This question was ‘inspired’ by recent comments by Twiggy Forrest regarding

The question:

This question was ‘inspired’ by recent comments by Twiggy Forrest regarding iron ore production (see for example http://www.abc.net.au/news/2015-03-25/andrew-forrest- calls-for-an-iron-ore-production-cap/6345798 ).

a. Consider the iron ore production industry, and assume that there are just two producers, FM and BHP. Initially assume that both firms are identical in terms of their production costs. If the two firms can cooperate, what should they do in order to maximise industry profits? How does your answer change if: (i) price discrimination is feasible; or (ii) the two firms have different costs of production? If you are working as a consultant for the ACCC, how would you view cooperation between the two iron ore producers?

b. Now assume that each firm is free to set its production level, but each firm can communicate (via the business press) what they plan to do first. Using an economic model, show that it might be difficult to sustain a cooperative (high-profit) outcome. Given this, how credible do you view any statement on capacity by Twiggy? What do you anticipate the impact of the entry of another producer (who we can call RT)?

c. Thinking more broadly than iron ore, how can two oligopolists try to avoid being caught in a competitive outcome? Are any of these relevant for the iron ore industry?