Application of game theory in Swedish raw material market Rami Al-Halabi 2020-06-12 Application of game theory in Swedish raw material market Investigating the pulpwood market Rami Al-Halabi Dokumenttyp – Självständigt arbete på grundnivå Huvudområde: Industriell organisation och ekonomi GR (C) Högskolepoäng: 15 HP Termin/år: VT2020 Handledare: Soleiman M. Limaei Examinator: Leif Olsson Kurskod/registreringsnummer: IG027G Utbildningsprogram: Civilingenjör, industriell ekonomi i Application of game theory in Swedish raw material market Rami Al-Halabi 2020-06-12 Sammanfattning Studien går ut på att analysera marknadsstrukturen för två industriföretag (Holmen och SCA) under antagandet att båda konkurrerar mot varandra genom att köpa rå material samt genom att sälja förädlade produkter. Produktmarknaden som undersöks är pappersmarknaden och antas vara koncentrerad. Rå materialmarknaden som undersöks är massavedmarknaden och antas karaktäriseras som en duopsony. Det visade sig att Holmen och SCA köper massaved från en stor mängd skogsägare. Varje företag skapar varje månad en prislista där de bestämmer bud priset för massaved. Priset varierar beroende på region. Både SCA och Holmen väljer mellan två strategiska beslut, antigen att buda högt pris eller lågt pris. Genom spelteori så visade det sig att båda industriföretagen använder mixade strategier då de i vissa tillfällen budar högt och i andra tillfällen budar lågt. Nash jämviktslägen för mixade strategier räknades ut matematiskt och analyserades genom dynamisk spelteori. Marknadskoncentrationen för pappersmarknaden undersöktes via Herfindahl-Hirschman index (HHI). Porters femkraftsmodell användes för att analysera industri konkurrensen. Resultatet visade att produktmarknaden är koncentrerad då HHI testerna gav höga indexvärden mellan 3100 och 1700. Det existerade dessutom ett Nash jämviktsläge för mixade strategier som gav SCA förväntad lönsamhet 1651 miljoner kronor och Holmen 1295 miljoner kronor. Dynamisk spelteori visade att SCA och Holmens budgivning följer ett mönster och att högt/lågt bud beror på avvikelser från Nash jämviktslägets sannolikhetsdistribution. Nash jämviktslägets råder ifall sannolikhetsdistributionerna vid låg budgivning är 68,6 procent för SCA och 66,7 procent för Holmen. Detta gav indikatorer för icke samarbetsvilliga spel. Slutsatsen är att om två spelare (kvarnar) når Nash-jämvikten, kommer ingen spelare att vinna mer genom att bara ändra sin egen strategi. Nyckelord: Spelteori, Herfindahl-Hirschman index (HHI), duopsony, multipel regression, massaved, mixad strategi, Nash jämvikt ii Application of game theory in Swedish raw material market Rami Al-Halabi 2020-06-12 Abstract The research aims to analyze the market structure of two companies in the forest industry (Holmen and SCA) with the assumption that these companies compete at buying raw materials and selling products. The product market in this study is the paper market under the assumption that both companies operate in a concentrated product market. The raw material market that one investigates in this study is the pulpwood market under the assumption that it is a duopsony. What this study has concluded is that Holmen and SCA buy pulpwood from lots of different self-managing forest owners. Each company creates a monthly pricelist where they decide the bid price of pulpwood. The amount varies depending on the region. Both SCA and Holmen chooses between two strategic decisions, either to bid high or to bid low. Through game theory, it has been clear that each company uses mixed strategies as they sometimes give high bids and sometimes give low bids. The Nash equilibrium for mixed strategies have been calculated mathematically and analyzed through the dynamics of game theory. As for the market concentration, the product market has been investigated through the Herfindahl-Hirschman index (HHI). Porter's five-force model was used to analyze the industry competition. The results showed that the product market is concentrated as the HHI tests gave High index scores between 3100 and 1700. In addition, there existed a Nash equilibrium in a mixed strategy that gave SCA expected payoff 1651 million SEK and Holmen 1295 million SEK. The dynamic game theory showed that SCA and Holmen's bidding follows a repeating trajectory and that the high/low bidding is due to deviations from Nash equilibrium probability distribution. The Nash equilibrium situation prevails if the probability distribution at low bidding is 68.6 percent for SCA and 66,7 percent for Holmen. This provided indicators for a non-cooperative game. The conclusion is that if two players (mills) reach the Nash equilibrium, no player will gain more by changing only their own strategy. Keywords: Game theory, Herfindahl-Hirschman index (HHI), duopsony, multiple regression, pulpwood, mixed strategy, Nash equilibrium iii Application of game theory in Swedish raw material market Rami Al-Halabi 2020-06-12 Preface This study has been inspired by the previous work of my supervisor Dr. Soleiman Mohammadi Limaei. Therefore, I would like to express my sincere thanks to his excellent guidance in this research. iv Application of game theory in Swedish raw material market Rami Al-Halabi 2020-06-12 Content Sammanfattning .................................................................................................................. ii Abstract .............................................................................................................................. iii Terminology ..................................................................................................................... viii 1 Introduction ...................................................................................................................... 1 1.1 Background ..................................................................................................................... 1 1.2 Corporate information .................................................................................................. 2 1.2.1 SCA ............................................................................................................................ 2 1.2.2 Holmen ...................................................................................................................... 3 1.3 Overall purpose .............................................................................................................. 3 1.4 Delimitations .................................................................................................................. 3 1.5 Goal .................................................................................................................................. 4 1.6 Contribution ................................................................................................................... 4 2 Theory ............................................................................................................................... 5 2.1 Problem description ...................................................................................................... 5 2.2 Microeconomics ............................................................................................................. 5 2.2.1 The theory of the firm .............................................................................................. 5 2.2.2 Pulp and paper industry ......................................................................................... 6 2.2.3 Competitive and Non-competitive markets ......................................................... 6 2.2.4 Porter's five forces .................................................................................................... 6 2.2.5 Market structure ....................................................................................................... 8 2.2.6 Cartel.......................................................................................................................... 8 2.2.7 Payoff calculation ..................................................................................................... 9 2.2.8 Herfindahl-Hirschman Index ................................................................................. 9 2.3 Regression analysis ....................................................................................................... 9 2.3.1 Multiple regression ................................................................................................ 10 2.3.2 Hypothesis testing ................................................................................................. 10 2.3.3 Goodness of fit ........................................................................................................ 10 2.4 Game theory .................................................................................................................. 11 2.4.1 Game definition ...................................................................................................... 11 2.4.2 Strategic game and Extensive game .................................................................... 12 2.4.3 Perfect and imperfect information ....................................................................... 12 2.4.4 Two-person game .................................................................................................. 12 2.4.5 Solution concept ..................................................................................................... 12 v Application of game theory in Swedish raw material market Rami