Ohio v. TrauthOhio v. Trauth Bidding, Bid Rigging, and School Milk PricesBidding, Bid Rigging, and School Milk Prices

Rebecca AdkinsRebecca AdkinsChelsea BlockChelsea BlockGracie RandallGracie Randall

Market StructureMarket Structure

600 school districts600 school districts

Demand is relatively inelasticDemand is relatively inelastic

Processors receive milk from dairy farms Processors receive milk from dairy farms Standardize butter fat and distribute to schoolsStandardize butter fat and distribute to schools

Market Structure

Market Structure

Players: Thirteen dairies

Meyer Dairy and Coors Dairy Trauth Dairy

The State of Ohio

Scheme Bid-rigging

“respecting incumbencies”

Economic Evidence Incentives to collude Behavior consistent with competition or collusion? Extent of damages

Timeline of EventsTimeline of Events

1980-1990: Bid Rigging1988: Florida Bid Rigging Case1993: Confession to Bid Rigging1993: DOJ clarifies Corporate Leniency Policy1994: 13 Dairies Charged1995: Failed Conspiracy Case1996: Settlement

Factors Facilitating Factors Facilitating CollusionCollusion

1. Firms Compete Only on Price2. Announcement of Bids3. Variation in Auction Dates4. Predictability of Demand5. Easily Defined Markets6. Small and Stable Set of Firms7. Similar Cost Structures 8. Contact Between Competitors in Multiple Markets9. Availability of Competitor’s Prices10.Frequent Customers of One Another11.Existence of Trade Associations

Competitive Model:Competitive Model:Deciding Factors of Bid SubmissionDeciding Factors of Bid Submission

1. Transportation Costs2. Distance from District3. Type of Firm4. Size of the School District5. Efficiency of Production Under Contract Terms

Competitive Model

Two decisions: Submit a bid? Level of bid?

Strongest factor: distance

Competitive Model

Competitive Model

Effect on Prices PaidEffect on Prices Paid

Prices increased 6.5%From the competitive model

Defendants’ Behavior

Behavior statistically significantly differs from control group Doesn’t necessarily mean collusion

Bid on districts farther away than model suggests Test for independence/zero correlation

Bid levels differ from competitive model Hypotheses of independent action vs.

complimentary bidding

Defendants’ ResponseDefendants’ Response

•Firms disagreed with this interpretation of the evidence

•Incomplete list of explanatory variables•Incohesive Control Group•Insufficient evidence to distinguish between a conspiracy and a tacit collusion

Summary and Aftermath

All 13 dairies charged with Collusion Settled in 1996, without trial 1993- DOJ clarified Corporate Leniency

Policy 1st confessor receives amnesty

Doesn’t shield from civil penalties Hastens collapse of collusive agreements