PRICE ELASTICITIES OF SUBSTITUTION BETWEEN SPECIES IN THE DEMAND OF UNITED-STATES SOFTWOOD LUMBER IMPORTS FROM CANADA

The softwood lumber that Canada exports to the United States is a heterogeneous mix of spruce, fir, red cedar, pine, hemlock, and other species. The purpose of this study was to determine to what extent each species is a distinct economic good by using a characteristic demand equation. The theory consisted of a cost-minimizing aggregate U.S. demand for imports and of share equations for each species. Partial adjustment was introduced to accommodate out-of-equilibrium observations. The results showed that the demand for each species, except fir, was elastic with respect to the price of that species, with elasticities that differed substantially by species. Cross-price elasticities between individual species were generally small. It is shown how the effect of a price change of any single species consists of two parts: a market-expansion effect that is the same for all species and a substitution effect that is species specific.