Znd. Eng. Chem. Res, 1987, 26, 2509-2515
2509
Microeconomic Predictions for Design Strategy Compared with Case Histories Dennis F. Brestovanskyt and David W. T. Rippin Swiss Federal Institute of Technology, Department of Applied Chemistry and Chemical Engineering, 8092 Zurich, Switzerland
T. W. Fraser Russell* Department of Chemical Engineering, University of Delaware, Newark, Delaware 19716
A microeconomic oligopoly model is developed by using a price-demand curve to quantify the effect that any producer can have on price and profitability in a duopoly (two firms producing and selling product). T h e theory predicts optimum process unit size and optimum operation strategies. Theoretical model predictions are compared with technical, economic, and sales information for ethylenediamine manufacture, a duopoly consisting of Dow Chemical and Union Carbide. The remarkable agreement between theory and data shows that the theory provides a new and effective tool for process plant sizing in a competitive environment. Chemical products are often produced and sold by a relatively small number of suppliers. In the United States, for example, between 1000 and 1300 chemicals are manufactured by only two firms (Wei et al., 1980). In these kinds of markets actions taken by any single competitor can have a significant effect on all other producers, and competitive analysis is essential to profitable operation. The most important decision faced by any producing firm is the determination of the optimum amount of product to be manufactured for sale. Initial plant capacity is a key variable in making such a decision, and to obtain maximum possible profit, a competitive analysis needs to be made. Firms in the chemical process inductries often estimate the size of the total market as a first step in production rate decision making. Some type of competitive analysis based on past marketing experience is then made to estimate the market share which can be captured. This is in turn used to establish the quantity the firm should be able to produce and sell (Russell and Bogaert, 1980). Almost no use is made of oligopoly theory techniques in developing a competitive analysis. This branch of microeconomicsapplies to markets composed of only a few producers and is ideally suited to the kinds of market environments often encountered in the chemical process industries. Using a true price-demand curve, the theory quantifies the effect each producer can have on the market price and hence the profitability of all competitors. The theory can also be used to predict optimal plant sizes and operating rates for a given competitive environment. Although the potential of the oligopoly approach to modeling competitive effects has been demonstrated in studies by using hypothetical markets (Russell and Bogaert, 1980; Fathi-Afshar and Rippin, 1984), it has not yet been shown that the strategies suggested by the method actually represent the actions of firms in the chemical industry, nor has it been shown that the capacity and production level predictions of the approach are reasonable in terms of industry practice. These factors may in part be responsible for the limited application found by the theory. The ethylenediamine market of the 1940s and 1950s provides a well-documented example of an oligopoly. This market case study will be used to show that the microe‘Present address: Union Carbide Corporation, Linde Division, Industrial Gases Development, Tarrytown, NY 10591.
conomic modeling approach is both descriptive and reasonable. Oligopoly techniques will be seen to have significant potential for use in capacity and production rate selection.
Ethylenediamine During the early years of manufacture, the ethylenediamine market was composed of a limited number of suppliers. The historical actions of producers in this market can be used to test and verify the theoretical approach to competitive analysis. From the late 1940s through the early 1950s, ethylenediamine (EDA) was manufactured by only two firms, both which were based in the United States. The Union Carbide Corporation and the Dow Chemical Company both produced EDA together with a series of higher amine coproducts, such as diethylenetriamine (DETA) and triethylenetetraamine (TETA). The f i s t relatively large-scale manufacture of EDA dates back to 1931 when Bersworth Laboratories operated a laboratory facility and supplied the product for research into potential end uses (American Chemical Society, 1931). By 1933, higher volume production research was under way at the Mellon Institute (Kirk-Othmer, 1950). Actual commercialization of EDA was begun by Union Carbide in a pilot plant which was started in 1935 in South Charleston, WV (Kirk-Othmer, 1950; Marcinkowsky and Keller, 1982; Best, 1983). This facility probably had a capacity of 2-4 X lo6 kg/year total amines, that is, EDA and all other coproduced ethyleneamine products. It was closed prior to 1950 after Union Carbide built its first full-scale commercial unit. This new plant had a capacity of 14 X lo6 kg/year total amines and was started in 1947 at Union Carbide’s multiproduct Texas City, TX, complex (American Chemical Society, 1947; Ham ell, 1983). Union Carbide operated this plant in a monopoly position from 1947 until 1957, at which time Dow Chemical started a 4.5 X lo6 kg/year total amines facility at its complex in Freeport, TX (Kirk-Othmer, 1965; Buzzelli, 1983). Dow Chemical’s capacity at this plant was rapidly expanded; first to 9 X lo6 kg/year in 1960 and subsequently to 13.5-16 x lo6 kg/year in 1961 (Buzzelli, 1983; Hahn, 1979). Following Dow Chemical’s entrance into the market, Union Carbide expanded its Texas City unit (Hahn, 1979). In 1962, capacity was doubled to 28 X lo6 kg/year total amines.
0888-588518712626-2509$01.50/0 0 1987 American Chemical Society
2510 Ind. Eng. Chem. Res., Vol. 26, No. 12, 1987 Table I. History of Production Capacities for EDA Producers production capacity, x lo6 klyear total year producer event amines EDA 1931 Bersworth Labs lab scale facility operating 1933 Mellon Institute production research, under way 1935 Union Carbide pilot plant, South 2-4 1-2.3 Charleston, WV 1947 Union Carbide commercial-scale 14 7-9.5 facility, Texas Citv. TX
