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Asian companies, including

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.

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Asian companies, including

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  1. 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

  2. Four Types of Market Structure Number of Firms many few one Type of Product identical differentiated Perfect Competition Monopolistic Competition Oligopoly Monopoly (lysine) (guano) (dowels) (funeral services) 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 • friends and foes • incentive to cooperate and act like monopoly • incentive to cheat on one another

  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 ASIAN Lysine

  5. Lysine Cartel Assumptions: (1) Two firms had identical plants with fixed costs of $15 million per year. (2) MC of producing lysine was $0.60 per pound at all levels of output, i.e., plants were never operated close to capacity. (3) Market demand for lysine in 1994 was: 1.80 P = 1.80 –  Q 720 ASIAN Lysine

  6. The Demand for Lysine, 1994 P ($/lb) 1.80 P = 1.80 –  Q 720 D MR Quantity (millions of lbs / year)

  7. TFC Avg Costs for a Lysine Plant AFC (Q = 20 million) = ——— Q Q (millions of lbs per yr) P $15 million AFC ($) AVC ($) ATC ($) = —————— ($/lb) 20 million = $.75 $0.75 $0.60 $1.35 20 $0.10 $0.60 $0.70 150 $0.025 $0.60 $0.625 600 Quantity (millions of lbs / year)

  8. TFC Avg Costs for a Lysine Plant AFC (Q = 20 million) = ——— Q Q (millions of lbs per yr) P $15 million AFC ($) AVC ($) ATC ($) = —————— ($/lb) 20 million = $.75 $0.75 $0.60 $1.35 20 $0.10 $0.60 $0.70 150 $0.025 $0.60 $0.625 600 Quantity (millions of lbs / year)

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

  10. US Market for Lysine, 1994 P ($/lb) PM 0.725 ATC MC=AVC ATC(½QM) D MR ½QM QM Quantity (millions of lbs / year)

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

  12. Using Game Theory to Model the Lysine Cartel Suppose ADM exceeds quota by ΔQADM=30 million Abide Cheat $57 million Abide ASIAN $57 million Lysine Cheat Suppose Asian Lysine exceeds quota by ΔQAsian Lysine=30 million

  13. One Cheater (1C): how does the cheater do? P TR=A+B= P1C* (½ QM+30) =$1.125*150=$168.75 million ($/lb) TC=B=ATC*(½QM+30) =$0.7*150=$105 million Econ π =A=TR−TC=$168.75-$105=$63.75 million PM P1C 1.125 A ATC MC=AVC ATC(QC) B D MR QM Q1C QC=(½QM+30)=150 Quantity (millions of lbs / year)

  14. Using Game Theory to Model the Lysine Cartel Suppose ADM exceeds quota by ΔQADM=30 million Abide Cheat $57 million $63.75 million Abide ASIAN $57 million Lysine Cheat Suppose Asian Lysine exceeds quota by ΔQAsian Lysine=30 million

  15. One Cheater (1C): how does the non-cheater do? P TR=A+B= P1C* ½ QM =$1.125*120=$135 million ($/lb) TC=B=ATC*(½QM)) =$0.725*120=$87 million Econ π =A=TR−TC=$135-$87=$48 million PM P1C 1.125 A 0.725 ATC MC=AVC B ATC(½QM) D MR ½QM QM Q1C Quantity (millions of lbs / year)

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

  17. Both Cheat (2C) P TR=A+B= P2C* (½ QM+30)=$1.05*150=$157.5 million ($/lb) TC=B=ATC*(½QM+30) =$0.7*150=$105 million Econ π =A=TR−TC=$158-$105=$52.5 million PM 1.05 1 P2C A ATC MC=AVC ATC(QC) B D MR QM Q2C QC=½QM+30 Quantity (millions of lbs / year)

  18. Using Game Theory to Model the Lysine Cartel Suppose ADM exceeds quota by ΔQADM=30 million Abide Cheat $57 million $63.75 million Abide ASIAN $57 million $48 million Lysine $48 million $52.5 million Cheat $63.75 million $52.5 million Suppose Asian Lysine exceeds quota by ΔQAsian Lysine=30 million

  19. Abide Cheat $57 $63.75 Abide $57 $48 ASIAN $48 $52.5 Lysine Cheat $63.75 $52.5 ASIAN Lysine

  20. Abide Cheat $57 $63.75 Abide $57 $48 ASIAN $48 $52.5 Lysine Cheat $63.75 $52.5 ASIAN Lysine has a dominant strategy because no matter what chooses to do, its best strategy is to cheat. ASIAN Lysine Since the payout matrix is symmetric, ’s dominant strategy is to cheat. ASIAN Lysine

  21. Incentives to Cheat on the Collusive Agreement Abide Cheat $57 million $63.75 million Abide ASIAN $57 million $48 million Lysine $48 million $52.5 million Cheat $63.75 million $52.5 million Nash Equilibrium: no player has anything to gain by changing only its own strategy

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

  23. Would Society Like the Firms to Abide or Cheat? Abide Cheat $57 $63.75 Abide $57 $48 ASIAN 2 Firms $48 $52.5 Lysine Cartel quota= 120 Cheat $63.75 $52.5 Cheaters= 30 extra P P Both Abide Both Cheat ($/lb) ($/lb) DWL DWL PM PM P2C 1.05 P2C 1.05 ATC ATC MC=AVC MC=AVC MR D MR D QM Q2C Q* QM Q2C Q* Quantity (millions of lbs / year) Quantity (millions of lbs / year)

  24. The Price of Lysine, 1990-1995 1st Meeting of Cartel in Mexico City Enormous ADM plant 1st operates FBI Raids ADM head-quarters Meetings in IL, Tokyo, Vancouver, Paris & CA 1990 1991 1992 1993 1994 1995

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