Arguments for the Prosecution in the Lysine Price-Fixing Conspiracy

The assignment content discusses the Lysine price-fixing conspiracy case that occurred in 1990 involving five companies: Archer Daniels Midland (American), Ajinomoto and Kyowa Hakko Kogyo (Japanese), and Sewon America Inc. and Cheil Jedang Ltd (Korean). The companies conspired to raise the price of lysine, an animal feed additive, by forming a cartel and engaging in anti-competitive practices. The case is analyzed using economic theory, including the Bertrand Model, which shows that the market structure was oligopoly. The five companies' intentions were to harm customers and gain excess profits through price-fixing, which is illegal.

Report
Arguments for the prosecution in the Lysine price-fixing conspiracy
The case:
This conspiracy occurred in 1990 by five companies who made an organized effort to raise the
price of lysine which was an animal feed additive (White, 2001). The high-tech fermentation
technologies were commercialized by the five companies. These companies were: Archer
Daniels Midland (American company), Ajinomoto and Kyowa Hakko Kogyo (Japanese
companies), and Sewon America Inc. and Cheil Jedang Ltd (Korean companies).
Arguments:
Lysine is an amino acid which is essential for the lean muscle development of poultry and hogs.
It is a chemical compound and close to being a homogeneous product. This is because; the
farmers can get the required nutrients by using soybean meal or by combining the corn and
lysine. The switching cost between these two nutrients is zero. The shadow price of the
alternative feed source (henceforth the “ceiling price”) can be approximated by a weighted
average of corn and soybean meal prices (Warren-Boulton, 1995). The characteristic of demand
is inelastic and the firms that produce it face the capacity constraints. The capacity of the firms,
their locations and the costs incurred by them is heterogeneous. These characteristics prove that
the structure of the market is the oligopoly. In the oligopoly market or the Bertrand Model, the
products are homogeneous, the firms that produce these products have extra capacity, and the
product is provided by few firms (Connor, 1997). In this case, the chemical compound with
which lysine is made is homogeneous, so the product is homogeneous. There are just five firms
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who produce it so the firms are less in number and they have extra production capacity.
Therefore, it is proved that the oligopoly exists and this model is the Bertrand model.
In 1990, the three firms dominated the market for lysine. The price was $1/lb (Connor, 2001).
The company ADM opened a production facility in Decatur, Illinois that doubled the capacity of
the world and the price was pushed below the $1. This price moved towards the marginal cost
that was $0.66/lb. After this, Whitacre orchestrated a coordinated effort to fix prices among the
four dominant producers (Connor, 2008). This formed collusion. This cartel was formed for
raising the selling price all over the world so that the companies can gain excess profits.
Although, an oligopoly is a legal form of market structure, but the firms have demonstrated
intent to corner the market using the anti-competitive practices. They have not dominated the
industry in an unintentional manner by giving the better product or using the superior business
practices or innovating, but they tried to dominate the market using the price fixing technique
which is illegal.
Then, the intention of the five companies was to harm the customers as they were found to talk
to each other that they consider the competitors as their friends and their customers as their
enemy (Connor, 1996). This shows that they tried to shake hands with the competitors so that
they can dilute the competition in the market and earn more profits in the long run. The lysine
conspirators actually created an amino acid working group or subcommittee of the European
Feed Additives Association, a legitimate trade group. The sole purpose of the new subcommittee
was to provide a false, but facially legitimate, explanation as to why they were meeting (Connor,
2007).
Conclusion
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From the above discussion, it can be concluded that the suspicions of price-fixing supported by
the economic theory in the Lysine price-fixing conspiracy case. The practices that facilitated
collusion, in this case, have been identified as the product being homogeneous, production being
extra capacity and the production of the product by few firms. Thus, it has been proved that five
firms that formed the cartel are guilty as they got indulged in a wrong practice that harmed the
market, customers and the fairness of the competition.
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References:
Connor, J.M., 1996. The Cost to US Animal-feeds Manufacturers of an Alleged Price-Fixing
Conspiracy by Lysine Manufacturers, affidavit presented in the case. re Amino Acid Lysine
Antitrust Litigation.
Connor, J.M., 1997. The global lysine price-fixing conspiracy of 1992–1995.Review of
Agricultural Economics, 19(2), pp.412-427.
Connor, J.M., 2001. “Our customers are our enemies”: The lysine cartel of 1992–1995. Review
of Industrial Organization, 18(1), pp.5-21.
Connor, J.M., 2007. Price-fixing overcharges: Legal and economic evidence.Research in law
and economics, 22, pp.59-153.
Connor, J.M., 2008. Forensic economics: an introduction with special emphasis on price
fixing. Journal of Competition Law and Economics, 4(1), pp.31-59.
Warren-Boulton, F.R., 1995. An Evaluation of “The Cost to US Animal Feeds Manufacturers of
an Alleged Price-Fixing Conspiracy by Lysine Manufacturers, 1992-1995. Re Amino Acid Lysine
Antitrust Litigation, Master File.
White, L.J., 2001. Lysine and Price Fixing: How Long? How Severe?. Review of Industrial
Organization, 18(1), pp.23-31.
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