOTE: Prices are in current dollars. applications. Consequently, the quantity of pulp and paper demanded is relatively unresponsive to price change. Derived demand is thought to be more inelastic the more essential the factor being examined; the more inelastic the demand for the final product; the smaller the percentage of total cost that goes to the factor; and the more inelastic the supply curve of other factors.4 But, as Gregory points out, this applies to pulp and paper when they are viewed as a single commodity. When separated into finer product classes, the demand for a specific paper product may be relatively elastic. The supply of pulp and paper is dominated, in part, by the nature of the industry. Excess capacity usually exists which makes supply relatively elastic. But, when excess capacity is used supply becomes largely inelastic due to time lags involved in expanding and adding new facilities. Fixed costs represent a large percentage of total costs. Thus, if there is excess capacity, a firm can decrease unit costs by increasing its sales volume. Examination of supply and demand regions is, at best, a means of delineating the geographic extent of the market. A spatial representa- tion of the market also says a good deal about industrial structure. The geographic extent of markets is a significant measurement of indus- trial concentration.5 Traditionally, the spatial component has been largely ignored in the analysis of economic problems. But it is an important element of analysis, particularly in terms of spatial compe- tition. Oftentimes, industries appear relatively unconcentrated when 4Gregory, p. 151. 5Weiss, p. 245. .1 E56 '3 39 examined over time, and on a national basis; but within a specific spatial context, concentration can be quite high. Weiss defines the geographic market as ”...the set of locations from which plants supply or could profitably supply a given consuming point."6 He indicated that the "most straight-forward measure" of the market would be the maximum profitable shipping distance. The Commodity Transport Survey of the Census of Transportation provides information on percent distribution by distance of shipment of commodities. The maximum distance shipped is not an accurate means of measuring market size because most products have shipments in all distance classes; and the farthest distance is not representative of the true market situ- ation.7 Consequently, indices are used that measure the radius within which 80 percent of total tonnage (R80) and 90 percent of total tonnage (R90) are shipped. The percentage of tonnage shipped less than 500 miles (P500) is also calculated. Using data from the 1972 Census of Transportation, the application of Weiss' technique revealed estimated market sizes as follows: R8?miles§90 P590 S.I.C. Industry group 26 Pulp, paper & allied products 511 781 79.6 26111 Pul 191 260 94.4 262 Paper, except building paper 750 929 66.0 2621 Paper 750 929 66.0 26213 Printing paper, coated & uncoated 723 922 68.8 These indices indicate that the market area for pulp has a radius approximately 225 miles from the point of production. At least 94 percent of the pulp produced in Michigan is shipped less than 500 miles 61pm. 7113111., p. 247. 1 . f .3 .sfggsrz‘an ;‘_;_£ 45.42;.” . . In animgi r42 away. The Census of Transportation indicates 45 percent of the distri- bution travels less than 100 miles. The trend of local and regional supplying applies to the entire East North Central region. Approximately 61.3 percent of the distribution remains in the East North Central Re- gion.8 The pulp mills in the state show overlapping supply areas. From available information, each of the pulp mills indicated that pulp pro- duced was used in their own paper production and the surplus sold on the market. Realistically, each pulp mill might supply smaller or larger areas, depending on their contract situation. Mills in the southern Lower Peninsula are within the supply areas of Menasha. Abitibi, S. D. Warren, and Packaging Corporation. Three of these companies produce principally paperboard, which uses a lower grade pulp than finer grade papers. Paper mills in the south also fall with- in Canadian supply regions and supply regions of other East North Cen— tral states. The market for paper products is generally much larger than pulp markets. The R80 and R90 indices indicate that the market for paper products is approximately 825 miles from the source of production. This indicates a more regional or national market. Large population centers such as Detroit and Chicago fall within these regions. From these points products are conceivably distributed nationwide. Hunter indi- cated that the market for low quality paper, such as newsprint was prob- ably more local, whereas the market for high quality paper is much larger.9 Since the transportation figures aggregate all the paper 8Charles L. Smith, ”The Transportation of Pulp, Paper and Board,” Pulp, Paper and Board, July 1971, p. 19. 9Hunter, ”Innovation, Competition, and Locational Changes in the Pulp and Paper Industry 1880—1950,” Land Economics 31(4): 321. 3. ' ,-: ~54";- .-.-..-..--: mu p1 afti‘fii niuq 31‘" I 4 1:11:21 I I I "- -..._ w 111* 2131 I {ET-h: 121145”? éflhliqr-I‘13yr: “he; “1.. . "_ - .,'._al"' -..-",,1 '.”3...:h .v . :. , -. "3:; 9"": .kuli-l. _-,-_. fii-isl'hv” . 41 grades together, the R80 and R90 estimates probably overestimate market size for low grades of paper. These indices are possibly inaccurate estimates of market size for a number of reasons. First, R80 and R90 are subject to interpo- lation, and thus may be inaccurate. Secondly, the distance commodities are shipped depends on established plant locations. The indices imply spatial equilibrium by assuming that long run optimal location patterns have been attained. Since long run equilibrium may not have been achieved, distance shipped either overstates or understates the area over which firms would compete.10 Third, the indices may be inaccurate ' if customers are geographically centralized or if inter-regional cost differences coincide with high transportation cost. According to the 1972 Census of Transportation, 95 percent of all pulp shipments from Michigan were by rail, and the remainder by motor carrier.H Over 50 percent of paper shipments were by rail. The greatest part of Michigan pulp and paper production was to the East North Central Region——Wisconsin, Illinois, Indiana, Michigan, and Ohio. The type of transport is a function of weight more so than distance. Railroads are generally used for longer, heavier shipments, whereas trucks are used for shorter and smaller hauls. Optimal Location Paper manufacturing has existed for hundreds of years. In the past, production was usually close to the market site, because of the 10According to Helen Hunter long run optimal location patterns in the industry have not been achieved; p. 325. 11U.S. Bureau of the Census, Census of Transportation, 1972, Commodity Transportation Survey-Area Series: Area Report 3, TC72C2-3, (Washington, D.C.: U.S. Government Printing Office, 1975). grades together, the R80 and R90 estimates probably overestimate market size for low grades of paper. These indices are possibly inaccurate estimates of market size for a number of reasons. First, R80 and R90 are subject to interpo- lation, and thus may be inaccurate. Secondly, the distance commodities are shipped depends on established plant locations. The indices imply spatial equilibrium by assuming that long run optimal location patterns have been attained. Since long run equilibrium may not have been achieved, distance shipped either overstates or understates the area 10 Third, the indices may be inaccurate over which firms would compete. if customers are geographically centralized or if inter-regional cost differences coincide with high transportation cost. According to the 1972 Census of Transportation, 95 percent of all pulp shipments from Michigan were by rail, and the remainder by motor carrier.n Over 50 percent of paper shipments were by rail. The greatest part of Michigan pulp and paper production was to the East North Central Region--Wisconsin, Illinois, Indiana, Michigan, and Ohio. The type of transport is a function of weight more so than distance. Railroads are generally used for longer, heavier shipments, whereas trucks are used for shorter and smaller hauls. Optimal Location Paper manufacturing has existed for hundreds of years. In the past, production was usually close to the market site, because of the 10According to Helen Hunter long run optimal location patterns in the industry have not been achieved, p. HU.S. Bureau of the Census, Census of Transportation, 1972, Commodity Transportation Survey—Area Series: Area Report 3, TC72C2-3, (Washington, D.C.: U.S. Government Printing Office, 1975). process used. Major inputs were either straw, rags, or waste paper, which were available at population centers. In addition, pulp mills were located next to paper mills. In 1880 wood pulp was introduced as a raw material source. This caused a major change in optimal loca- tion patterns of pulp and paper mills. Hunter indicated three reasons why this change occurred.12 Pulp manufacturing is a weight-losing process, therefore it is not economical to transport pulpwood logs over long distances, in order to process them. Secondly, woodpulp is most efficiently produced on a large scale. Because of high capital invest— ment in plant and equipment, it is advantageous to locate close to where there is a long—time adequate wood supply. Finally, Hunter notes that newsprint and cheaper grades of paper are most efficiently produced at plants integrated with pulp mills. The economies of integration compensate for the cheaper transportation rate of pulp. Location theory usually assumes that in the long run, competitive forces will cause the industry to conform to optimal location patterns. "Competition, in so far as it prevails, will reward and encourage well- 1ocated enterprises and shorten the lives of poorly located one."13 Hunter claims, though, that the optimal location pattern has not evolved. Her study of mill locations indicated that, “There seems to have been a continuing preference for locations near the traditional ..14 sites of paper production. She claims that the high capital to value of output ratio has, in part, prevented competitive forces from forcing inefficiently located mills from the market. Liquidation of 12113111., p. 317. 13Edgar M. Hoover, The Location of Economic Activity, (New York: McGraw—Hill, 1954). p. 9. 14 Hunter, p. 318. 43 small mills did not result in heavy capital losses, but large plants continued production even at the added cost of transporting roundwood. As plant size and production increased, the proportion of fixed to total costs also increased. Therefore, the higher the proportion of fixed costs, the less influence competition had on eliminating ineffec— tive mills. Secondly, Hunter indicates there was also an increase in firm size. ”These large firms were not able to eliminate competition, but there can be no doubt that the paper and pulp market as a whole was less competitive...“15 As the scale of production rose, large firms had greater staying power than small firms. These factors are more prevalent in high—grade paper production, rather than in newsprint and wrapping paper. Expansion and new sites seemed to approach optimal locations for newsprint and wrapping paper. Fine quality paper production, however, continued to resist forces for optimal location. Due to high fixed costs, mills shifted from low grade to higher grade paper, and more profitable production. Higher grade paper is more differentiated, and thus, "...mills seem to have ”16 Paper mills did not have to 10- found competition less strenuous. cate near timber supplies, necessarily, due to the availability of Scandinavian pulp. It is more efficient to ship pulp to paper mills rather than ship pulpwood to pulp mills. Hunter's analysis of the industry does not completely hold in Michigan's case. With the exception of the Menasha Corporation in Allegan County, the other seven pulp mills are located close to those areas where pulpwood production is clearly greatest (Figure 2). The western Upper Peninsula harvests the greatest amount of pulpwood, 15 16111111., p. 321. Hunter, p. 320. M ///7’/ IIIIIII 1 i l 45 followed by the eastern Upper Peninsula, the northern Lower Peninsula, and finally the southern Lower Peninsula. The 1939 edition of Lockwood's Directory indicated there were ten pulp mills in the state. Only five of those mills are still in opera- tion today. It is significant that three of the mills that closed were not located near pulpwood supplies. The other two mills were located near pulpwood sources, but probably did not achieve significant enough economies of scale to stay in operation. With the exception of Menasha, the remaining mills in operation today are located near pulpwood sup- plies. Hunter hypothesized that the high proportion of fixed to total costs was the reason for less than optimal firms remaining in business. Examination of the Michigan mills lends support to this theory. " I '.I- '.-'_' 1‘ - .i-fll-l'a __ . Wmd'lm'flfilim' ~ -» ~ airline 311‘" ill-"F"- 111‘: 1., adv-3' '-.:I.1 .maninma are! ." 'ém 11:01:." ‘1' : .“ _ __ -7... __ __.‘-_ . - " - -’-=.- ice-1 infant-7 TDH_-,- " . : . _ _ . . ' .3 ., ' _. ..j;i .11" 'I-. .' _ u I I‘- CHAPTER IV THE STRUCTURE OF THE PULP AND PAPER INDUSTRY IN MICHIGAN Location Twenty-three pulp and paper companies were examined in this study. Eight of the companies have integrated facilities, producing both pulp and paper. Four integrated pulp mills and ne paper mill are located in the Upper Peninsula of Michigan. Using the northern border of Muskegon County as the division between the northern and southern Lower Peninsula, two pulp and two paper mills are located in the northern Lower Peninsula; and two pulp mills and twelve paper mills are located in the southern Lower Peninsula. Most paper companies lie in the most populated area of the state and relatively close to large population centers (Detroit, Kalamazoo, Muskegon). Figure 2 indicates the location of the various mills. Ownership Twenty companies are either subsidiaries or divisions of large, national corporations. Only three companies in the state, Fletcher Paper Company, French Paper Company, and Port Huron Paper Company, are not part of larger firms. Six companies, Fletcher, French, Manistique, Menasha, Watervliet, and Simpson Lee,are all privately or closely held corporations for which no annual reports or stock prospectus are 11'. «its-1+3: . 1;.- n16!” (Mi- ‘1""~' . . - ’1'. twig-4.1153 47 available. Twelve companies are wholly-owned subsidiaries, while eight are considered divisions. Table 2 provides the location of the companies, their legal distinction, and the name and location of par— ent companies. It was difficult to distinguish whether a company was a subsidi- ary or a division, according to legal definitions. Often companies use these terms interchangeably in annual reports. Delineation was made according to responses reported in the Form lO-K Report to the Securities and Exchange Commission. In addition, there is often a complex hierarchy of ownership that makes it difficult to identify the parent company, as in the case of Pioneer Paper Stock Company. Pioneer Paper is a division of Container Corporation of America which was a division of Marcor,Inc.1 Marcor was recently acquired by Mobil Corpo- ration in which Container Corporation, Montgomery Ward and Company, Inc. and Mobil 011 are all operating units. A diagram of this complex rela- tionship is provided in Figure 3. All companies are corporations with the exception of Kimberly- Clark Corporation—Munising Division. To do business in the state, a corporation must be registered with the Corporations Division of the Michigan Department of Commerce as either a domestic or foreign corpo- ration. A domestic corporation is one which originally incorporated in the State of Michigan. A foreign corporation is one that has incor- porated under the laws of another state, but wishes to conduct business in Michigan. Incorporation laws are different for each state. Some 1There was some confusion as to whether or not Container is still considered a division of Marcor. The 1976 Annual Report indicates that Container Corporation is considered one of five holding companies that comprise Mobil Corporation. 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Considering the two populations toget- her indicates that the mill employs approximately 5 percent of the Manistee and surrounding area population. Packaging does employ 5.1 percent of the county's labor force. Other large employers, in relation to city population, included Watervliet Paper, 22.6 percent; Plainwell Paper, l4 percent; Kimberly-Clark, l2.7 percent; and Celotex, 10 percent. In addition, the percentage of city population figures probably under- estimates true employment concentration since it is derived from city population, rather than labor force estimates. Integration All companies in the state, with the exception of Fletcher and French, are integrated companies that vary in degree of integration. One must distinguish between corporate and functional integration. Corporation integration indicates that while a particular company, subsidiary or division of a larger company, is not integrated, other parts of the parent company do provide the necessary upstream or down- stream processes9 to make the product a result of an integrated effort. Functional integration applies to those companies which are integrated at the millsite. The large forest products companies including Abitibi, Mead, Georgia-Pacific, Hoerner-Naldorf, International, and Scott, own their own timber supplies and conduct pulping, paper making, converting, distributing, and sales activities, although at different locations around the country. Twenty companies are integrated upstream, and only 9Upstream integration means raw material or preliminary processes are owned by the same firm. Downstream integration means that processes that are closer to the finished product are owned by the same company. :u__r;-II°!I.'V1 -__ ...a- mhpMnJ mun-1mm m: aflhillm" - . ; nnffii‘aw 43-fzfinqt‘flmb.ég «I '-fiffl .firwr‘ *Nda! z'v‘fiun! sfl: ‘6 -v_ |.|'. ' ..,i.' 64 three companies, French, Fletcher, and Port Huron, do not have other divisions or subsidiaries that supply them, in part, with the necessary raw materials or provide preliminary processing, but rather they trans- act on the open market. All companies are integrated downstream with the possible exception of Fletcher and French. These companies are privately held, therefore estimates were made as to their production processes. There are eight active woodpulp mills in the state, and all are integrated with paper making and converting facilities. There are also three other pulp mills in the state that do not use roundwood as an input. Brown Company has a secondary fiber mill in Kalamazoo, that uses recycled waste materials as a substitute for virgin woodpulp. In l975 this facility produced approximately l5,000 tons of pulp. Georgia- Pacific has a deinking pulp facility in Kalamazoo that produces 80 tons per day. Finally, Simpson Lee has a pulp mill in Vicksburg that uses rags as a raw material. Ten companies own timber resources nationally, as well as inter- nationally. International Paper Company considers itself to be the largest private timberland owner in the world. Also it is second only to the Federal Government in terms of single organization ownership of timber acreage in the United States. Three companies, Abitibi, Packaging Corporation, and Hoerner-Naldorf own timberlands in Michigan (Table 10). Kimberly—Clark used to own substantial acreage in the Upper Peninsula and Northern Wisconsin, but sold the land in July l976 to Champion International. Nine companies are integrated with chemical divisions including Georgia-Pacific, International, Kimberly—Clark, Jim Walter, Philip Morris, Tenneco, Mead, Mobil Corporation, and SCM/ Allied. .' _ - 'u'u II. _ *2 I.“' ' fppfi m zeitlfm- m - ’ . - "u +7.. ‘—:- noise-33.45 std} :- \ m. a! BWn'1EFfiflawa seen? .fiinHW? L- -.- .1 :7 ~ -_=i:.‘..: -..- urn 65 TABLE lO.-—TIMBER 0WNERSHIP--l975. Total Timber Company Ownership In (acres) Michigan Abitibi Corp. 23,000,000 34,000a Brown Co. 520,000 - Escanaba Paper Co. l,435,000b 87,000 Georgia-Pacific Corp. 6,000,000 Hoerner—Waldorf Corp. 300,000 33,000 International Paper Co. 8,500,000 - Kimberly-Clark Corp. 4,787,000c 374,000 Packaging Corp. of America 541,000 l38,000 Pioneer Paper Stock Co. 744,000 - S.D. Warren Co. 3,300,000 - SOURCE: Form lO-K Reports to Securities and Exchange Commissions; Annual Reports of respective companies; and Pulp & Paper, January l976; State Journal, July 15, l976. aRay Pfiefer, Michigan Dept. of Natural Resources estimated Abitibi owned between 30,000 and 38,000 acres in the Upper Peninsula. bTimberlands owned or controlled by Mead, plus 50 percent of timberlands owned by Georgia Kraft and British Columbia Forest Products. CIn July l976 Kimberly Clark sold 374,000 acres in the Upper Peninsula and northern Wisconsin to Champion International, which pro- posed a merger with Hoerner—Waldorf in December l976. While many companies have timber supplies, chemical divisions, and pulp operations, they usually do not totally supply their own production. In most instances, a company will supply 25—30 percent of its own pulpwood needs and buy the rest on the open market. For example, Brown Company obtains 25 percent of its pulpwood needs from its con- trolled lands, and 75 percent from local suppliers and other timber sources. It has the capacity to provide 35 percent of its needs.10 10Brown Company, Form lO—K. All of the estimates of resource use were obtained from the companies' Form lO-K. '."igiUILIi 5:1 . d": .. i‘ =.'; URL:- -.I I .' .I ‘- 'M .'- - 66 Mead Corporation uses approximately 20 percent of its own timberlands for its needs, but all pulp at the Escanaba mill is produced internally, with excess being sold on the open market. Georgia-Pacific obtains approximately 50 percent of its timber requirements from its own re- serves and purchases the rest on the open market. Scott Paper produces its own pulp, buys on the open market, and sells a portion of its supply to other companies. Although the Company has sufficient pulp manufacturing capacity to supply essentially all of its domestic pulp requirements, it usually acquires pulp from, and sells a portion of its own pro- duction of pulp to other persons. Kimberly—Clark produces approximately 60 percent of its own needs and purchases the rest on the market. Diversification All companies in the state except Fletcher and French are members of diversified corporations. Companies were classified in Table ll into groups of differing diversification based on the number of product lines and the researcher's subjective judgment. The extent of diversi- fication ranges from very low, as in the case of Port Huron, to very high, as in the case of Jim Walter Corporation. The type of diversifi— cation also varies significantly. Jim Walter Corporation is involved in gas and oil, minerals, chemicals, pipe products, sugar, stone and concrete, retail stores, finance and credit, as well as wood and paper products. Philip Morris, Inc. has five operating companies that pro— duce cigaretts, beer, paper products, and land and housing development and sales, and consumer products. 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