wart The Kentucky Milk Case Many products and services are purchased by governments, cites, states, and bust nesses on the basis of scaled bids, and contracts are awarded tothe lowest bidders. This process works extremely well in competitive markets, but it has the potential o increase the ‘cost of purchasing ifthe markets are noncompetitive oF if collusive practioss are present ‘An investigation that begun witha statistical anal {sof bis inthe Florida schoo! milk markt led lo the recovery of more than $35:000/100 from daiies that had conspired to rg the bids there ‘The imestigation spread quickly 10 other states and (o dale, solements and Snes from dairies ‘xeved $100100,000 for schoa ml: Narain 20 other states This care conceens a school mie birgging investigation in Kentucky. Fach year, the Commonvialth of Kentucky invites Sis fom dacs to supply hall-pint containers of id ik products for its schoo! “stile The products include whole White ml, low-fat white mil, and low-fat chocolate milk In 13 school disses in northern Kency, the Sipps (dies) were ces of prce-tns" that i conspiring to allocate the dstrcts 50 that the winner” was predetermined. Because these distits are foeated ia Noone, Campbell, and Kenton counties the geographic market hey ep- resent is designated ay the "it-county” markel ‘Over a Oyear period, two dates Mayer Daly and Trauth Dalry—were the only bidders on the milk contacts the schoo distri inthe t county market. Comseguently hese two comps ise were swarded al the milk contacts ia to market. (Un contrast, a large number of diferent ‘dies won the milk contacs forthe school dis trots inthe remainder ofthe northern Kentcky tmarketcalled the “surrounding” market) The 154 ‘Commoawcalth of Kentucky lleged that Meyer ‘and Trauth conspired to allocate the districts in the tr-eounty marke To dale, one of the dai: fs (Majer) hat admitted gull, while the other (Traut) stcactasly maintains is innocence “The Commonwealth of Kentucky maintains database on all bids received from the dalle, Competing for the mik contracts Some of thes: ‘ata ave Been mide availabe to you Io analyze Setermine whether there is empirial evidence of bi collusion in the tcounty market. The data, saved in the MILK file are described in detail be Tow. Some background information onthe data and Important economic theory feparding bid collusion jako. provided. Use thi information to side Your analysis Prepare a professional document that presens the resuls of your analysis and gives your Spinion regarding eollvson. Background Information CCollusive Market Environment Certain economic features of a market create an fnvironment in which collusion may. be found These hase Features inlide the following 1 Few sellers an hgh concenaton. Ona tw dai fer con all or ner alo he alk buses i 2 Homogeneous produc The products sod arse ‘cata the sane fon the std the bayer (Ge. tne schoo dtc. Ileal demand Dectnd is rativly isesive to pac. (Now: Tho quantity oF alk oquied by ‘schol dint spy dated y shot lle, ot piss) 4 similar cous. The dies bide for the ak earacts ace siaular cost consens. (Nok: “Approximately 6% of a dairy’ prectom eat Nm, which is edoraly regulated. Mayer and “Th ae dare of sina si, soa bh Bought hiram rom he same sper) Although these market structure characterises reas an environment that makes callsive be havior easier. they do not necessarily indicate the texbtenae of collusion, An analysis ofthe actual ba friscs may provide addtional information aout the degree of competition inthe marketWro ptlon ‘ON ‘Year n which milk contract awarded MARKET = QL. [Nerthem Kentucky Market (TRICOUNTY or SURROUND) WINNER o. Nam of winning dary wen on Winning bi price of whole white milk (doles par ali) wwory on (Quantity of whol whe mik purchased (number of hal-pns) Lewin on Winning bid price of low-fat white mil (dollars per hat pints) lewary on (Quantity of low-fat white milk purchased (numbor of hal-pnts) LFcao on Winning bi price of low-fat choclate mik (dots par ha ie) u-cary on (Quantity of low-fat chocolate mik purchased (number of hal-pints) DIsTRICT aL. School district umber KvFMO on FRO minimum raw cost of mik (dollars par hat pet) MILESM on Distance (miles) from Meyer processing plant to school district MULEST an Distance (mies) fom Tauth processing plant to school district LEDATE OL. Date on which bidding on mik contract began (monttveay/yeat) (Sumter oeeaone 52) rm seums, ‘Collusive Bidding Pattomns 4. Price vers convdstance. ta comptiine markets ‘The analyses of patterns in sealed bids reveal ‘much about the level of competition, or lack thereof, among the vendors serving the markt ‘Consider the following bid analyses 1. Marker shares. A macket share fe a daisy isthe ‘number of mak hal pits supped by the dairy fer 2 given school year divided by the total ‘numer of hall-pints supplied t the entire mar eet One sgn of poteatil collie behavior is Sale, samy equal market sharos ever time for the dais under investigation. “ncumency rates Market allocation seo {orm of collusive behavior in bidriggingconspira- ces Typically the same dairy controls the same choo! dstits year atts your The incumbeney "ate fora markt ina given schoo years dotnod {5 the percentage of schoo istics that are won by the same vendor who won the previous yest ‘An incombency rate tat exceeds 70% has been considered a sign of collusive behavior. 4 id evetsand sport. ta somite sal id ‘markets vendors do aol share information about thie bide Coasequaty, more dispersion of ati ahlityamong the ide is observed than in coli ‘markets where venders communica shout their bids and have a tendency to submit bids in lose prcsimiy to one another ia a attempt to make the bidding appear competitive. Furthermore, in ‘omptitive markts th Bid dspersion tends to be lwctly proportional he level ofthe bid: When bide are subastied at elatively high Levels there {s more vay among the Dis than when they are submit at or acaF marginal cos. which wil bbe approxumatoly the same among dies ia the same pogeaphie mart id peices are expected to tack costs overtime “Ts i he markt i competitive, the hid price ‘of mi should Ne highly corel! with the rae trl cost. Lack of sch 8 relationship another ‘Spa of colltsion similar, bid prise should be ‘orld 0 the cstance tho pret mus vol from the processing plant to the school (due to alivery cots) ina competitive market, |S ud sequence. School milk bids are submitted ‘over the spring and summer months. generally At the endo one schoot year und before the hogianiag of the next When the Bids are examn- ned in soquonce ia competitive markets the Jovel of bidding is expected to fall a the bide ding season progresses. (This phenomenon is altsbutable tothe learning process that occurs ‘ring the season, with Dis adjusiod accord {ingly Dairios may submit rolatively high bids ‘early ia tho seasoa to “test the market,” coat ‘dent that volume can be picked up later i he ‘arly heh bids lose. But, dries who do not win ‘uch business early in the season av likely to hecome moee aggresive i theie Bidding as the ‘season progresses, driving price levels down.) ‘Constant or sihily increasing price patterns of sequential bids ia a market where a sagle dairy ‘wins year alter year is considered another ind ‘cation of collusive behavior 6 Comparson of averige winning bud. prces ‘Consider two simular markets One in which bide ae possbly aged andthe other ia which Bids ‘are competitively determined. In theory, the ‘ean wing price i the “gz mrt will ‘be signiicanly higher than the mean pice in the ‘competitive markt for each your a which colle 155