Production and Cost in the U . S . Paper and Paperboard Industry

The United States paper and paperboard industry has experienced significant structural changes over the past twenty-five years, including reductions in the number of mills, lower rates of capacity growth, employment cutbacks, and a loss of market share to foreign competitors. These structural shifts portray an industry that increasingly has difficulty adapting to a more competitive global environment. Based on aggregate data from 1965-1996, this paper estimates a short run translog cost function for the industry. The estimated model fits the data well and all sample points satisfy monotonicity and concavity conditions at all points. Among the findings, the industry operates at slightly increasing returns to capital utilization and labor and energy are Allen-Uzawa complements but Morishima substitutes in production. Technological progress generated 0.02% reduction in annual operating costs and consistent with an ailing U.S. industry, estimated marginal costs approximated average operating costs until 1982 after which marginal costs significantly diverged from average operating costs. JEL: D2, L11, L25, L67, L73