Friday, January 17, 2014

United States v. Andreas case brief summary

United States v. Andreas case brief summary
  • ADM was a new entrant to a lysein cartel including a handful of other manufacturers worldwide, including Ajinomoto. They artificially inflated the price of lysein significantly by restricting output. The cartel policed the agreement through secret meetings in the guise of trade association meetings with fake agendas (and were only caught to do a whistle-blower—see the movie, “The Informant”).
  • Since there were few alternatives for lysein (a food additive for animal feed), animal feed manufactures had an inelastic (downward-sloping) demand curve. An inelastic (downward-sloping) demand curve is direct evidence of market power.
  • ADM’s counterarguments included:
    • The price-increase was not an exercise of market power, but rather a reaction to increased cost of inputs and a labor strike.
    • ADM needed to finance its investment in the lysein plant (which had high initial costs) by charging more than the marginal cost (competitive price) of lysein.
    • Cooperation between the members of the cartel allowed lower costs, such as reduced costs of shipping – an efficiency argument.
    • Social benefits, such as reduced pollution and conservation of natural resources also justified the cartel’s actions.

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