Question
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
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 Iysine - 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 Chapter 9 of Managerial Economics and Business Strategy by Michael Baye to provide a potential explanation for what happened in the lysine market. Support your answer with appropriate calculations.
(Hint: Before ADM's entry, Ajinomoto was effectively a monopolist in the lysine market. What would be Ajinomoto's profit-maximizing output?After ADM's entry, there would be two possible scenarios: a Bertrand competition and a Duopoly with Collusion. Use these market structures to explain the price movements.What would be each firm's profit maximizing output under a duopoly with collusion? Assume each firm splits the market equally.)
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