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Requirement
Arguments for the prosecution in the Lysine price-fixing conspiracy.
Solution
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).
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Arguments:
Lysine is an amino acid that 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 an 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 a 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 that 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.
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 other easily and they earned higher cooperative profits. Secondly, the product was homogeneous, so the characteristics of the product are easier to observe and hence the companies were able to collude. Thirdly, price of the product were transparent. Fourthly, the market was not volatile and price-cutting was done easily. Lastly, the demand was inelastic and this was used by the company for coming into collusion.
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 better products or using 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).
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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 like the product being homogeneous, production being extra capacity and the production of the product by a 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.
References:
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Connor, J.M., 1996. The Cost to US Animal-feeds Manufacturers of an Alleged Price-Fixing Conspiracy by Lysine Manufacturers, the affidavit presented in the case. re Amino Acid Lysine Antitrust Litigation.
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Connor, J.M., 1997. The global lysine price-fixing conspiracy of 1992–1995.Review of Agricultural Economics, 19(2), pp.412-427.
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Connor, J.M., 2001. “Our customers are our enemies”: The lysine cartel of 1992–1995. Review of Industrial Organization, 18(1), pp.5-21.
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Connor, J.M., 2007. Price-fixing overcharges: Legal and economic evidence.Research in law and economics, 22, pp.59-153.
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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.
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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.
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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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