Review of Industrial Organization 18: 5–21, 2001.

5
© 2001 Kluwer Academic Publishers. Printed in the Netherlands.

“Our Customers Are Our Enemies”: The Lysine

Cartel of 1992–1995 ?

JOHN M. CONNOR
Department of Agricultural Economics, Purdue University, 1145 Krannert Bldg., West Lafayette, IN
47907-1145, U.S.A.
E-mail: connor@agecon.purdue.edu

Abstract. Prosecution of the lysine cartel signaled a resurgence in global price-fixing conspiracies
in dozens of markets. It was the first to enter the video age and set new precedents for large criminal
fines. This paper examines the sensitivity of overcharges generated by the cartel to several factors:
time period, seasonality of demand, and the price absent collusion. Civil settlements in the federal
class action (including the interrelated citric acid conspiracy) were the fourth highest in legal history.
Yet, overcharges of $65 to $134 million mean that buyers in the federal class received at most single
damages. The opt-out firms got double damages.

Key words: Antitrust law, Archer Daniels Midland, cartel, citric acid, Department of Justice, lysine,
overcharge.

I. Introduction
The focus of this paper is on the role of economists and economic analysis in the
federal civil damages cases involving lysine price fixing in the early 1990s. Before
examining the main topic, I think it is instructive to examine the history, structure,
and conduct in the lysine industry. To understand more fully the position of the
forensic economists working on the lysine damages in 1996 and 1997, one cannot
ignore the interplay of the economists’ tasks with the ongoing legal strategies.
Therefore, before examining the issues in the civil suit, there is a brief descrip-
tion of developments in the criminal price-fixing cases. While I have examined
the lysine and citric acid cartels in other outlets (Connor, 1997a, 1998a, b), the
? Prepared for delivery at a session of the Allied Social Sciences Association sponsored by the
Industrial Organization Society, New York City, January 5, 1999. No privileged information from
parties in legal actions has been used in preparing this paper. The author thanks Greg Werden for
providing several helpful comments on an earlier version of this paper. The quotation in this paper’s
title is the second part of an oft-repeated maxim used by ADM offices. The full phrase, “Our com-
petitors are our friends, and our customers are our enemies”, was first cited by ADM Vice President
Mark Whitacre in a Fortune magazine interview in 1996. Precisely the same aphorism was repeated
by ADM President James Randall to Ajinomoto managers who were touring ADM’s lysine plant
in Decatur, Illinois on April 30, 1993. FBI Agent Brian Shepard testified that this phrase was often
repeated by several of ADM’s managers who were caught on tapes made for the FBI (Tr. 2904).
6 JOHN M. CONNOR

information in those publications stopped in early 1997. Since then I have studied
the 6172-page transcript of the late 1998 criminal trial in Chicago and will utilize
some new information contained in it.1

II. The Evolution of the Lysine Industry

Ajinomoto Company of Japan has its roots in the food flavorings industry. By the
1960s Ajinomoto had become committed to extending its expertise in fermentation
to a broad range of food, feed, and pharmaceutical products. Aided by substantial
R&D subsidies provided by Japan’s Ministry of International Trade and Industry,
Ajinomoto became the leading company in Japan’s dynamic biotech industry (Con-
nor 1998c). One target of biotechnology research has been the development of low
cost production methods to make vitamins and amino acids, organic chemicals
that are very expensive to extract from vegetable matter or make by chemical
synthesis. Lysine is an amino acid that speeds the development of lean muscle
tissue in humans and animals.
Based on scientific discoveries in Japan in the 1956 that amino acids could
be produced from bacterial fermentation, Ajinomoto appears to have been the
first to produce lysine in commercial quantities. Production most likely began at
Ajinomoto’s plant in Saga Prefecture in the early 1960s. A rival Japanese food and
pharmaceutical maker, Kyowa Hakko, began to manufacture lysine about the same
time. Feed-grade lysine exports from Japan to the United States began as early as
the mid-1970s (Tr. 875–900). The vast majority of lysine is sold to manufacturers
of feeds for swine and poultry.
Ajinomoto capitalized on its early lead in the lysine industry by quickly ex-
panding abroad. A Franco-Japanese joint venture called Eurolysine was organized
in 1974 and began production in its French plant a couple of years later. In 1986,
Ajinomoto built its third lysine plant in Thailand and a fourth plant run by Heart-
land Lysine in Iowa. In addition to its first plant in Japan, Kyowa began production
of lysine in Mexico in 1980 and in Missouri in 1984. By 1990, Kyowa had grown
to about half the size of Ajinomoto. Ajinomoto and Kyowa continued to dominate
the world lysine market for its first three decades. (A third Japanese lysine man-
ufacturer, Toray Industries, confined its sales to Japan and rather quickly faded to
insignificance by the late 1980s.)
Testimony by senior Ajinomoto sales managers confirms that the lysine industry
fixed prices throughout its early history. Lysine prices were fixed in Japan in the
early 1970s and late 1980s. All three Asian producers were co-conspirators in the
latter conspiracy (Tr. 906–908). Ajinomoto’s French subsidiary, Eurolysine, fixed
prices with rivals in Europe (Tr. 906–908). However, neither of these agreements
involved explicit market-share allocations. Moreover, the French CEO of Eurolys-
ine, testified that Eurolysine avoided allocating specific customers out of fear of
antitrust discovery (Tr. 2239). Refusals to deal were viewed by the lysine sellers
1 The transcript of U.S. v. M. Andreas et al. will be cited simply as “Tr” in the text.
OUR CUSTOMERS ARE OUR ENEMIES 7

as such definitive signs of a price-fixing agreement that customers were sure to

complain to the EU authorities. Finally, there was a U.S. lysine conspiracy in 1986–
1990 (Tr. 1858–61, 2005). In this case, not only were lysine prices raised in the U.
S. market but also Ajinomoto and Kyowa agreed on a 55–45 percent split of the
market. In addition, Ajinomoto agreed not to sell lysine in Mexico, and Kyowa
agreed not to export to Thailand.
A third major rival entered the lysine industry around 1980. Sewon (part of the
Miwon Group) began production of lysine in Korea in 1980 and added capacity
several times thereafter. Sewon never built outside Korea, but was highly export-
oriented from the beginning. By 1990, Sewon was approaching Kyowa in size and
in fact surpassed it in 1996. Although Sewon twice engaged in cartel behavior
before 1992 with the two Japanese producers, its obvious growth orientation must
have made it an unwilling partner. No other entry took place from 1981 to 1990.2
Thus, at the end of the 1980s the world lysine industry consisted of three sig-
nificant sellers: Ajinomoto, Kyowa, and Sewon. The U.S. market was supplied by
two Japanese-owned plants and significant imports from Japan, Mexico, France,
and Sewon’s Korean plant. Price fixing had been common in the three largest
consumption areas: Japan, Europe, and North America.
Although protected somewhat by patents and technological secrecy, around
1989 two companies decided to enter lysine manufacturing. Archer Daniel Midland
Co. purchased a lysine production technology from Eastman Kodak, but tried to
get a better one through industrial espionage.3 Archer Daniels Midlands (ADM)
then built by far the world’s largest lysine plant in Decatur, Illinois, having learned
that lysine being made in Japan was using U.S. dextrose as the principal feed-
stock. ADM hired a promising Ph.D. biochemist, Mark Whitacre, to head its new
bioproducts division. Whitacre had spent a few years with Degussa, a German
chemical firm that was the world’s largest producer of amino acids. Cheil Jedang,
South Korea’s largest food processing company, built a relatively small lysine
plant in Indonesia, perhaps inspired by Sewon’s demonstrated success in the lysine
industry.

III. The Lysine Cartel

The large-scale entry of ADM in February 1991 was the triggering event in the
formation of the lysine cartel in 1992. In 1990, global “nameplate” capacity in
lysine was about 390 million pounds per year, of which up to 55 million pounds
2 Thus, during this period, the global lysine industries seemed to incorporate all the necessary
and facilitating conditions for cartel formation (Dick, 1992, 1996a, b, 1998; Asch and Seneca, 1975;
Fraas and Greer, 1997; Fog, 1960; Hay and Kelley, 1974; Lean et al., 1985; Einhorn, 1993; Lanzilotti,
1996; Phillips, 1972). See also Connor (1998a, pp. 8–10).
3 James Randall, President of ADM, was caught on tape discussing a bizarre plot to steal
Ajinomoto’s lysine production secrets, but the transcript is not clear as to whether the scheme was
successful. Ajinomoto’s counter-espionage was ambiguous.
8 JOHN M. CONNOR

could be made in the two Japanese-owned U.S. factories (Connor, 1998c: Tables
1 and 2). ADM’s new Decatur plant was rated at 250 million pounds’ capacity.
By mid-1992 the Decatur plant had reached an annual rate of almost 100 million
pounds, or 40 percent of its theoretical capacity. Cheil’s plant came on stream sim-
ultaneously with ADM’s, but until 1994 the Indonesian plant exported relatively
little to the U.S. market. ADM’s plant was so large by current standards (three
times the size of Ajinomoto’s largest plant) that ADM gave incredulous Ajinomoto
and Kyowa executives and engineers unrestricted tours in June 1992 and April
1993, respectively, in order to prove that ADM had ample excess capacity to force
prices even lower than they were. In the three months before ADM’s entry, the
average U.S. lysine transaction price was $1.22 per pound. By the summer of 1992
after an 18-month price war, the U.S. price averaged $0.68 per pound, by which
time ADM’s share of U.S. supply (domestic production and imports) had reached
an impressive 80 percent.
Ajinomoto had begun developing a strategy to cope with ADM’s entry as early
as April 1990 (Tr. 840). Neither Ajinomoto nor Kyowa had any success in slowing
what appeared to them to be ADM’s inexorable drive for global dominance. Cred-
ible testimony confirms the obvious: all three Asian lysine manufacturers were
extremely worried about ADM’s huge impact on lysine prices (Tr. 1776–1801).
The price impact was worldwide. In France, Eurolysine saw lysine prices plummet
60 percent from 1990 to mid-1992 (Tr. 2239–42). Internal financial records of
Ajinomoto’s U.S. subsidiary showed that the affiliate had lost $1.9 million in fiscal
1992, which its board attributed entirely to ADM’s aggressive volume growth (Tr.
2065). Desperate to signal their willingness to cooperate, Ajinomoto and Kyowa
attempted to raise prices several times in early 1992 (Tr. 841), but ADM seemed
committed to inflicting memorable pain on their rivals. By early 1992, the three
Asian manufacturers were seriously considering asking ADM to join them in a
more cooperative arrangement (Tr. 1776–1801).
ADM shortly thereafter signaled its willingness to engage in softer forms of
competition. In April 1992, Mark Whitacre and his boss Terrance Wilson jour-
neyed across the Pacific to meet with top Ajinomoto and Kyowa managers. ADM
proposed forming a world lysine association that would meet on a regular basis.
The new association would collect and distribute production and market-share in-
formation, much like the Corn Refiners Association did for U.S. corn wet milling
products (Tr. 1734–36). Wilson also suggested that, like the European Citric Acid
Manufacturers’ Association, the new association would provide a convenient cover
for illegal price-fixing discussions (Tr. 2186). In a year or two, a lysine association
in fact emerged that met quarterly and performed the two functions that Wilson
proposed.
The first of 25 price-fixing meetings took place in the Nikko Hotel in Mexico
City on June 23, 1992. Wilson and Whitacre represented ADM; three lysine man-
agers represented Ajinomoto and Eurolysine; and Kyowa sent two executives. They
discussed setting up a lysine association, raising prices, and shared information on
OUR CUSTOMERS ARE OUR ENEMIES 9

global lysine volume and growth. Wilson proposed raising the U.S. price from the
current $0.69 per pound to $1.05 by October and to $1.20 by December, to which
the other companies agreed (Tr. 712–714).4 Ajinomoto further agreed to pressure
Sewon to join the price agreement.
Why did ADM initiate these price discussions at this time, and did the discus-
sions cause prices to rise? The answer to the first question revolves around several
factors. First, ADM had in early 1992 achieved its strategic goal by accounting for
one-third of global lysine sales.5 Aggressive pricing was no longer necessary to
expand its market share beyond this satisfying level. ADM explicitly threatened its
rivals to use its excess capacity if they did not join. Second, ADM believed that its
rivals were convinced that the Decatur plant could crank up to even more damaging
levels of output. ADM explicitly threatened its rivals that it would use its excess
capacity if they did not join. Third, unknown to the Asian companies, ADM was
having considerable difficulties with low yields due to contamination of its lysine
fermentors.6 Fourth, and to me the most pressing reason, ADM had forced prices so
low that it was losing money on its lysine operation. New testimony reveals that to
overcome initial FBI skepticism about the existence of ADM-related price fixing,
Whitacre showed the FBI ADM’s financial statements for the lysine department
(Tr. 2834–35). Net margins had turned negative in the months of July and August
1992 when U.S. lysine prices averaged $0.66 per pound. Equally interesting is the
fact that ADM’s lysine profits became positive during September and October 1992
when the price jumped up to $0.82 and $0.92, respectively. Experienced lysine
managers were convinced that the Mexico City agreement was effective in raising
lysine prices worldwide. This evidence also supports the notion that ADM’s costs
of lysine production were somewhere between $0.68 and $0.82 per pound.7
Did the Mexico City agreement affect prices? Most of the previous evidence and
the new evidence from the trial seems to support the affirmative. U.S. lysine prices
rose quickly from their July 1992 trough to a plateau of $0.98 for three months
thereafter (see Figure 1). Such a three-month period of steady prices had never
been observed in the 1990s. Moreover, the November–January plateau immediately
followed the first full-scale meeting of the lysine association in Paris on November
1, 1992. Ajinomoto’s global sales manager testified explicitly that prices responded
to the agreement made in Mexico City and to all subsequent meetings (Tr. 1468–
4 The agreement covered only dry feed-grade lysine. Liquid lysine, sold only to a few specially
equipped customers by Ajinomoto and ADM, was a very small niche product at the time of the
conspiracy.
5 ADM officers repeatedly assured its co-conspirators about this goal, and ADM appears to follow
this objective in all of its other product lines (except ethanol).
6 To dispel criticism of his management abilities, Whitacre concocted a story about saboteurs
demanding a ransom. This was the reason that the FBI was called in and that Whitacre was recruited
to be an FBI mole beginning in November 1992 (Connor, 1997a).
7 Operating profits subtracts all variable costs of production and marketing from sales on an
accounting basis. Certain central office expenses and capital costs are not allocated to a profit center
like lysine.
10 JOHN M. CONNOR

1666). The CEO of Eurolysine said the same thing, explaining further that the
one-month lag in price response was due to price protection clauses in lysine supply
contracts (Tr. 2198–99). It is true that the plateau fell short of the price objective,
but the 50 percent increase in price from July to November must have seemed
highly satisfactory to cartel members who had seen only a downward trend for one
and one-half years.
It has been suggested that the late 1992 price rise has alternative competitive
explanations. It is widely accepted that the prices of natural sources of lysine
provide a ceiling on the price of lysine made by fermentation. In the United States,
100 pounds of soymeal provided an equivalent amount of lysine to three pounds of
lysine mixed with 97 pounds of corn. In Europe and some parts of Asia, fishmeal
prices formed a ceiling for lysine prices (Tr. 2200–35). I have calculated the soy-
corn ceiling price for lysine (Connor, 1998b: Table A2). During late 1992, these
ceiling prices were at least $0.68 higher than observed lysine prices, so they cannot
have acted as a constraint on monopoly pricing.
A second competitive explanation carries some weight. Defendants’ expert
White suggested that the late 1992 price increase was caused by seasonality of
demand. Even with modern confinement methods of raising hogs and poultry,
colder temperatures increase overall feed use in the winter months, creating a peak
in derived manufacturing demand in the fall months. An examination of monthly
lysine volume by the four leading U.S. lysine sellers shows a December peak dur-
ing the years 1990–1995, accompanied by a March trough. Moreover, there is an
intra-annual price peak between October and January each year; the trough price
is usually in June or July. Excluding 1992 and 1993, the average peak-to-trough
price increases ranged from 4 to 23 percent and averaged 13 percent. Therefore,
it is possible that one-fourth of the late 1992 price increase could be attributed to
regular seasonality. Put another way, an ideal time to initiate a price agreement is in
mid-summer when a seasonal surge in prices is normally expected by buyers. The
cartel in fact implemented its first price agreement in July 1992 and reconstituted
its consensus on prices in June and July 1993.8
A final point that supports the effectiveness of the cartel’s price agreements
concerns the breakdowns in consensus observed during the cartel’s history. From
the beginning the four original members of the lysine cartel held disparate be-
liefs about each other, with the greatest gap between ADM and the two Japanese
companies. Ajinomoto believed that ADM had stolen its patented lysine micro-
organisms, and the trial transcript makes clear that ADM did attempt to steal lysine
secrets from Ajinomoto. Tape recordings of the conspiracy meetings show that
the participants often quarreled over matters of fact and intentions. An Ajinomoto

8 By “implemented” I mean the dates that previously agreed price targets were announced to cus-
tomers. Because contracts had 30-day price-protection clauses, transactions prices did not surge until
August or September. After the market-share agreement was reached in December 1993, seasonality
of prices disappeared for a year. However, seasonality of quantity demanded remained a factor that
complicated the conspirator’s attempts to keep to their agreed annual volumes.
 OUR CUSTOMERS ARE OUR ENEMIES
Figure 1. ADM U.S. lysine price, January 1992–June 1995.

11
12 JOHN M. CONNOR

manager testified that cheating was frequent but that “the range of cheating is not
too big ... they kept their promise about 90 percent. Something like that” (Tr. 999–
1000). Ajinomoto believed, probably correctly, that the world lysine market was
at least 30,000 metric tons larger than ADM’s estimates in 1992, and they kept
this information to themselves for quite some time. ADM wanted a professional
accounting firm to audit plant production records (a system used in citric acid), but
the others would not agree.
The spring and summer of 1993 became an especially contentious period for the
cartel. Three bilateral meetings were held in Illinois in April to try to patch things
up between ADM and Ajinomoto. At the regular, full-scale meetings of the cartel
(Tokyo 5/93, Vancouver 6/93, and Paris 10/93), ADM’s push for a market-share
agreement was repeatedly thwarted. The two Korean firms were pressing hard for
larger volume shares. Production restraints by ADM were loosened in early 1993.
Total U.S. volume of the top four lysine manufacturers had reached a new peak
of 183 million pounds per year by mid-1993, causing prices to decline throughout
early 1993, dropping again to unprofitable or marginally profitable levels late in
the spring of 1993 (Figure 1).
The crisis was resolved at a summit meeting in Irvine, California in October
1993 between ADM’s Executive V.P. Michael Andreas and his counterpart at
Ajinomoto. This meeting, caught on video by the FBI and shown in public at the
Chicago trial, restored harmony to the lysine cartel. The key feature of the agree-
ment was adoption of global market-share objectives by ADM and Ajinomoto.
Previously ADM had insisted on parity with Ajinomoto in any volume allocation.
Andreas offered an important concession, an ADM production limit of 12.7 million
pounds per month (equivalent to a 27 percent share of cartel production) and a
larger allocation for Ajinomoto (34 percent).9 Both companies in fact adhered quite
closely to this agreement in 1994, as did the other cartel members. U.S. production
fell by 10 percent in the first quarter of 1994 from late 1993 levels. Nearly every
observer of the lysine cartel concedes that the period November 1993 to June 1995
was the cartel’s most effective in raising prices. I believe that the price effects
lingered with diminished force for the rest of 1995, helped by a high ceiling price
and seasonal demand increases.10

9 ADM was promised half of all future demand growth which would in theory have given it
parity with Ajinomoto in a couple of years. Ajinomoto saved face by getting the largest share and by
becoming the monthly accountant of global sales for the cartel.
10 There were three reasons for an early 1995 decline. First, production reached its usual seasonal
bottom in March. Second, the soy-corn ceiling price fell to $1.03 per pound in May and $0.95 in
June, causing an immediate drop in lysine prices. Third, in April 1995 Mark Whitacre had a fit when
he found out that Ajinomoto had filed a patent-infringement suit against ADM concerning the amino
acid threonine (which Ajinomoto won). Whitacre was concerned that his embezzlement of ADM
which involved fake technology-licensing agreements, would be discovered.
OUR CUSTOMERS ARE OUR ENEMIES 13

IV. The Criminal Case

The FBI undercover investigation began in November 1992. With the cooperation
of Mark Whitacre nearly 300 audio and video tapes were made of conversations at
ADM headquarters and price-fixing meetings of the lysine association around the
world (if local authorities permitted the taping). A federal grand jury was secretly
formed in Chicago in June 1995, and it issued subpoenas that led to the FBI raids
of late June 1995. Incriminating documents of detailed lysine production figures
were found, as well as evidence of the collusive meetings and attempts to cover up
the true purpose of those meetings.
For more than a year, the five lysine conspirators refused to admit their guilt.11
In fact, matters looked bleak for government prosecutors in the spring of 1996 for
by that time the government had discovered that its main witness was an embezzler.
Prosecutors could not win a criminal conviction if only Whitacre was available to
testify as to the intent of the conspirators. Around this time the DOJ sent copies
of selected tapes to the conspirators’ lawyers and boards. A special committee of
so-called outside directors of ADM set up to advise management on legal strategy
began to press for a quick settlement. Presumably similar pressures began to mount
at the other companies as well.
In August 1996, the Asian lysine firms announced that they had reached an
agreement with the DOJ to plead guilty, pay fines, and cooperate in prosecuting
ADM and its officers. On October 14, 1996, ADM finally caved in. It agreed to
plead guilty (as a company), to pay a record $70 million fine, and to fully cooperate
in the prosecution of its own officers, Michael Andreas and Terrance Wilson.12 The
$70 million figure is not an arbitrary amount. Under federal sentencing guidelines
uncooperative felons can be fined double the harm caused by the illegal activ-
ity. That is, $70 million represents about double the informed DOJ’s estimate of
ADM’s portion of the overcharges on direct buyers of lysine.13 Given ADM’s share
of the U.S. lysine market (50 to 55 percent), total overcharges must have been at
least $65 million.

11 Cheil Jedang was admitted as a member of the cartel in June 1993 and given a small (4 to 6
percent) market share.
12 Simultaneously, ADM pleaded guilty to price fixing in citric acid, paid an additional $30 mil-
lion, and began to cooperate in prosecuting its four co-conspirators in the world citric-acid market.
Because ADM was the first to settle with the government in citric acid, the $30 million fine represents
a considerable discount from what was due under the “twice-the-harm-caused” formula. ADM also
got a 100 percent discount on alleged price fixing in corn sweeteners (that is, absolute immunity from
DOJ prosecution).
13 Section 8C2.4 of the Guidelines Manual of the U.S. Sentencing Commission specifies twice
the gain or twice the harm (pecuniary loss) due to price fixing. However, under section 2R1.1 courts
may substitute 20% of the volume of commerce affected by the price fixing unless the overcharge
is substantially above 10% of sales during the conspiracy. It is difficult to tell which standard was
invoked.
14 JOHN M. CONNOR

V. The Civil Treble-Damages Case

When Congress passed the Clayton Act, it intended that the facts and decisions
made in criminal antitrust trials be used by plaintiffs in civil antitrust trials. The lys-
ine cartel’s wily lawyers pre-empted this process by offering to settle the civil treble
damages in April 1996 for $45 million. Note that the date of this offer was four
to five months before the criminal plea agreements were entered into. Moreover,
lysine buyers had to decide by mid July whether to accept a guaranteed portion
of the $45 million (by remaining members of the federal class). The alternative
was for buyers to opt out of the proffered settlement and take the riskier route of
suing individually at a much later date. The question facing the opt-out firms was
whether actual overcharges were so much above the amount implied by the offer
of ADM et al. ($15 million) that the possible future settlement was large enough to
compensate for the possibility of getting nothing. It is at this point that economists’
estimates of the lysine overcharges were crucial.

1. I NFORMATION N EEDED AND I NFORMATION AVAILABLE

The calculation of the overcharge rectangle is in principle a simple arithmetic
exercise. One requires actual transactions prices charged by the conspirators, the
quantities sold during the conspiracy (or, more precisely, the period during which
prices were affected by the conspiracy), the dates of the conspiracy-effects period,
and the price that sellers would have charged but for the conspiracy. The overcharge
is the revenues of the members of the cartel during the conspiracy-effects period
less revenues that would have accrued at the but-for price.14
During the discovery phase of the civil case, four of the lysine defendants
provided their average monthly lysine transactions prices for the years 1991–1995.
Annual sales to customers located in the United States were given, so reasonable
estimates of monthly quantities sold by the four companies could also be calculated
(see Connor, 1998c: Table A2). In addition to market prices and quantities, there
was essential agreement among experts on the market structure of the U.S. lysine
market in the early 1990s. The Herfindahl-Hirshman Index of concentration was
about 3500, the product was homogeneous, and barriers to entry were substantial.15

14 In some federal circuits conspirators are also responsible for the overcharges imposed by firms
that remained outside the conspiracy but that raise price to the level of the cartel. The extent of
non-conspiratorial overcharges was de minimis in the lysine market.
15 Barriers were doubtless high for specialized lysine facilities like the ones built by Kyowa in
the 1980s. However, barriers would be lower for producers like ADM, Cargill, A.E. Staley, or
Degussa which could “swing” fermentor units from making MSG, ethanol, or other amino acids
rather quickly. Also, by the late 1990s, substantial new entry was taking place by other firms that
signaled a loosening of technological barriers to entry. Homogeneity of lysine is absolute in the
sense of no substitutes. However, lysine may be complementary to certain other amino acids when
used as a concentrate for animal feeds.
OUR CUSTOMERS ARE OUR ENEMIES 15

It is at this point that a consensus ended. Disagreement about the dates of the
conspiracy- effects period, the but-for price, and the type of industry conduct ab-
sent collusion produced disagreement about the estimate of the lysine overcharge.
Assuming a conspiracy-effects period of 36 months and a but-for price of $0.70 per
pound, the overcharge was $155-166 million, or at least ten times the defendants’
implicit overcharge estimate (Connor, 1997a). However, assuming the defendants
adopted a short conspiracy period (November 1993–June 1995), their explicit $15
million overcharge requires an implicit but-for price of $1.10 per pound.

2. T HE T IME P ERIOD
There are facts in the record about which reasonable persons might well differ in
their interpretations. The conspiracy effects period is one such topic.
The high and curiously stable monthly prices observed during the period
November 1993 through March 1995 makes this period the least controversial one
(17 months). Above I assembled information that I believe supports the initiation
of the conspiracy at the June 1992 Mexico City meeting, with the effects of that
agreement taking effect in August. While recognizing that the consensus broke
down in the spring of 1993, there is little to be gained by excluding this period
because the prices were so low that the overcharge estimate will hardly be affected.
In early 1995, prices began trending downward, but this decline was in response
to a lower corn-soybean ceiling price that limited the effects of the agreement but
did not destroy it. The cartel had a harmonious meeting in Hong Kong in April
1995 and had scheduled its next regular meeting for the Cayman Islands in July
1995. At the time of the FBI raid, the cartel was actively sharing information.
July 1995 seems to me to be the earliest the effects period could have terminated,
which brings the conspiracy-effects period up to 36 months. Given lags in raising
production and exports to the United States, the rest of 1995 might arguably be
included as well (44 months).

3. T HE B UT-F OR P RICE
There are four analytical approaches to estimating the appropriate non-conspiracy
price (Page). First and most common is the before-and-after approach. In this
instance the analyst uses information on industry conduct to identify a period or
periods free of collusive conduct. The reigning price(s) during that (those) period(s)
becomes the basis of comparison, that is, the elusive but-for price.16 Second, given
information on industry concentration, marginal costs of production, the own-price
elasticity of demand, and an assumed mode of pricing behavior, a theoretical model
16 Although information on meetings, price announcements and demand and supply factors are
often used to distinguish the noncollusive (“before”) periods from the collusive (“after”) periods,
time-series price data can be analyzed econometrically using a dummy variable to measure price
effects during a conspiracy.
16 JOHN M. CONNOR

of oligopoly can be employed to predict the but-for price. Third, consonant with the
definition of the Lerner index, defendants could provide proprietary information
on capacity utilization, fixed costs, and variable costs in order to construct a proxy
for a but-for price. Fourth, a time-series econometric model that would estimate
industry demand and supply relationships could then include a qualitative variable
for the alleged conspiracy period that should capture the collusive effect on price.17
With the information available, I chose to adopt the before-and-after method to
identify the but-for price.18 In particular, two periods of three or four months each
were identified as apparently highly competitive ones, namely, May-July 1992 and
April-July 1993. During both periods, U.S. transactions prices of lysine averaged
$0.70 per pound. Both periods happen to include the two months with the lowest
observed lysine prices ($0.64 in July 1992 and $0.62 in June 1993), but the two
periods were not chosen simply because of the low prices. To do so would be in
general illogical.
There were several reasons relating to seller conduct that led me to infer that
the two periods approached the level of cutthroat price rivalry described by the
economist’s model of pure competition. Additional evidence that has unfolded
about the lysine cartel since July 1996 seems to support the wisdom of that earlier
decision. The two periods correspond to the months just prior to two key meetings
of the lysine conspirators: Mexico City in late June 1992 and Irvine, California
in October 1993. Prior to Mexico City there was no oligopolistic consensus, and
ADM was behaving very aggressively in expanding output. Prior to the Califor-
nia meeting the fragile consensus had broken down over a dispute about ADM’s
promise to restrain production.19 During May–July 1993, it appears that ADM was
also attempting to signal its unhappiness to its co-conspirators about the cartel’s
failure to reach an accord on volume allocations.20 In addition to the evidence
of the degree of pricing discipline, we have the new evidence from the Chicago
trial that ADM was suffering operating losses in lysine during July–August 1992,
17 The econometric-modeling approach was infeasible to apply in the case of the lysine class-
action decision. The two months available was insufficient, the technique requires a significant
portion of nonconspiracy time periods, and certain necessary data (capacity utilization, for example)
are near to impossible to measure without the full cooperation of the defendants. Plaintiffs demands
for production and cost information were not honored.
18 I was employed by a law firm representing buyers of lysine who were contemplating opting out
of the federal class of private plaintiffs. My work was done during April–July 1996, a time during
which the lysine defendants had offered to settle the private suit for $45 million but before they had
pleaded guilty to criminal price fixing.
19 By 1993 ADM was exporting the bulk of its U.S. production, so its surge in production in early
1993 was being felt in several foreign markets as well as the U.S. market.
20 In May–July 1993, ADM’s lysine output averaged 10.3 million pounds per month, an increase
of 88 percent above the first quarter of 1993 and 22 percent above the August–October quarter. The
May–July surge in production cannot be attributed to the industry’s seasonal peak in demand (usually
December but always very late in the year), and except for 1993 ADM also had peak production
later in the year. In both mid-1992 and mid-1993, ADM’s U.S. production share rose well above 80
percent, a level it did not reach at any other time.
OUR CUSTOMERS ARE OUR ENEMIES 17

losses that turned to profits in September when the market price rose above $0.70
per pound. This fact suggests that ADM’s average variable costs were above $0.70
per pound and its average total costs were between $0.76 and $0.82 per pound.
Finally, affidavits by lysine buyers assert that ADM salespersons told them that
ADM’s break-even price was in the “upper 60 cents” range. Despite the urgings
of plaintiffs’ lawyers, the court did not to require the class-action defendants to
reveal cost of production data, so more reliable cost data were not available until
two years later.21
Defendants’ experts White and Warren-Boulton took the oligopoly-model ap-
proach to develop a but-for price. They asserted that the homogeneous Cournot
model was the appropriate model to generate a predicted but-for price. Even if
one agrees with the Cournot assumption, the predicted price is highly sensitive
to assumed parametric values. The choice of HHI (3500 or a little lower) is un-
controversial for the U.S. lysine industry, but the choice for marginal costs or the
elasticity of demand is debatable.22 If, as appears to be the case, lysine is mixed in
fixed proportions with grains and other supplements, then the farm-level demand
for hog or poultry feed is likely to be quite inelastic. Consequently, lysine demand
by feed manufacturers for species-specific feeds will also be inelastic. However,
because many buyers purchased lysine for a range of feed products, it is more
likely that their demand elasticity was even more inelastic, perhaps approximating
the demand for all meat and poultry rather than one meat.23 No matter what the
costs of production, a demand elasticity less than −0.35 for all meats results in
Cournot equilibrium prices that are negative. Put another way, if marginal costs
were anywhere near $0.70 per pound, then prices of lysine between $0.70 and
$1.00 require that demand is almost infinitely elastic.24

21 To average total costs of manufacturing should be added U.S. distribution costs (5 to 10 cents
per pound), selling costs (about 3 percent of sales in industries of this type) and normal profits (about
6 percent) to get total average costs of manufacturing and distributing lysine. Average variable costs
of production would be much lower than total costs because corn wet milling is a capital-intensive
industry. In the 1998 criminal trial, evidence of ADM’s lysine costs show that in fiscal 1994 total
manufacturing costs averaged $0.66 per pound and selling and distribution costs another $0.086
per pound (Exhibits 60–67). Moreover, these costs were constant over the relevant range during the
conspiracy. Therefore, allowing for a normal rate of return, the long run marginal costs were very
likely in the $0.76 to $0.82 per pound range.
22 Perhaps uncontroversial is too strong because the 3500 HHI refers solely to the U.S. market.
If the cartel viewed the world market as the appropriate competitive space, then the HHI was 2100.
Observed cartel prices are then compatible with elasticities less than −0.8. However, trial evidence
shows that the cartel set discriminatory prices in up to nine regions during 1994–1995 and strived to
prevent geographic arbitrage, suggesting that regional HHI is the appropriate choice.
23 My review of the literature on hog and pork demand found elasticities in the −0.2 to −0.4
range. Poultry elasticities were far more variable, roughly in −0.15 to −0.50 range. For all high
protein products, demand is even more inelastic, probably in the range −0.10 to −0.25.
24 These improbable prices are partly an artifact of assuming a linear demand function. Linear
demand may be a reasonable assumption during periods of steady output growth like 1994, but
other demand-curve shapes may not predict such unlikely prices. Another possibility is that ADM
18 JOHN M. CONNOR

There are also structural reasons to cast doubt on the idea that the Cournot
model is appropriate for long-run pricing in the lysine industry in the early 1990s.
First, entry barriers created by production technology (scale economies, fermenta-
tion secrets) may not have been as formidable during the cartel’s existence as was
believed by the experts writing in 1996. Information has come to light that sub-
stantial supply flexibility may exist among fermentation finishing units. Producers
making lysine, sweeteners, ethanol, monosodium glutamate, and other fermenta-
tion products from a common starch source may be able to alter the mix of products
with a few weeks of conversion time. Moreover, trade publications subsequently
reported more actual entry during the conspiracy than was known to have existed in
1996. For example, the large German biotech firms Degussa owned a small lysine
joint venture in Slovakia that was up and running in 1994. Various Chinese lysine
joint ventures were operating in 1994, some of them with Japanese firms that were
members of the cartel. A large lysine plant owned by AECI Chemical in Durban,
South Africa, began operating as early as 1996. Thus, during the later phase of the
conspiracy the Cournot assumption of barricaded entry may no longer have been
tenable.
Second, the type of passive-cooperative behavior envisioned by the Cournot
model was unlikely to be attainable, during 1992–1994 at least. While it is true
that the two Japanese manufacturers had a long history of cooperative behavior,
Sewon probably had not conspired with them previously. Like most Korean manu-
facturers, Sewon had displayed a strategy of aggressive market-share enhancement
throughout the 1980s.25 When the lysine cartel came to light, Sewon complained
publicly that it had been coerced by Ajinomoto and Kyowa into joining; the small
fine assessed by the DOJ tends to confirm that Sewon was the most cooperative
of the Asian conspirators in settling the criminal case. Even less likely to behave
in a passive manner were the two 1991 entrants, ADM and Cheil. Cheil acted like
a maverick during most of the cartel’s existence. Besides the absence of strategic
interaction, the chasm in business cultures between ADM and the rest of the cartel
was profound. ADM aimed for market-share equity with Ajinomoto up until the
Irvine meeting in late 1993, while Ajinomoto’s 30 years of industry leadership
in research as well as output made the idea of ceding leadership to an upstart
unthinkable.26 It was not until ADM agreed to let Ajinomoto retain a significantly

employed Cournot pricing behavior to set its own price, expecting the other U.S. sellers to follow its
commanding lead in the market. However, this approach produces “reasonable” prices (in the $0.90
to $1.20 range) only if the absolute value of the elasticity is too high, viz., 1.10 to 4.95, for a likely
range of long run marginal costs.
25 When the East Asian financial crisis hit Korea in 1997, Sewon was by Western accounting
standards bankrupt. Sewon’s urge to grow led it to acquire a debt load that was three or four times its
net assets. Sewon sold its lysine operations to a European chemical firm (BASF) in 1998.
26 From a Japanese perspective, ADM’s behavior was insulting. Testimony in the Chicago trial
reveals that the Ajinomoto managers developed a visceral dislike for Terrance Wilson, a man his
own lawyer described as crude, profane, and uneducated. Despite personal invitations to Michael
OUR CUSTOMERS ARE OUR ENEMIES 19

larger market share and allowed Mimoto to perform the monthly accounting of
sales volumes that a sufficient degree of cartel harmony was achieved.
It is possible that by late 1995, cartel members had developed the degree of
historical interaction necessary to form the conjectures necessary for a tacit un-
derstanding to develop, and this may account for the price increases observed
from late 1995 to early 1997.27 However, even if one concedes that some form
of noncooperative oligopoly became feasible in 1994 or 1995, the fundamental
arbitrariness of the choice of the Cournot model over all others remains. I believe
the profession agrees with Kwoka and White (1989, p. 11) that the popularity of
the Cournot model is mainly a result of its mathematical tractability. Equally viable
oligopoly candidates are the many varieties of the price-leadership model and the
homogeneous Bertrand. Of course, with five players in the lysine industry, the latter
model brings us back to a predicted competitive price.
Forensic economics is badly in need of a data-driven statistical method that
would allow analysts to identify the most appropriate competitive model for nat-
ural markets. Methods that can distinguish between industries with and without
market power do not go far enough; rather, they ought to be able to distinguish
between cooperative/overt and cooperative/tacit sources of market power. In the
absence of statistical tests, distinguishing legal from illegal oligopolistic behavior
requires often complex or messy analyses of shifts in conduct indicators. Until
quantitative methods are developed and tested, pure competition should remain the
but-for option by default.

VI. Conclusions
The lysine cartel was precedent-setting in several ways. It presaged a resurgence
in the formation of global commodity cartels the full dimensions of which are still
unraveling.28 The recruitment by the FBI of a mole as high up in a company’s
administrative structure as Mark Whitacre was also new. Whitacre’s cooperation
allowed antitrust investigators to enter the electronic age and record cartel activity
with audio-video images for the first time. These tapes became the crucial factor in
securing the defection of accused corporate conspirators as well as the conviction
of ADM executives in a jury trial.

Andreas to visit Japan, K. Yamada (Andreas’exact counterpart at Ajinmoto) was forced to make at
least three trips to the United States to negotiate, whereas Andreas stayed on his home ground.
27 Seasonal price effects may have contributed to the late-1995 and late-1996 lysine price
increases. Moreover, the ceiling price was above $1.50 during almost all of this period (July
1995–December 1997).
28 Up to the end of 1999, guilty pleas have been obtained or formal investigations announced
by the DOJ for the following global price-fixing conspiracies: citric acid, corn sweeteners, sodium
gluconate, thermal fax paper, six vitamins, heavy-lift marine construction services, heavy-lift semi-
submersible marine transport services, and graphite electrodes. In addition, rumors reported in the
press suggest actions against makers of the amino acid threonine and lactic acid.
20 JOHN M. CONNOR

The criminal prosecution of ADM et al. also set new precedents. Lysine was
virtually the first antitrust case to employ the Congressionally-mandated guidelines
for imposing fines on felons. The so-called two-times rule allows the DOJ to im-
pose fines that are twice the profits made or twice the injury caused by criminal
price fixing. In large markets the two- times rule permits the DOJ to seek fines
that are far larger than the $10 million statutory limit prescribed by the Sherman
Act as amended in 1990. The two-times rule, when fully applied by the DOJ in
plea bargains announced early enough, can supply important information on min-
imum damages to seek in civil actions.29 In theory, since the lysine case, future
corporate price fixers are liable for five times the overcharges paid by buyers.
Indeed, transnational price fixers are now in danger of a kind of geographic double
jeopardy because the DOJ recently decided to apply the two- times rule to global
overcharges, not just U.S. overcharges. Fines imposed by other jurisdictions are
independent of the U.S. fines.
The civil settlements made in the related lysine and citric acid cases were among
the highest ever made, a total of about $245 million (Connor 2000), of which about
$66 million was received by lysine buyers. Based on the criminal fine paid by
ADM, the U.S. overcharges on lysine were at least $65 million. But based on the
inference that $0.70 is a reasonable but-for price, that the conspiracy-effects period
lasted for 31 months, and taking into account seasonality of demand for lysine,
the estimated overcharge was $134 million.30 Whether $65 or $134 million, in the
federal class lysine buyers recouped at most single damages, not the treble damages
due them. This suggests that the deterrence effect of private treble damage suits is
considerably less than what Congress intended. On the other hand, many of the
32 firms that opted out were rewarded for their patience when they later settled
individually with ADM et al. for amounts closer to treble damages.

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OUR CUSTOMERS ARE OUR ENEMIES 21

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