Please prepare a professional document describing why your support or do not support the claim of collusion. You may choose one or more of the six different categories from the book that can be used to prove whether or not collusion existed in the market for milk. The process of going through the calculations and making the argument is what makes these case studies so valuable to you as a student.

[PART 1] The Kentucky Milk Case Many products and services are purchased by governments, cities, states, and businesses on the basis of scaled bids, and contracts are awarded to the lowest bidders. This process works extremely well in competitive markets, but it has the potential to increase the cost of purchasing if the markets are noncompetitive or if collusive practices are present. An investigation that began with a statistical anal- ysis of bids in the Florida school milk market led to the recovery of more than $33,000,000 from dairies that had conspired to rig the bids there. The investigation spread quickly to other states, and to date, settlements and fines from dairies exceed $100.000,000 for school milk bidrigging in 20 other states. This case concerns a school milk bidrigging investigation in Kentucky. Each year, the Commonwealth of Kentucky invites bids from dairies to supply half-pint containers of fluid milk products for its school districts. The products include whole white milk, low-fat white milk, and low-fat choco- late milk. In 13 school districts in northern Kentucky, the suppliers (dairies) were accused of price-fixing that is, conspiring to allocate the districts so that the winner was prede- termined. Because these districts are located in Boone, Campbell, and Kenton counties, the geographic market they represent is designated as the tri-county market. Over a 9-year period, two dairies - Meyer Dairy and Trauth Dairy- were the only bidders on the milk contracts in the school districts in the tri-county mar- ket. Consequently, these two companies were Commonwealth of Kentucky alleged that Meyer and Trauth conspired to allocate the districts in the tri-county market. To date, one of the dair- ies (Meyer) has admitted guilt, while the other (Trauth) steadfastly maintains its innocence. The Commonwealth of Kentucky maintains a database on all bids received from the dairies competing for the milk contracts. Some of these data have been made available to you to analyze to determine whether there is empirical evidence of bid collusion in the tri-county market. The data, saved in the MILK file, are described in detail below. Some background information on the data and important economic theory regarding bid collusion is also provided. Use this information to guide your analysis. Prepare a professional document that presents the results of your analysis and gives your opinion regarding collusion. Background Information Collusive Market Environment Certain economic features of a market create an environment in which collusion may be found. These basic features include the following: Background Information Collusive Market Environment Certain economic features of a market create an environment in which collusion may be found. These basic features include the following: 1. Few sellers and high concentration. Only a few dair- ies control all or nearly all of the milk business in the market. 2. Homogeneous products. The products sold are es- sentially the same from the standpoint of the buyer (i.e., the school district). 3. Inelastic demand. Demand is relatively insensitive to price. (Note: The quantity of milk required by a school district is primarily determined by school enrollment, not price.) 4. Similar costs. The dairies bidding for the milk contracts face similar cost conditions. (Note: Approximately 60% of a dairy's production cost is raw milk, which is federally regulated. Meyer and Trauth are dairies of similar size, and both bought their raw milk from the same supplier.) Although these market structure characteris- tics create an environment that makes collusive behavior easier, they do not necessarily indicate the existence of collusion. An analysis of the actual bid prices may provide additional infor- mation about the degree of competition in the market. Variable Type YEAR QN MARKET QL QL WINNER WWBID WWQTY LFWBID QN QN QN LFWQTY QN Description Year in which milk contract awarded Northern Kentucky Market (TRI-COUNTY or SURROUND) Name of winning dairy Winning bid price of whole white milk (dollars per half-pint) Quantity of whole white milk purchased (number of half-pints) Winning bid price of low-fat white milk (dollars per half-pints) Quantity of low-fat white milk purchased (number of half-pints) Winning bid price of low-fat chocolate milk (dollars per half-pint) Quantity of low-fat chocolate milk purchased (number of half-pints) School district number FMO minimum raw cost of milk (dollars per half-pint) Distance (miles) from Meyer processing plant to school district Distance (miles) from Trauth processing plant to school district Date on which bidding on milk contract began (month/day/year) LFCBID QN QN LFCQTY DISTRICT QL KYFMO QN MILESM QN MILEST QN LETDATE QL (Number of observations: 392) Data Set: MILK Collusive Bidding Patterns The analyses of patterns in sealed bids reveal much about the level of competition, or lack thereof, among the vendors serving the market. Consider the following bid analyses: 1. Market shares. A market share for a dairy is the number of milk half-pints supplied by the dairy over a given school year, divided by the total number of half-pints supplied to the entire mar- ket. One sign of potential collusive behavior is stable, nearly equal market shares over time for 4. Price versus cost/distance. In competitive markets, bid prices are expected to track costs over time. Thus, if the market is competitive, the bid price of milk should be highly correlated with the raw milk cost. Lack of such a relationship is another sign of collusion. Similarly, bid price should be correlated to the distance the product must travel from the processing plant to the school (due to delivery costs) in a competitive market. 5. Bid sequence. School milk bids are submitted over the spring and summer months, gener- ally at the end of one school year and before number of milk half-pints supplied by the dairy over a given school year, divided by the total number of half-pints supplied to the entire mar- ket. One sign of potential collusive behavior is stable, nearly equal market shares over time for the dairies under investigation. 2. Incumbency rates. Market allocation is a com- mon form of collusive behavior in bidrigging conspiracies. Typically, the same dairy controls the same school districts year after year. The incumbency rate for a market in a given school year is defined as the percentage of school districts that are won by the same vendor who won the previous year. An incumbency rate that exceeds 70% has been considered a sign of col- lusive behavior. 3. Bid levels and dispersion. In competitive sealed- bid markets, vendors do not share information about their bids. Consequently, more dispersion or vari- ability among the bids is observed than in collusive markets, where vendors communicate about their bids and have a tendency to submit bids in close proximity to one another in an attempt to make the bidding appear competitive. Furthermore, in competitive markets the bid dispersion tends to be directly proportional to the level of the bid: When bids are submitted at relatively high levels, there is more variability among the bids than when they are submitted at or near marginal cost, which will be approximately the same among dairies in the same geographic market. from the processing plant to the school (due to delivery costs) in a competitive market. 5. Bid sequence. School milk bids are submitted over the spring and summer months, gener- ally at the end of one school year and before the beginning of the next. When the bids are examined in sequence in competitive markets, the level of bidding is expected to fall as the bidding season progresses. (This phenomenon is attributable to the learning process that occurs during the season, with bids adjusted accordingly. Dairies may submit relatively high bids early in the season to "test the market, confident that volume can be picked up later if the early high bids lose. But, dairies who do not win much business early in the season are likely to become more aggressive in their bidding as the season progresses, driving price levels down.) Constant or slightly increasing price patterns of sequential bids in a mar- ket where a single dairy wins year after year is considered another indication of collusive behavior. 6. Comparison of average winning bid prices. Consider two similar markets, one in which bids are possibly rigged and the other in which bids are competitively determined. In theory, the mean winning price in the "rigged" market will be significantly higher than the mean price in the competitive market for each year in which collu- sion occurs. [PART 1] The Kentucky Milk Case Many products and services are purchased by governments, cities, states, and businesses on the basis of scaled bids, and contracts are awarded to the lowest bidders. This process works extremely well in competitive markets, but it has the potential to increase the cost of purchasing if the markets are noncompetitive or if collusive practices are present. An investigation that began with a statistical anal- ysis of bids in the Florida school milk market led to the recovery of more than $33,000,000 from dairies that had conspired to rig the bids there. The investigation spread quickly to other states, and to date, settlements and fines from dairies exceed $100.000,000 for school milk bidrigging in 20 other states. This case concerns a school milk bidrigging investigation in Kentucky. Each year, the Commonwealth of Kentucky invites bids from dairies to supply half-pint containers of fluid milk products for its school districts. The products include whole white milk, low-fat white milk, and low-fat choco- late milk. In 13 school districts in northern Kentucky, the suppliers (dairies) were accused of price-fixing that is, conspiring to allocate the districts so that the winner was prede- termined. Because these districts are located in Boone, Campbell, and Kenton counties, the geographic market they represent is designated as the tri-county market. Over a 9-year period, two dairies - Meyer Dairy and Trauth Dairy- were the only bidders on the milk contracts in the school districts in the tri-county mar- ket. Consequently, these two companies were Commonwealth of Kentucky alleged that Meyer and Trauth conspired to allocate the districts in the tri-county market. To date, one of the dair- ies (Meyer) has admitted guilt, while the other (Trauth) steadfastly maintains its innocence. The Commonwealth of Kentucky maintains a database on all bids received from the dairies competing for the milk contracts. Some of these data have been made available to you to analyze to determine whether there is empirical evidence of bid collusion in the tri-county market. The data, saved in the MILK file, are described in detail below. Some background information on the data and important economic theory regarding bid collusion is also provided. Use this information to guide your analysis. Prepare a professional document that presents the results of your analysis and gives your opinion regarding collusion. Background Information Collusive Market Environment Certain economic features of a market create an environment in which collusion may be found. These basic features include the following: Background Information Collusive Market Environment Certain economic features of a market create an environment in which collusion may be found. These basic features include the following: 1. Few sellers and high concentration. Only a few dair- ies control all or nearly all of the milk business in the market. 2. Homogeneous products. The products sold are es- sentially the same from the standpoint of the buyer (i.e., the school district). 3. Inelastic demand. Demand is relatively insensitive to price. (Note: The quantity of milk required by a school district is primarily determined by school enrollment, not price.) 4. Similar costs. The dairies bidding for the milk contracts face similar cost conditions. (Note: Approximately 60% of a dairy's production cost is raw milk, which is federally regulated. Meyer and Trauth are dairies of similar size, and both bought their raw milk from the same supplier.) Although these market structure characteris- tics create an environment that makes collusive behavior easier, they do not necessarily indicate the existence of collusion. An analysis of the actual bid prices may provide additional infor- mation about the degree of competition in the market. Variable Type YEAR QN MARKET QL QL WINNER WWBID WWQTY LFWBID QN QN QN LFWQTY QN Description Year in which milk contract awarded Northern Kentucky Market (TRI-COUNTY or SURROUND) Name of winning dairy Winning bid price of whole white milk (dollars per half-pint) Quantity of whole white milk purchased (number of half-pints) Winning bid price of low-fat white milk (dollars per half-pints) Quantity of low-fat white milk purchased (number of half-pints) Winning bid price of low-fat chocolate milk (dollars per half-pint) Quantity of low-fat chocolate milk purchased (number of half-pints) School district number FMO minimum raw cost of milk (dollars per half-pint) Distance (miles) from Meyer processing plant to school district Distance (miles) from Trauth processing plant to school district Date on which bidding on milk contract began (month/day/year) LFCBID QN QN LFCQTY DISTRICT QL KYFMO QN MILESM QN MILEST QN LETDATE QL (Number of observations: 392) Data Set: MILK Collusive Bidding Patterns The analyses of patterns in sealed bids reveal much about the level of competition, or lack thereof, among the vendors serving the market. Consider the following bid analyses: 1. Market shares. A market share for a dairy is the number of milk half-pints supplied by the dairy over a given school year, divided by the total number of half-pints supplied to the entire mar- ket. One sign of potential collusive behavior is stable, nearly equal market shares over time for 4. Price versus cost/distance. In competitive markets, bid prices are expected to track costs over time. Thus, if the market is competitive, the bid price of milk should be highly correlated with the raw milk cost. Lack of such a relationship is another sign of collusion. Similarly, bid price should be correlated to the distance the product must travel from the processing plant to the school (due to delivery costs) in a competitive market. 5. Bid sequence. School milk bids are submitted over the spring and summer months, gener- ally at the end of one school year and before number of milk half-pints supplied by the dairy over a given school year, divided by the total number of half-pints supplied to the entire mar- ket. One sign of potential collusive behavior is stable, nearly equal market shares over time for the dairies under investigation. 2. Incumbency rates. Market allocation is a com- mon form of collusive behavior in bidrigging conspiracies. Typically, the same dairy controls the same school districts year after year. The incumbency rate for a market in a given school year is defined as the percentage of school districts that are won by the same vendor who won the previous year. An incumbency rate that exceeds 70% has been considered a sign of col- lusive behavior. 3. Bid levels and dispersion. In competitive sealed- bid markets, vendors do not share information about their bids. Consequently, more dispersion or vari- ability among the bids is observed than in collusive markets, where vendors communicate about their bids and have a tendency to submit bids in close proximity to one another in an attempt to make the bidding appear competitive. Furthermore, in competitive markets the bid dispersion tends to be directly proportional to the level of the bid: When bids are submitted at relatively high levels, there is more variability among the bids than when they are submitted at or near marginal cost, which will be approximately the same among dairies in the same geographic market. from the processing plant to the school (due to delivery costs) in a competitive market. 5. Bid sequence. School milk bids are submitted over the spring and summer months, gener- ally at the end of one school year and before the beginning of the next. When the bids are examined in sequence in competitive markets, the level of bidding is expected to fall as the bidding season progresses. (This phenomenon is attributable to the learning process that occurs during the season, with bids adjusted accordingly. Dairies may submit relatively high bids early in the season to "test the market, confident that volume can be picked up later if the early high bids lose. But, dairies who do not win much business early in the season are likely to become more aggressive in their bidding as the season progresses, driving price levels down.) Constant or slightly increasing price patterns of sequential bids in a mar- ket where a single dairy wins year after year is considered another indication of collusive behavior. 6. Comparison of average winning bid prices. Consider two similar markets, one in which bids are possibly rigged and the other in which bids are competitively determined. In theory, the mean winning price in the "rigged" market will be significantly higher than the mean price in the competitive market for each year in which collu- sion occurs