Report. Arguments for the prosecution in the Lysine pri

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ReportArguments for the prosecution in the Lysine price-fixing conspiracyThe case:This conspiracy occurred in 1990 by five companies who made an organized effort to raise theprice of lysine which was an animal feed additive (White, 2001). The high-tech fermentationtechnologies were commercialized by the five companies. These companies were: ArcherDaniels Midland (American company), Ajinomoto and Kyowa Hakko Kogyo (Japanesecompanies), 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; thefarmers can get the required nutrients by using soyabean meal or by combining the corn andlysine. The switching cost between these two nutrients is zero.The shadow price of thealternative feed source (henceforth the “ceiling price”) can be approximated by a weightedaverage of corn and soybean meal prices (Warren-Boulton, 1995). The characteristic of demandis 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 thatthe structure of market is oligopoly. In the oligopoly market or the Bertand Model, the productsare homogeneous, the firms that produce these products have extra capacity and the product isprovided by few firms (Connor, 1997). In this case, the chemical compound with which lysine ismade is homogeneous, so the product is homogeneous. There are just five firms who produce it1
so the firms are less in number and they have extra production capacity. Therefore, it is provedthat the oligopoly exists and this model is the Bertand model.In the 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 ofthe world and the price was pushed below the $1. This price moved towards the marginal costthat was $0.66/lb. After this, Whitacre orchestrated a coordinated effort to fix prices among thefour dominant producers (Connor, 2008). This formed collusion. This cartel was formed forraising the selling price all over the world so that the companies can gain excess profits.There were some factors that made this collusion easier between the five companies. They were:the number of sellers who sold lysine was less so they were able to coordinate with each othereasily and they earned higher cooperative profits. Secondly, the product was homogeneous, sothe characteristics of the product are easier to observe and hence the companies were able tocollude. Thirdly, price of the product were transparent. Fourthly, the market was not volatile andprice cutting was done easily. Lastly, the demand was inelastic and this was used by thecompany for coming into collusion.Although, oligopoly is a legal form of market structure, but the firms have demonstrated intent tocorner the market using the anti-competitive practices. They have not dominated the industry inan unintentional manner by giving better product or using the superior business practices orinnovating, but they tried to dominate the market using the price fixing technique which isillegal.Then, the intention of the five companies was to harm the customers as they were found to talkto each other that they consider the competitors as their friends and their customers as their2
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