1. During the 1980s, most of the world\'s supply of lysine was produced by a Jap
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1. During the 1980s, most of the world's supply of lysine was produced by a Japanese company named Ajinomoto. Lysine is an essential amino acid that is an important livestock feed component. At this time, the United States imported most of the world's supply of lysine—more than 30,000 tons—to use in livestock feed at a price of $1.65 per pound. The worldwide market for lysine, however, fundamentally changed in 1991 when U.S.-based Archer Daniels Midland (ADM) began producing lysine—a move that doubled worldwide production capacity. Experts conjectured that Ajinomoto and ADM had similar cost structures and that the marginal cost of producing and distributing lysine was approximately $0.70 per pound. Despite ADM's entry into the lysine market, suppose demand remained constant at Q = 208 ? 80P (in millions of pounds). Shortly after ADM began producing lysine, the worldwide price dropped to $0.70. By 1993, however, the price of lysine shot back up to $1.65. Use the theories discussed in this chapter to provide a potential explanation for what happened in the lysine market. Support your answer with appropriate calculations. Also, I strongly suggest the book “The Informant” by Kurt Eichenwald and the later movie of the same name, starring Matt Damon, upon which this question is based (http://www.imdb.com/video/imdb/vi2750218777/) 1. During the 1980s, most of the world's supply of lysine was produced by a Japanese company named Ajinomoto. Lysine is an essential amino acid that is an important livestock feed component. At this time, the United States imported most of the world's supply of lysine—more than 30,000 tons—to use in livestock feed at a price of $1.65 per pound. The worldwide market for lysine, however, fundamentally changed in 1991 when U.S.-based Archer Daniels Midland (ADM) began producing lysine—a move that doubled worldwide production capacity. Experts conjectured that Ajinomoto and ADM had similar cost structures and that the marginal cost of producing and distributing lysine was approximately $0.70 per pound. Despite ADM's entry into the lysine market, suppose demand remained constant at Q = 208 ? 80P (in millions of pounds). Shortly after ADM began producing lysine, the worldwide price dropped to $0.70. By 1993, however, the price of lysine shot back up to $1.65. Use the theories discussed in this chapter to provide a potential explanation for what happened in the lysine market. Support your answer with appropriate calculations. Also, I strongly suggest the book “The Informant” by Kurt Eichenwald and the later movie of the same name, starring Matt Damon, upon which this question is based (http://www.imdb.com/video/imdb/vi2750218777/)Explanation / Answer
This peciular phenomenon can be explained as monopolist pricing behavior. Initially when lysine was produced by Japanese firm Ajinomoto it uses it's monopoly power to charge higher price. However when American firm enter the market and started production of lysine then monopoly power of Japanese firm is eroded and the price fell drastically. Now since both firm have same cost? structure this means no one can outdo other by slightly undercutting it'as price and capturing entire market. So profits are falling for both the firms and only option left to them is to form a cartel and charge monopolist price and divide the profits equally.
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