asian companies, including
DESCRIPTION
Lysine Conspiracy. Archer Daniels Midland. & 3 other. Asian companies, including . produced. input. Lysine—dietary supplement that makes pigs, chickens and dogs grow faster. animal feed. Four Types of Market Structure. Number of Firms. - PowerPoint PPT PresentationTRANSCRIPT
Asian companies,
including
produced
Lysine—dietary supplement that makes pigs, chickens and dogs grow faster.
input
animal feed
& 3 other
Lysine Conspiracy
Archer Daniels Midland
Four Types of Market Structure
Number of Firms
many few one
Type of Product
identical differentiated
Perfect Competition
Monopolistic Competition
Oligopoly Monopoly
(dowels) (funeral services)(lysine) (guano)
Imperfect Competition
Oligopoly: The Case of Lysine, 1994
Characteristics of Oligopoly
1) Small number of Sellers
2) Similar or identical products
3) Firms know one another—oscillate between being
incentive to cooperate and act like monopoly
incentive to cheat on one another
friends and foes
Lysine Cartel
Mark Whitacre, “boy wonder” president of lysine division1992: Mark was embezzling
new plant wasn’t working Mark blamed it on sabotage
triggered FBI investigation
Mark turned Informant
Lysine Cartel
fixed costs of $15 million per year.(2) MC of producing lysine was $0.60 per
Assumptions: (1) Two firms had identical plants with
pound at all levels of output, i.e., plants were never operated close to capacity.
(3) Market demand for lysine in 1994 was:
P = 1.80 – Q1.80720
P($/lb)
Quantity (millions of lbs / year)
The Demand for Lysine, 1994
DMR
P = 1.80 – Q1.80720
P($/lb)
Quantity (millions of lbs / year)
$0.75
AFC ($)
Q (millions of lbs per yr)
20150
600
$0.60
AVC ($)
$1.35
ATC ($)
$0.60$0.60$0.10 $0.70
$0.025 $0.625
TFC Q
$15 million 20 million
= ——————
= $.75
Avg Costs for a Lysine PlantAFC (Q = 20 million) = ———
P($/lb)
Quantity (millions of lbs / year)
$0.75
AFC ($)
Q (millions of lbs per yr)
20150
600
$0.60
AVC ($)
$1.35
ATC ($)
$0.60$0.60$0.10 $0.70
$0.025 $0.625
TFC Q
$15 million 20 million
= ——————
= $.75
Avg Costs for a Lysine PlantAFC (Q = 20 million) = ———
What did the Lysine Cartel do?
(1) Fix Prices
(2) Set Quotas (Q) for 2 Firms
(3) Meetings & Phone ConversationsTo Monitor (and Haggle over) Quotas
SupposeFixed P = PM
Each Firm’s Quota
= QM12
P($/lb)
Quantity (millions of lbs / year)
PM
QM½QM
ATC
(½Q
M)
0.725
US Market for Lysine, 1994
MC=AVCATC
DMR
P($/lb)
Quantity (millions of lbs / year)
PM
QM½QM
ATC
(½Q
M)
A
B
0.725
TR=A+B= PM* ½ QM=$1.2*120=$144 million
TC=B=ATC* ½ QM=$0.725*120=$87 million
Econ π =A=TR−TC=$144-$87=$57 million
US Market for Lysine, 1994
MC=AVCATC
DMR
Abide Cheat
Abide
Cheat
$57 million
$57 million
Using Game Theory to Model the Lysine CartelSuppose ADM exceeds quota byΔQADM=30 million
Suppose Asian Lysine exceeds quota byΔQAsian Lysine=30 million
P($/lb)
Quantity (millions of lbs / year)
PM
QM Q1CQC=(½QM+30)=150
ATC
(QC)
A
B
TR=A+B= P1C* (½ QM+30) =$1.125*150=$168.75 million
TC=B=ATC*(½QM+30) =$0.7*150=$105 million
Econ π =A=TR−TC=$168.75-$105=$63.75 million
MC=AVCATC
DMR
One Cheater (1C): how does the cheater do?
P1C 1.125
Abide Cheat
Abide
Cheat
$57 million
$57 million
Using Game Theory to Model the Lysine CartelSuppose ADM exceeds quota byΔQADM=30 million
$63.75 million
Suppose Asian Lysine exceeds quota byΔQAsian Lysine=30 million
P($/lb)
Quantity (millions of lbs / year)
PM
QM Q1C½QM
ATC
(½Q
M)
A
B
TR=A+B= P1C* ½ QM =$1.125*120=$135 million
TC=B=ATC*(½QM)) =$0.725*120=$87 million
Econ π =A=TR−TC=$135-$87=$48 million
MC=AVCATC
DMR
One Cheater (1C): how does the non-cheater do?
P1C 1.125
0.725
Abide Cheat
Abide$57 million
$57 million
Using Game Theory to Model the Lysine CartelSuppose ADM exceeds quota byΔQADM=30 million
$63.75 million
$48 million
$63.75 million
$48 millionCheat
Suppose Asian Lysine exceeds quota byΔQAsian Lysine=30 million
P($/lb)
Quantity (millions of lbs / year)
PM
QM Q2CQC=½QM+30
A
B
TR=A+B= P2C* (½ QM+30)=$1.05*150=$157.5 million
TC=B=ATC*(½QM+30) =$0.7*150=$105 million
Econ π =A=TR−TC=$158-$105=$52.5 million
MC=AVCATC
DMR
Both Cheat (2C)
P2C 1.05
1
ATC
(QC)
Abide Cheat
Abide$57 million
$57 million
Using Game Theory to Model the Lysine CartelSuppose ADM exceeds quota byΔQADM=30 million
$63.75 million
$48 million
$63.75 million
$48 million $52.5 million
$52.5 million
Cheat
Suppose Asian Lysine exceeds quota byΔQAsian Lysine=30 million
If Chooses Best Choice BECAUSE
Abide Cheat $63.75 > $57
Cheat Cheat $52.5 > $48
Abide Cheat
Abide
Cheat
$57 $63.75$57 $48
$48 $52.5
$63.75 $52.5
If Chooses Best Choice BECAUSE
Abide Cheat $63.75 > $57
Cheat Cheat $52.5 > $48
Abide Cheat
Abide
Cheat
$57 $63.75$57 $48
$48 $52.5
$63.75 $52.5
has a dominant strategy because no matter what chooses to do, its best strategy is to cheat.
Since the payout matrix is symmetric, ’s dominant strategy is to cheat.
Abide Cheat
Abide$57 million
$57 million
$63.75 million
$48 million
$63.75 million
$48 million $52.5 million
$52.5 million
Incentives to Cheat on the Collusive Agreement
Cheat
Nash Equilibrium: no player has anything to gain by changing only its own strategy
Abide Cheat
Abide$57 million
$57 million
$63.75 million
$48 million
$63.75 million
$48 million $52.5 million
$52.5 million
Is This a Prisoners’ Dilemma?
Cheat
Yes
Cartel quota= 120 2 Firms
Cheaters= 30 extra
Would Society Like the Firms to Abide or Cheat? Abide Cheat
Abide
Cheat
$57 $63.75$57 $48
$48 $52.5
$63.75 $52.5
P($/lb)
Quantity (millions of lbs / year)
QM Q2C Q*
MC=AVCATC
DMR
1.05P2C
PM
P($/lb)
Quantity (millions of lbs / year)
MC=AVCATC
DMR
1.05P2C
PM
Both CheatBoth Abide
QM Q2C Q*
DWL DWL
0.500.55
0.600.650.700.75
0.800.850.900.95
1.001.051.10
1.151.201.251.30
1.351.40
J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D
The Price of Lysine, 1990-1995
1990 1991 1992 1993 1994 1995
Enormous ADM plant 1st operates
1st Meeting of
Cartel in Mexico
City
Meetings in IL, Tokyo,
Vancouver, Paris & CA
FBI RaidsADM head-
quarters