Jointly produced metal markets are endogenously unstable

The production of many minerals and fossil fuels is unstable, and managing volatilities is an important task for managers. External shocks have been regarded as sources of market instability, but a recent empirical analysis showed that external shocks do not fully explain the price volatilities of coproducts. The present study provides an analytic model that identifies the endogenous sources of the market instability of jointly produced metals using a game-theoretic approach. In this model, a joint product company that produces both a primary product and a by-product competes with two firms: 1) a primary product company that produces only primary products in the primary market; and 2) a by-product company that produces only the by-product in the secondary market. This study models the competition among these firms as single-period, sequential quantity competitions. The results indicate that competition causes market instability if the joint product firm sets its production after observing the decisions of other firms and if the joint product firm has efficient capacity. The numerical example, which is motivated by zinc and indium markets, suggests that the endogenous factor affected the markets in 2013. Moreover, endogenous instability will be more important as the price sensitivity to production quantity increases, the relative size of the by-product market grows, and the by-product production technology improves.