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Game Theory

Required Reading:
All students are expected to read the following article, reproduced below, prior to attempting this task:
“Visy fined $36m over price fixing” 2007, ABC News, 2 November, https://www.abc.net.au/news, viewed 12 December 2020.
Visy fined $36m over price fixing
The Federal Court has fined Visy $36 million over its involvement in a price fixing cartel.
Visy’s former chief executive Harry Debny, who accepted responsibility for his part in the cartel, was fined $1.5 million.
Former general manager Rod Carroll, who also accepted responsibility for the cartel, was fined $500,000. Richard Pratt, as owner of Visy, escaped a personal fine.
Mr Pratt admitted his company entered into a price fixing agreement with rival Amcor to maintain a share of the cardboard box market.
The Federal Court was told the deal was set up by senior executives in a series of meetings around Melbourne.
Justice Peter Heeney told the court the penalties ordered are more than twice the highest penalty previously ordered for cartel conduct.
“These penalties reflect the fact that in light of the time for which the cartel operated, the importance of the market, the size of the company, the calculated and premediated conduct, the seniority of the individuals involved, this was the worst cartel to come before the courts in the 30-plus years in which such conduct has been illegal in Australia,” he said.
University of Melbourne professor Ian Ramsay backed the ruling.
“Because of the nature of this industry, this $2 billion a year industry, cardboard packaging, virtually every Australian uses cardboard packaging in some form or another,” he said.
“Therefore the cartel that operated for so many years had extremely widespread adverse effects on all consumers.”
Additional Recommended Reading:
The following is a list of additional readings that students may find useful when attempting this task:
The CORE Team, (2020), The Economy: Economics for a changing world, Chapter 4.
Parkin, M, & Bade, R 2016, Microeconomics: Australia in the global environment, Pearson Australia, Melbourne, Chapter 17.
Questions:
1. Using Game Theory:
(a) illustrate the market equilibrium for recycled cardboard packaging before the cartel formation.
(b) explain why the companies formed a cartel and the impact of this on the market for recycled cardboard packaging using your diagram from part (a).
2. Evaluate the outcomes in the market for recycled cardboard packaging in terms of Pareto efficiency, fairness, and the effect on the consumer surplus, producer surplus, and deadweight loss. Include appropriate diagrams to illustrate your answers:
(a) prior to the formation of the cartel.
(b) after the cartel was formed by the two companies.
3. Analyse the formation of the cartel in the recycled cardboard packaging from both the consequentialiiqust and deontological ethical viewpoints.

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