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Asian companies, including produced Lysine—dietary supplement that makes pigs, chickens and dogs grow faster. input animal feed & 3 other Lysine Conspiracy.

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Presentation on theme: "Asian companies, including produced Lysine—dietary supplement that makes pigs, chickens and dogs grow faster. input animal feed & 3 other Lysine Conspiracy."— Presentation transcript:

1 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

2 Four Types of Market Structure Number of Firms many few one Type of Product identical differentiated Perfect Competition Monopolistic Competition OligopolyMonopoly (dowels)(funeral services) (lysine)(guano) Imperfect Competition

3 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

4 Lysine Cartel Mark Whitacre, “boy wonder” president of lysine division 1992:  Mark was embezzling  new plant wasn’t working  Mark blamed it on sabotage triggered FBI investigation Mark turned Informant

5 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 –  Q

6 P ($/lb) Quantity (millions of lbs / year) The Demand for Lysine, 1994 D MR P = 1.80 –  Q

7 P ($/lb) Quantity (millions of lbs / year) $0.75 AFC ($) Q (millions of lbs per yr) $0.60 AVC ($) $1.35 ATC ($) $0.60 $0.10$0.70 $0.025$0.625 TFC Q $15 million 20 million = —————— = $.75 Avg Costs for a Lysine Plant AFC (Q = 20 million) = ———

8 P ($/lb) Quantity (millions of lbs / year) $0.75 AFC ($) Q (millions of lbs per yr) $0.60 AVC ($) $1.35 ATC ($) $0.60 $0.10$0.70 $0.025$0.625 TFC Q $15 million 20 million = —————— = $.75 Avg Costs for a Lysine Plant AFC (Q = 20 million) = ———

9 What did the Lysine Cartel do? (1) Fix Prices (2) Set Quotas (Q) for 2 Firms (3) Meetings & Phone Conversations To Monitor (and Haggle over) Quotas Suppose Fixed P = P M Each Firm’s Quota =  Q M 1 2

10 P ($/lb) Quantity (millions of lbs / year) PMPM QMQM ½Q M ATC(½Q M ) US Market for Lysine, 1994 MC=AVC ATC D MR

11 P ($/lb) Quantity (millions of lbs / year) PMPM QMQM ½Q M ATC(½Q M ) A B TR=A+B= P M * ½ Q M =$1.2*120=$144 million TC=B=ATC* ½ Q M =$0.725*120=$87 million Econ π =A=TR−TC=$144-$87=$57 million US Market for Lysine, 1994 MC=AVC ATC D MR

12 AbideCheat Abide Cheat $57 million Using Game Theory to Model the Lysine Cartel Suppose ADM exceeds quota by ΔQ ADM =30 million Suppose Asian Lysine exceeds quota by ΔQ Asian Lysine =30 million

13 P ($/lb) Quantity (millions of lbs / year) PMPM Q M Q 1C Q C= (½Q M +30)=150 ATC(Q C ) A B TR=A+B= P 1C * (½ Q M +30) =$1.125*150=$ million TC=B=ATC*(½Q M +30) =$0.7*150=$105 million Econ π =A=TR−TC=$ $105=$63.75 million MC=AVC ATC D MR One Cheater (1C): how does the cheater do? P 1C 1.125

14 AbideCheat Abide Cheat $57 million Using Game Theory to Model the Lysine Cartel Suppose ADM exceeds quota by ΔQ ADM =30 million $63.75 million Suppose Asian Lysine exceeds quota by ΔQ Asian Lysine =30 million

15 P ($/lb) Quantity (millions of lbs / year) PMPM Q M Q 1C ½Q M ATC(½Q M ) A B TR=A+B= P 1C * ½ Q M =$1.125*120=$135 million TC=B=ATC*(½Q M) ) =$0.725*120=$87 million Econ π =A=TR−TC=$135-$87=$48 million MC=AVC ATC D MR One Cheater (1C): how does the non-cheater do? P 1C

16 AbideCheat Abide $57 million Using Game Theory to Model the Lysine Cartel Suppose ADM exceeds quota by ΔQ ADM =30 million $63.75 million $48 million $63.75 million $ 48 million Cheat Suppose Asian Lysine exceeds quota by ΔQ Asian Lysine =30 million

17 P ($/lb) Quantity (millions of lbs / year) PMPM Q M Q 2C Q C =½Q M +30 A B TR=A+B= P 2C * (½ Q M +30)=$1.05*150=$157.5 million TC=B=ATC*(½Q M +30) =$0.7*150=$105 million Econ π =A=TR−TC=$158-$105=$52.5 million MC=AVC ATC D MR Both Cheat (2C) P 2C ATC(Q C )

18 AbideCheat Abide $57 million Using Game Theory to Model the Lysine Cartel Suppose ADM exceeds quota by ΔQ ADM =30 million $63.75 million $48 million $63.75 millio n $48 million $52.5 millio n Cheat Suppose Asian Lysine exceeds quota by ΔQ Asian Lysine =30 million

19 If Chooses Best ChoiceBECAUSE AbideCheat$63.75 > $57 Cheat $52.5 > $48 AbideCheat Abide Cheat $57$63.75 $57$48 $52.5 $63.75 $52.5

20 If Chooses Best ChoiceBECAUSE AbideCheat$63.75 > $57 Cheat $52.5 > $48 AbideCheat Abide Cheat $57$63.75 $57$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.

21 AbideCheat Abide $57 million $63.75 million $48 million $63.75 million $48 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

22 AbideCheat Abide $57 million $63.75 million $48 million $63.75 million $48 million$52.5 million Is This a Prisoners’ Dilemma? Cheat Yes

23 Cartel quota= Firms Cheaters= 30 extra Would Society Like the Firms to Abide or Cheat? AbideCheat Abide Cheat $57$63.75 $57$48 $52.5 $63.75 $52.5 P ($/lb) Quantity (millions of lbs / year) Q M Q 2C Q * MC=AVC ATC DMR 1.05 P 2C PMPM P ($/lb) Quantity (millions of lbs / year) MC=AVC ATC DMR 1.05 P 2C PMPM Both CheatBoth Abide Q M Q 2C Q * DWL

24 The Price of Lysine, Enormous ADM plant 1st operates 1st Meeting of Cartel in Mexico City Meetings in IL, Tokyo, Vancouver, Paris & CA FBI Raids ADM head- quarters


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