Streetwise Professor

March 1, 2014

Coase Meets Rusal, or, the Aluminum Meets Polonium Solution

Filed under: Commodities,Economics,Russia — The Professor @ 7:04 pm

In one of his famous papers, Durability and Monopoly, Coase conjectured that a durable goods monopolist could not exercise market power because he could not credibly commit to reduce output.  Let’s say that the monopolist had a stock of the good equal to X.  He sells the monopolist quantity of .5X.  Once he does that, he has an incentive to sell half of the remaining half.  Then he has an incentive to sell half of the half of the remaining half.  And on and on.  Understanding this, consumers believe that the monopolist will eventually sell all X units, and hence will pay no more than P(X)-which just happens to be the competitive price.  Due to the inability to precommit, the monopolist cannot charge a monopoly price and extract a monopoly rent.  (Stokey and others have proved Coase’s conjecture formally.)

The other day I was speaking to someone in the aluminum business.  He related a conversation with a Russian guy who traded for Rusal-Oleg (“The Living Neanderthal”) Deripaska’s aluminum company.  Since the Crisis, huge stockpiles of aluminum have built up.  These stocks weigh on prices.  Rusal and others are keeping these supplies off the market, but that still doesn’t support prices because consumers realize that they will eventually be released.  Rusal (and others) cannot credibly commit not to sell these ingots in the future.

What a dilemma.

But the Russian Rusal trader had a solution.  He said: “If only there was a way to make all this aluminum radioactive! Then all our problems would be solved!”

And he’s right: once contaminated, the metal would be unsaleable. Credibility problem solved.

Call it the Aluminum Meets Polonium Solution to the Coase Conjecture.

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  1. But the Russian Rusal trader had a solution. He said: “If only there was a way to make all this aluminum radioactive! Then all our problems would be solved!”

    The Goldfinger Solution. :D

    In any case, I think a ton of that is going to be dumped on the open market if interest rates go up and they can no longer get affordable financing to keep stuff sitting in warehouses.

    Comment by Brett — March 1, 2014 @ 7:19 pm

  2. Oh, so economists are the last refuge of Xeno’s Paradox? I’m appalled. They neglect the dimension of time which is central to economics. Besides, Rusal is not a trader, they’re a producer with a production capacity [range] per unit time. And monopolists have an optimum price.

    Aluminum is best viewed as electricity solidified. Pricing follows energy. A big stockpile is a very useful tool to discourage competitors from building new capacity, and might be used to encourage them to shutdown existing capacity. That matters more to monopolists than silly speculators.

    Comment by Robert in Houston — March 1, 2014 @ 9:30 pm

  3. @Robert. Spare me. Ignore the time dimension? Read my book. It’s all about time, storage, etc. And you have no clue regarding Rusal. Per your theory, the Rusal trader-and yes, they do have traders-would have been ecstatic about large inventories. In fact, he-and the rest of Rusal-is panicked about it. Which is why they are freaking out about the LME rule change that would make it easier to get stocks out of warehouses. For comic relief you can’t beat Rusal suing in London claiming that the rule changes violated the company’s “human rights.” You can’t make up this stuff.

    The ProfessorComment by The Professor — March 1, 2014 @ 9:55 pm

  4. @swp: Of course Rusal has traders, how else to move product? LME is finally moving to make delivery less-impossible to salvage their tattered credibility. So naturally traders hate it — less expiry liquidation pressure and they will need to increase holdings (& stg fees) for delivery. I have negative sympathy for LME traders. The tail does not wag the dog.

    Comment by Robert in Houston — March 1, 2014 @ 10:06 pm

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