In 1996, Arauco acquired Alto Paraná in Argentina to expand its land holdings and production capacity of pulp. Alto Paraná produces approximately 350,000 tons of pulp in its own pulp mill, which is supplied by its own plantations (50%) and third parties (50%). Alto Paraná frequently enters into negotiations with third parties, but must contend with substantial transaction costs due to the remoteness of the Alto Paraná facility. These transaction costs, in the form of transportation expenses, drastically decrease profit margins. In our analysis of Alto Paraná’s operations, we calculated the quasi-rents to be $61.7/ton. Given these costs, we believe that Arauco made the right business decision to vertically integrate Alto Paraná’s operations to own both forests and pulp production facilities.
In order to calculate quasi-rents, the components of transaction costs to both the pulp mill and the forest, and each party’s next-best selling and buying alternatives (if they were to stop conducting business with each other) must be evaluated. If the pulp mill does not procure softwood from the surrounding forest plantations it would have to acquire it from Corrientes, which is 300 km away. As such, Alto Paraná would incur additional transportation costs (assuming cost of wood is the same at both places) over the new supply route. This value (Tcpulp) comes out to $14.4 / ton (see Appendix).
If the local forested wood cannot be sold to the pulp mill in Alto Paraná, it will have to be transported over larger distances to other mills and cost more to the forest. The case provides several alternative locations (Page 7) which have a fractional demand of 175,000 tons of wood that would need to be sold. The per ton transportation costs for each of these alternatives (Tcf) is $47.3/ ton (See Appendix), which represents the additional cost of conducting business with the least